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India’s inward (re)turn: is it warranted? Will it work?

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Abstract

India is turning inward. Domestic demand is assuming primacy over export orientation and trade restrictions are increasing, reversing a 3-decade trend. This shift is based on three misconceptions, which we dispel: that India’s domestic market size is big, India’s growth has been based on domestic not export markets, and export prospects are dim because the world is deglobalizing. In fact, India still enjoys large export opportunities, especially in labor-intensive sectors such as clothing and footwear. But exploiting these opportunities requires more openness and more global integration. Abandoning export orientation is thus akin to killing the goose that lays golden eggs. Indeed, given constraints on public, corporate and household balance sheets, abandoning export orientation is akin to killing the only goose that can lay eggs.

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Fig. 1

Source: WTO and Ministry of Commerce, Government of India

Fig. 2

Source: WTO and Ministry of Commerce, Government of India

Fig. 3

Source: Chatterjee and Subramanian (2020a)

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Fig. 5

Source: Chinnoy and Jain, 2018 (updated)

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Data availability statement

The data and codes that support the findings of this study are available from the authors upon request.

Notes

  1. Development is about a lot more than this question but we chose to focus on one dimension both because it is macro-economically important and because it has become a domain of intellectual and policy contestation. On another important issue, namely fixing the financial system to revive investment, a more detailed diagnosis and prescriptions are in Subramanian and Felman (2019).

  2. All discretionary scrutiny of FDI was abolished, reflected in the dismantling of the foreign investment promotion board. In terms of sectoral scope, India is closer to a negative list of impermissible FDI than to a positive list of permissible FDI. Similarly, there has been a consistent opening to foreign equity and bond inflows as well as relaxation of limits on external commercial borrowings (Patel, 2020). The impact of these measures on actual gross capital inflows has been substantial. In the period before 2014, FDI averaged $27.5 billion and total capital inflows averaged $80 billion; thereafter FDI jumped to 42.5 billion (55% increases) and total inflows to $133 billion (66% increase). Two exceptions to the FDI liberalization were in relation to China and to retail, the latter to favour a domestic incumbent against foreign competition from Walmart and Amazon.

  3. One tension about this view is that it is at complete odds with the official figures which now show steadily rising and robust growth in private consumption until 2018.

  4. Recent ideas from scholars at Azim Premji University to create urban employment guarantee schemes and from Jean Drèze for low-wage subsidies are extremely important and worthy of consideration. But they should be seen more as strengthening the social safety net and less as policies to sustainably boost growth (Abraham et al., 2020; Drèze, 2020). We therefore do not discuss them in this paper.

  5. A number of China-related actions have also been taken—restricting Chinese foreign direct investment (FDI), excluding Chinese firms from bidding for government contracts, indigenizing military production and reducing military imports, delaying clearing of goods and services coming from China, and banning Chinese technology apps and platforms. This paper will not focus on these trade actions, as they are largely geo-political in intent.

  6. The HS Classification was revised in 2017. Hence, we cannot fully compare 2017 categories with 2016 categories. Thus, the bar for the tariff changes between 2016 and 2017 is omitted. The 3200 increases in tariffs for HS6 digit lines includes the 24 increases between 2016 and 2017.

  7. Kelkar et al. (2020) cite the Global Trade Alert database to show that India had the highest count of protectionist actions amongst developing countries (Chart 3, https://www.livemint.com/news/india/india-must-remain-vocal-for-global-11594822682912.html).

  8. $300bn is the total imports in 2017 across all HS-6 categories where tariffs were increased between 2017 and 2020. Note that we cannot say how much of actual imports were affected because some came under free trade agreements but we discuss this issue below.

  9. High and low skill sectors are defined in Chatterjee and Subramanian (2020a). Apparel, textiles, leather and footwear are the large and prominent low-skill sectors.

  10. Simple average of MFN duty for HS-2 digit category 85. Cell phones and electronic products are not low-skill intensive products although their final assembly might be.

