Reducing tariff and non-tariff barriers to trade need not go against India’s ‘Make in India’ policy and can, instead, complement the country’s objective of boosting local manufacturing, say Ran Li and Nora Dihel, Senior Economists with the World Bank and co-authors of the India Development Update (IDU) 2024. In an interview with businessline, the two explain nuances of the report. Excerpts:
Last fiscal India’s economy grew at 8.2 per cent, which was much higher than the global average, and growth, per the World Bank, is expected to remain strong for the country over the next two years. Is the forecast based on things continuing as they are or have the policy changes prescribed in the IDU been factored in?
Ran Li: A lot of the policies discussed in the report are not new and are a strengthening or a continuation of what the government is doing. Most of these are aiming for a longer time growth to increase the potential. Most of the impact may only materialise beyond the medium-term horizon. And our medium-term forecast is a combination of several factors. For example, last year growth was particularly strong. So, it will affect our this year’s forecast as well. And the forecast also included the momentum we saw earlier this year. And also, some of the policies, including over the past few years, which will have an effect now. Also, the ongoing reforms, many of which are consistent with what we discussed in the report, like public infrastructure. It is one important factor that drives growth momentum. The government has already been doing it.
The report also says that the geopolitical risks notwithstanding, India’s medium-term prospects are positive because of significant public investments, and also recovery of agriculture and inflation reduction. So will it be correct to say that India could keep growing despite the Middle East crisis and the Russia-Ukraine conflict continuing?
Li: The geopolitical tensions unfortunately will have an impact on the global economy and every single country in it including India. But India, despite being not immune to global developments, will suffer a relatively smaller impact. One reason is that India’s exposure to the risk is relatively low as of now because some of the channels affected by the global shocks, including trade, economy and capital, India is still developing.
The second reason, which is actually more important, is that over the past few decades India has developed sufficient and increasing buffer to these external shocks. Its market has been increasing and foreign reserves have been increasing. Its external balances, like the current account deficit, has been improving. These will help India have resilience against future shocks. We saw that during the pandemic as well.
While the geopolitical tensions will have an impact on India, it will be relatively smaller. And it will not affect the fundamental momentum of the Indian economy.
Female urban unemployment has gone down to 8.5 per cent in early FY24-25 while urban youth unemployment remained high at 17 per cent. What does it signify?
Youth unemployment is not just an Indian policy priority or concern. It is a global policy concern, especially for developing countries, like India, where the youth population is continuing to grow really fast. Urban youth unemployment rate of 17 per cent, is at a lower level compared to either the peak of the pandemic or even the pre pandemic average. So, there has been a significant improvement. But yes, the number for youth unemployment is relatively high. And another challenge is that around 30 per cent of the youth population are not in education, training or employment. And this is broadly consistent with the broader labour evolution as well.
There are challenges across groups. For example, the female labour force participation is still low despite the improvement.
Another aspect to look at is how good these jobs are. Whether they are secure, providing sufficient salaries etc. We definitely have more room to improve here. For example, around 70 per cent of the jobs are in self-employment among which a lot is unpaid. But the government has been doing a lot of reforms including announcing measures in the most recent budget, both from labour demand and labour supply side.
For example, the newly-announced skilling programmes and education schemes. And also on the labour demand side, to support the private sector through trade, public investment etc. So, these, we hope, will have an impact in the near future.
The IDU report highlights that India’s trade in goods and services have declined as a percentage of GDP over the past decades and exports are concentrated in non labour intensive areas. Is it mostly the increase in import duties on key intermediaries, which has been pointed out in the report, mostly responsible for this decline?
Nora Dihel: The IDU does highlight the negative impact of increase in import duties on key intermediate inputs, but they impact both the competitiveness of capital intensive and labour intensive sectors such as textiles and apparels.
But the report acknowledges other factors that could be contributing to declining exports and the under performance of these labour intensive sectors. I will just mention a few. There are some infrastructure and logistical limitations. There are some gaps in technology and skills. And there is policy uncertainty that firms are often mentioning. These are additional potential constraints in the report. The interplay of these factors create a complex scenario. The high import duties on crucial inputs exacerbates challenges faced by the labour intensive industry. And that hinders export growth and overall competitiveness.
One of the recommendations of the IDU for India to achieve $1-trillion export target is to lower tariff and non-tariff barriers. Is the recommendation restricted to key intermediary inputs or for other products as well? Will it then not go against India’s policy of boosting local manufacturing?
Dihel: To hit the target of $1 trillion of exports, we propose a new strategy that builds on progress that was made in trade facilitation, prioritises reduction of trade barriers, both tariff and non-tariff barriers and also advocates for a deeper regional and global integration. Yes, we recommend reducing tariff and non-tariff barriers for key intermediate inputs. But actually, for a broader set of products, it is to be able to create a level playing field, eliminate the disparities, and to lower the cost for all intermediate inputs because that will benefit various sectors including capital intensive sectors and labour intensive sectors.
We know that India has this policy of boosting local manufacturing. But actually, reducing the trade barriers can complement this objective. Because it will create better access, more efficient and cheaper intermediate inputs and that can actually increase the efficiency of the domestic market because it will improve the productivity of local manufacturers and ultimately will enhance their competitiveness in both domestic and international markets.
You also mention leveraging Global Value Chains (GVCs) to generate more jobs and increase productivity in the report. Is it through Free Trade Agreements (FTAs)?
Dihel: There are several avenues that India can follow to deepen its integration into GVCs and those include strengthening trade facilitation efforts, simplifying customs procedures, reducing tariffs and non-tariff barriers and of course deepening the regional and global integration. So, when it comes to FTAs, of course, expanding them broadening participation in international trade could be beneficial, but there are a number of additional steps that can be taken.
Improving infrastructure, streamlining bureaucratic processes, enhancing transparency in trade regulation are also crucial steps in improving GVC participation. So what I want to underline here is that it’s a combination of policies that we need for deeper participation in GVCs.
It has not been easy for India to negotiate FTAs with developed nations as its goods tariffs are relatively high and rich nations are not keen on liberalising work visa rules. Moreover, it is apprehensive of FTAs with countries or blocs where China’s influence is high, for instance RCEP. Should it go in for deeper trade integration despite its apprehensions and concerns?
Dihel: We acknowledge in the report the challenges in negotiating FTAs with developed nations. We also try to highlight there are potential benefits of greater plurilateral and multilateral cooperation. And what we find in general is that comprehensive integration scenarios, which include trade facilitation, services, FDI, trade in goods, are likely to bring in the highest games. Those concepts also apply for India’s strategy to engage in these FTAs.
By participating in these broader trade agreements and trade blocks, India can access a wider market and attract more FDI to enhance its overall competitiveness. All these concerns about tariff disparities and labour mobility are challenging. But the potential economic benefits of this deeper trade integration could outweigh the challenges, especially in in the long run.
We are, of course, talking at a conceptual level. Which FTA or broader economic bloc India decides to join is up to India.
Over the past few decades India has developed sufficient and increasing buffer to the external shocks. Its market has been increasing and foreign reserves have been increasing. Its external balances, like the current account deficit, has been improving. These will help India to have resilience against future shocks. Ran Li, Senior Economist with World Bank
There are several avenues that India can follow to deepen its integration into global value chains and those include strengthening trade facilitation efforts, simplifying customs procedures, reducing tariffs and non-tariff barriers and of course deepening the regional and global integration. Nora Dihel, Senior Economist with World Bank