Return of import phobia in India! Failure of SEZs and a forceful comeback of the swadeshi ideas

The year 2019 was notable for India’s stubborn disengagement on trade. It also marked the exceptionally low priority trade has come to occupy in India’s economic policy-making.

Historically, India was anti-trade for several years after independence. For four decades after independence, imports were limited to the ‘essential’ and ‘high priority’. The ostensible reasons were encouraging local industry to develop sufficient capacities and capabilities. The eventual realisation that four decades of heavily protective import-substitution policies had resulted in large industrial shortages and inefficiencies, forced a re-think on trade. This coincided with negotiations going on at the Uruguay Round of the General Agreement on Tariffs and Trade (GATT), which led to the creation of the World Trade Organisation.

India played an active role in establishing the WTO and formulating global trade rules. The active role was inspired by the belief that it needed to trade more with the rest of the world to maximise its own economic interests. It was equally influenced by the view that an outward-oriented, economically reformed India could be a model for achieving economic prosperity through greater participation in rules-based global trade for several other developing countries.

During the 1990s and the first decade of the current century, India remained engaged in global and regional trade consultations. At the WTO, its role became increasingly defensive. This was largely due to the push-back on the Doha Development Agenda (DDA). As most OECD countries resisted implementation of DDA without more significant market access concessions by developing countries, India begun leading the developing country resistance to such concessions. At the same time, like several other developing countries, it began exploring bilateral and regional FTAs, to get market access over and above that in the WTO. But, whether at the WTO or through FTAs, it remained engaged in trade talks, successfully pulling off various FTAs, first with smaller economies, and later, with advanced ones like Japan and Korea.

A significant change in India’s trade engagement arose came in the middle of the last decade. India began turning back on various ongoing FTA negotiations.

These included advanced negotiations like those with Australia, Canada, and the EU. The withdrawal from the Regional Comprehensive Economic Partnership (RCEP) last year, was, by far, the strongest example of India resorting to active disengagement on trade. Looking back, India appears to have turned around the last three decades in one single sweep by going back to the kind of disengagement it practised before the 1990s.

Today, trade in India suffers from a noticeable absence of champions. This wasn’t so in the early years of the century. At a time when the Indian economy was growing at 8% annually and trade was expanding, the role of trade was considered virtuous for the economy’s long-term growth. Indeed, it even inspired the government of the day to announce the Special Economic Zones (SEZs) strategy for prioritising exports through long-term financial incentives. Multiple imperfections led to limited results from the policy, with several SEZs getting scrapped, the policy inviting flak for encouraging dubious real estate deals, and state governments—who should have been at the forefront of the export drive—giving up on SEZs. A bottom-up, holistic implementation of the policy, backed by creation of durable infrastructure and trade facilitation might have resulted in much greater shares of Indian manufacturing and services in global trade.

The failure of most SEZs to deliver, and the cynicism surrounding them, including politically catastrophic issues like acquisition of land for commercial and industrial development, pushed export promotion way down the priority ladder. A simultaneous forceful comeback of the swadeshi ideas in politically enabling conditions ensured the return of the import phobia of the 1960s and 1970s. Importing even for eventual exports, became a non-priority. Nowhere is this more evident than in the structuring of the GST, which, by not allowing exporters to avail exemptions on inputs used for manufacturing exports, has hit them hard.

As exports became low-priority, competitiveness and ‘national interest’ became useful grounds for disengaging from trade talks. The nearly five decades old logic of resisting opening up for fear of the adverse impact it would have on uncompetitive domestic industries has been reemployed successfully for disengaging from FTAs, particularly RCEP. While doing so, it has hardly been realised that the services currently driving the economy—hospitality, entertainment, education, and health—are not entirely domestic. The global exchanges prominent in these services necessitate India focusing closely on trade policies involving data, competition, investment, and standards—a far larger gamut of issues than India’s sole point of obsession, i.e., tariffs.

Disengagement has not just meant India losing out on multiple economic opportunities. It has also meant India not being involved in dialogues and discussions on latest developments in global trade, thereby losing out on the opportunity to contribute to the process of rule-making around these developments. Obsession with the local has shifted sight from the realisation that the local is hardly as local as it is made out to be. It has become more global than is imagined, and will become even more so, over time. A good dash of global is needed for nurturing the local, which is impossible without engagement.

The author is Senior research fellow and research lead (trade and economic policy), NUS. Views are personal

Source: Financial Express