How India missed the global trade bus

India’s Trade Policy in the 21st Century

Author: Amita Batra

Publisher: Routledge

Pages: 180

Price: £96

About three decades ago, India’s trade policy was liberalised in response to a major economic crisis. In the summer of 1991, India faced an unprecedented balance of payments problem, made worse by a rapid widening of the Union government’s fiscal deficit. The Indian rupee was devalued sharply in two phases and export subsidies were abolished. In the following few years, import licensing was substantially relaxed, import duties were slashed and the Indian rupee was gradually made fully convertible on the current account. 

India’s exports, which were just about 6 per cent of gross domestic product or GDP in 1990-91, began rising along with imports which were then estimated at less than 9 per cent of GDP. By the end of the century, these ratios improved to 8 per cent for exports and 12 per cent for imports. In the following 12 years, the pace picked up and exports accounted for about 17 per cent of GDP and imports were much higher at 27 per cent of GDP. 

But in the following six or seven years, those ratios began declining quite rapidly. By 2019-20, a pre-Covid year, the share of exports in GDP dipped to just 11 per cent and imports fell to 17 per cent. What went wrong with India’s foreign trade?

Noted trade policy expert and professor of economics at Jawaharlal Nehru University, Amita Batra, presents a riveting account of how India missed the bus on trade in the last two decades. She recalls that even when India’s merchandise trade-to-GDP ratio in 2018 was 30 per cent, China’s was 60 per cent, Mexico had notched up a share of 76 per cent and Indonesia had a share of 35 per cent. Using a different matrix, she notes that India’s share in global merchandise exports and imports was around 2 per cent, while China had a share of 10 per cent. 

Her central point is that the most significant development in global trade in the 21st century has been the rise and rise of global value chains (GVC) as a key trigger for propelling trade among countries. There was fragmentation and geographical dispersion of production across the world, resulting in intermediate goods and components crossing many borders before being shipped to their final consumption centres. Both the rise of global trade in the first decade of the 21stcentury and its slowdown in the second decade were attributable to the evolution of GVCs and their subsequent restructuring. 

The second big development that has marked global trade in the last two decades, according to Dr Batra, is that the increase in global trade during this period has been led by developing countries, which now account for as much as half of the total global exports of merchandise goods. India is a laggard in that list of developing countries. Sadly, she argues, India’s declining participation in GVCs is one of the reasons for its disappointing trade performance. 

The problem emanates not just from India’s failure to exploit the opportunities arising out of GVCs. “India’s trade policy has not just been more protectionist relative to other developing economies over this period, but also not been driven by the objective of GVC integration,” she notes. Complicating this problem has been India’s hesitation in forging preferential trade agreements and even shying away from regional trading arrangements, which help member-countries integrate with regional or global value chains. 

The six chapters in this book provide an excellent historical perspective of how India’s trade policy evolved, how global trade experienced major shifts, including the rise of GVCs, India’s performance in global trade in the past two decades, what ails India’s policy on its engagement with GVCs and what options are available to the government. 

The highlight of the book is a clear elucidation of five basic trade policy principles that should guide the Indian government and with which few could have disagreements. These imperatives are to integrate India with GVCs instead of trying to build entire supply chains domestically, lay greater emphasis on GVCs in sectors with maximum backward linkages, forge trade and investment policies that support such integration, set up linkages with geographically proximate GVC hubs in East Asia and South-East Asia and restructure the policy on free trade agreements to focus not just on tariff reduction but also on reforming the rules of origin, regulatory frameworks for GVC investments and investor protection.

Apart from lucidly articulating her assessment of what went wrong with India’s trade policy, Dr Batra provides a mine of data on global trade, with particular emphasis on India. The only complaint is that the rich data in the book would have made a bigger impact if they were presented in the form of more accessible charts and graphics. Nevertheless, no serious trade economist or trade policymaker in the government should give this book a miss.