With a projected 7 per cent growth for the ongoing year, the Indian economy is set to register the highest growth rate across all the majoreconomies of the world.Quite rightly, FM Nirmala Sitharaman in her 2023 Budget Speech described the Indian economy as a “bright star” given the gloomy global economic backdrop.
This essay argues that the Indian growth story for the years to come will be shaped by the unfolding geoeconomic and geopolitical forces that will sustain its “consumption-driven-growth” phenomenon, further driving investment and production.
Indian tryst with RTAs/ FTAs
Many reckon India’s withdrawal from the Regional Comprehensive Economic Partnership (RCEP) in November 2019 as a lost opportunity. This is mooted on the hypothesis that the erstwhile 16-nation mega-agreement (including India as a member) will help the Indian MSMEs getting plugged in the ASEAN commodity value-chain, and help in the Indian vision of “Make in India”.
Again, there have been arguments that the various costs of India’s participation in the RCEP are high enough to overwhelm the proclaimed benefits. Domestic commodity value-chains were envisaged to be negatively affected with domestic manufacturing not being in a position to combat the increased competition from various RCEP economies.
On the other hand, the concerns of increasing trade deficits also loomed large. However, the most overwhelming reason as pointed out by many analysts was the Chinese presence in the RCEP bloc.
Though many perceived India’s withdrawal from RCEP as “protectionist” and “conservative”, it seems that India’s withdrawal from the negotiations was a wise move given the imperceptible and unestimated costs that arise on the domestic economic, geoeconomic and geopolitical fronts.
Domestic commodity value-chains were envisaged to be negatively affected with domestic manufacturing not being in a position to combat the increased competition from various RCEP economies.
However, from 2021, there has been a sudden spurt in signing bilateral trade agreements by India. The India-Mauritius CECPA (Comprehensive Economic Cooperation and Partnership Agreement) in 2021, India-UAE CEPA Comprehensive Economic Partnership Agreement), and Australia-India ECTA (Economic Cooperation and Trade Agreement) in 2022, are some examples.
Talks on these grounds with the UK and Canada are in advanced stages, and serious intentions on inking FTAs with the EU and Israel have also been expressed.
This sends across the message to the global community that India is shedding off the “conservative” and “protectionist” image. The geoeconomic implications are also immense. The India-UAE CEPA strengthens Indian commitment with I2U2 (i.e. Israel, India, UAE and the United States), also referred to as the western QUAD, a regional force convened in October 2021.
Again, this agreement provides India an access to the western neighbours that can facilitate the process of negotiating trade agreements in the absence of China. Furthermore, it puts India a step ahead towards having an India-GCC (Gulf Cooperation Council) FTA, thereby ameliorating its relations with the gulf nations.
On the economic front, the trade pact is envisioned to almost double bilateral commodity trade by 2027 to USD 100 billion, increase service trade to USD 15 billion, and generate 10 lakh jobs in labour-intensive sectors.
Further, the Australia-India ECTA boosts Australia-India ties on various fronts, including geopolitical one. Once a more comprehensive FTA, i.e. the CECA (Comprehensive Economic Cooperation Agreement) gets inked between the two nations,various other areas such as services, investments, government procurement and intellectual property will be covered.
Even within the QUAD, the strong relationship between Australia and India will help in creating an Australia-India niche.
Again, the Indo-Pacific Economic Framework for Prosperity (IPEF), an economic initiative driven by the Biden administration with a total of fifteen participating member nations, presents the massive potential to ink a regional trade agreement and create a trade bloc without China. If that happens, India, being a member, will definitely be a beneficiary.
The IPEF is bigger in size in both population and aggregate income than the RCEP, and can definitely throw a major challenge to the latter with the potential to delineate a new global economic order. No doubt, FTAs are emerging as important tools for economic diplomacy for India for deeper levels of engagement with friendly nations.
At the same time, the FTAs are two-level games for India. At the international level, it has to negotiate with the concerned nation/s, while at the domestic level it has to negotiate with various contending constituencies. Yet, FTAs’ role as a growth driver through trade and investment cannot be ignored.