  11. https://www.business-standard.com/article/economy-policy/duty-free-hits-a-fifth-of-manufacturing-imports-says-wto-report-120071201035_1.html.

  12. For example, motor vehicles, textiles, petroleum products, sugar, wheat, vegetable oil dairy products and other food products were excluded or placed in the sensitive track for delayed liberalization in India’s ASEAN FTA. If certain goods are excluded, then the question of trade diversion does not arise and tariff increases will lead to a reduction in imports.

  13. https://www.business-standard.com/article/economy-policy/invoking-self-reliant-india-govt-bans-import-of-101-defence-items-120080900743_1.html).

  14. A recent exposition of this view is by respected banker and former government-appointed head of the BRICs bank, K.V. Kamath: “India and China have had very different growth paths, he said, adding that the neighbour to the east expanded into exports because they didn’t have a big enough domestic market for the goods. India, the world’s second-most populous country, will likely focus on the ‘Atmanirabhar Bharat’ plan championed by the government. That, according to Kamath, will benefit India’s economy and balance of account.” (https://www.bloombergquint.com/economy-finance/indian-banking-system-in-a-much-better-place-than-earlier-says-kv-kamath.).

  15. This corresponds roughly to the median purchasing power estimated in Ghatak et al. (2020).

  16. We do not include consumption for two reasons: the pragmatic one is that the mismeasurement in GDP affects consumption, especially for the last two decades, and hence misleading for analysis (see Appendix 4 in Chatterjee and Subramanian, 2020a). The more conceptual reason is that consumption is likely to be more endogenous to income than the other demand correlates, although supply factors could be driving all these correlates.

  17. The strong correlation between non-oil exports and the real exchange rate is also true for the non-oil current account balance and the real exchange rate. And, as Fig. 5 shows, the correlation holds for earlier periods as well.

  18. A different policy implication drawn by Ghatak et al. (2020) is to bias growth (on the supply side) in favour of those who have greater propensities to consume. An agricultural push, because it raises incomes of those that are relatively poor, potentially increases demand for the kinds of manufacturing goods where scale might matter. But nothing about this argument prevents a push on construction which is highly unskilled labor intensive (see Amirapu and Subramanian, 2015); or even on unskilled labour intensive manufacturing and exports. And nothing about this argument warrants protectionism that would raise costs and incentivize inefficiency.

  19. There has been a gradual change in this 4Cs problem. Until recently, the problem was that these investigative institutions were using their institutional independence (in the context of a weak executive) to act as unaccountable vigilantes that exerted a chilling effect on public sector decision-making. Now they have become instruments of the government and as a result their targets are more politically decided. The recent example of a privatization transaction being re-opened by a state high court against a former minister and critic of the government is a case in point.

  20. In the case of China, nearly 90 percent of intermediate imports of textiles and clothing are embedded in exports. Today, China’s dependence on imports have declined but after it has achieved success. These import dependence numbers are much greater in IT and electronics, suggesting that even in those sectors greater openness will be required.

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Acknowledgements

This paper builds upon a contribution to the Peterson Institute for International Economics (PIIE) volume on the US-India trade relations. We are grateful to colleagues at PIIE and seminar participants at Ashoka University, the Center for Policy Research Delhi, and the Institute for Economic Growth Delhi for comments, and to Abhishek Anand, Sajjid Chinoy, Rana Hassan, Pravin Krishna, Rohit Lamba, Aaditya Mattoo, T.N. Ninan, Dani Rodrik, Sutirtha Roy, Justin Sandefur, Harsha V. Singh, and Navneeraj Sharma, and especially Devesh Kapur for valuable discussions. Thanks are due to Christoph Lakner and Sajjid Chinoy for sharing data. And we are particularly grateful to Josh Felman for several discussions on this topic over many years and for detailed comments that considerably improved early drafts.

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Chatterjee, S., Subramanian, A. India’s inward (re)turn: is it warranted? Will it work?. Ind. Econ. Rev. 58 (Suppl 1), 35–59 (2023). https://doi.org/10.1007/s41775-023-00156-1

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