Editorial 2: A time to look outward
Context
For its economy, India must get closer to the world.
The thrive of economy
- There is a general sense that India is an inward-looking economy. After all, agriculture makes up a fifth of the economy, and India is more domestic demand-driven than some export-led Asian neighbours.
- Having said that, we find that India has grown at its fastest pace in periods of rising integration with the world.
- We use the rolling correlation between India and world growth as a measure of global integration and find that 2000-2010 stands out as a period of rising global integration.
- Back then, India was slashing import tariffs and integrating further into global trade networks, resulting in a higher share of global exports and stronger GDP growth.
- In the following decade, 2010-2020, India became more protectionist and started to raise import tariffs. This period marked a fall in the country’s global export share and GDP growth.
- In the last few years, those following the pandemic, there has been a move back towards stronger global integration, though so far it remains a tad one-sided — more financial integration, less trade integration.
India’s global integration
- One may argue that higher global integration exposes a country to global volatility, which may be negative for growth.
- It is found that the positive impact of being more integrated with the world outweighs and is longer lasting than the negative impact of being exposed to global shocks.
- All said, deeper interlinkages with the world have led to higher growth, more than offsetting the negative impact of the rise in volatility.
- India’s global integration has impacted different sectors. It is found that consumption is most integrated with world growth (95 per cent), followed by investment (70 per cent), and then exports (35 per cent). Surprising, as one would imagine exports would be the most globally aligned.
- On the other hand, lower global integration in mid-tech exports explains weaker growth and incomes, and why individuals in these sectors are largely focused on consumption of essentials, without much surplus left over for investment.
- Measures that raise mid-tech labour-intensive exports can boost India’s trade interlinkages, mass consumption, and GDP growth. An opportunity to deepen trade linkages is knocking on the door.
A golden chance
- If supply chains are rejigged during the second Trump presidency due to higher tariffs on large exporters, and the world is looking for new producers, India may get a chance to integrate more deeply with global value chains.
- If sectors such as electronics, textiles, furniture, and footwear are where global opportunities from potential supply rejigging lie, as we have seen from Vietnam, which made significant progress in the first Trump presidency, it is worth noting that India is already a player, with room to grow further, given advantages such as low wage costs.
- Incidentally, China’s excess capacity in these mid-tech sectors is less pronounced. Space for another manufacturer may well exist.
Way forward
- But first, India needs to make changes. And there is good news here. Potential US tariffs may have become a catalyst for external reforms, such as lowering the import tariffs India levies on others and fast-tracking trade deals.
- Some domestic reforms are also being pursued, for instance, a deregulation drive across the central and state governments, which could help improve the ease of doing business.
- These are steps in the right direction. But for results, these reforms will have to run deep.