It helps create a competitive business environment for foreign investment, helps in obtaining cheaper factors of production that can make Indian products competitive in the global markets, boosts consumption demand, and will therefore be a critical driver of future economic growth.
While I mentioned about FTAs boosting consumption demand, this can happen through two avenues. The first is that FTAs will enable cheaper imports of commodities and will increase the consumption choice.
The second is that the direct multiplier effect of enhanced trade and increased employment will have its multiplier effect on domestic incomes.Both the forces combined together will increase the purchasing power of the consumers, and increase consumption demand.
As such, the Indian growth story over the last three decades since economic liberalisation has been driven by private consumption. In fact, the deceleration and the negative growth during 2020-21 were also attributed to a declining private consumption expenditure, while the recent growth revival also needs to be attributed to that.
While many nations, including China, made policy interventions to move towards the “consumption-led-growth” strategy for a sustainable growth model, India is blessed to have been organically gifted with that driver.
Though many attribute the fiscal packages announced in the 2020 pandemic year as the driver of the apparent revival of the Indian economy, the force of private consumption as a growth determinant for India is indicated by data itself.
On the one hand, consumption growth will be spurred by the FTAs further. On the other hand, the other enabling factor for the Indian growth story will be China with its misdemeanours and mismanagement of its international strategic relations as also its domestic economy.
The Geopolitical and Geoeconomic optics
The pandemic and subsequent war have taught the global economy that overdependence on a single economy-specific global value chain (whether it is China or with Ukraine-Russia) is fraught with extensive risks. The US-China trade war and the pandemic-induced supply chain disruptions prompted the China Plus One (C+1) strategy for diversifying investments from China to other countries, in order to mitigate the economic and geopolitical risks associated with the former.
India is and will be a major beneficiary of this for various reasons. As such,of the cumulated FDI of USD 950 billion received by India ever since 1947, more than 55% arrived ever since the pandemic set in.
First, India’s competitive advantage lies with its comparative demographic dividend over China. The under-30 population in India, being about 52 percent, compares favorably with around 40 percent for China, which is going to shrink faster over the next decade. The young population is expected to boost consumption, savings and investments, and will drive consumption-led-growth.
Second, as per 2019 estimates,the average Indian wage is 10% of that of China, thereby rendering relative cost-competitiveness to the products manufactured in India as compared to China. This is already enticing foreign investment.
Third, India’s massive emphasis on physical infrastructure through projects like the National Infrastructure Pipeline (NIP) for FY 2019-25 (estimated total project cost of US$ 1791.05 billion) and transport sector growth will reduce the transaction costs of doing business.
There are allegations that in China, there is fragmentation of the logistics chain with the pick-up, over-the-road transport, and final delivery being done by different companies, which increases the transaction costs.
Fourth, India has been working extensively to reform its business environment through effective policy practices: be it through measures like Production Linked Incentive (PLI) scheme, or bringing about substantial changes in its tax regimes, liberalization of the Foreign Direct Investment (FDI) policies in manufacturing, etc.
Fifth entails digital literacy and English language skills.On both counts, the Indian youth is way ahead of China.
Seventhly, as stated earlier, Indian diplomacy is also playing an important role with trade agreements being used as important instruments of diplomacy. This is true for the UAE, Australia, and the partnerships like QUAD (or even IPEF), and I2U2.
The subsequently planned trade agreements with Canada, EU and African countries will add to the bandwidth of the Indian businesses to tap both untapped factor and product markets that will further boost the consumption-driven-growth phenomenon.
Finally, with India becoming the most populous nation in the world, surpassing China in January 2023, it presents itself as the largest product and factor market to the global community.
There is no other nation in the world, which presents a big market with a population base of 1.4 billion whose incomes are increasing at 7% per annum as per recent estimates. This market is only slated to grow further. No doubt, global investors are getting lured by this sheer size.
This commentary originally appeared in India Today.
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