Obamanomics and India
Column : Obamanomics and India
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Wed, Jan 21 02:46 AM
Obama’s inauguration as US president will be a remarkable event in world history. The euphoria will be spread all over the world, including India. But we need to consider what impact his policies are likely to have on the recent turnaround in bilateral trade between the two great democracies. The picture appears far from bright. What should be India’s response?
The US economy is in deep economic chaos with recession likely to last at least till end 2009. Unemployment is rising, wages are falling, and income inequality is increasing. Most Americans are already disillusioned with free trade. In a reputed global survey, only 53 per cent felt that trade is good for the US, down from 78 per cent in 2002. Economists like Paul Krugman, Larry Summers and Alan Blinder feel that trade is hurting the middle class with stagnant wages and widening inequality. They are upholding the view that mobility of labour, capital and trade with poorer countries are making US workers suffer. Protectionism is emerging as a panacea.
Obama’s views and that of bulk of the Democrats are in line with the current mood of sacrificing free trade for fair trade. In their discussions with India, they will probably put up a strong case for labour and environmental standards and strict adherence to intellectual property rights. They may urge India to reduce trade transaction costs and allow greater market access by reducing tariffs. There may be a natural inclination to reduce work visas and offshoring to India, and providing direct and portfolio investment to India. Any discussion on a free trade agreement may include thorny labour and environmental standards, making trade agreements next to impossible. The Doha round is unlikely to be revived.
What are India’s options? India must make every effort to continue to forge a strong economic partnership with USA. It has little alternative market access. East Asian economies are already adversely affected by the recent global financial turmoil with their trade share massively dipping. Europe is under a severe recession and in no mood to encourage imports or foreign investment. To maintain its high growth momentum, India has to intensify its dialogue with the US at all levels and ensure that a strong bilateral trade relationship is sustained, and even strengthened. Bilateral official talks, private sector interactions have to be intensified, and US think tanks have to be made aware of the importance of trade with India. Both sides must be prepared to make the key policy changes that are asked for in these discussions.
Perhaps there is a silver lining to this apparently gloomy scenario. Indian government should seize the opportunity by undertaking much needed reforms in trade facilitation, tariffs and further opening up of critical sectors to FDI. These actions will not only buttress our relationship with the US, but will stand in good stead to promote trade with other strategic partners.
Transaction costs are extremely high in India. Trade procedures still involve countless signatures from a large number of agencies, and cargo dwell times are in weeks as against hours in successful trading countries. Recommendations of a 2004 trade faciliation report I wrote for the ministry of finance is yet to be fully implemented. It is high time we take the required actions to drastically lower the transaction costs.
Indian tariffs are one of the highest in the world. The rupee has depreciated by about 25 per cent since January, making imports prohibitive. In line with our goal of bringing tariffs to ASEAN levels, the government should reduce non-agriculture tariffs to encourage imports and promote exports. The revenue loss will be compensated by higher volume of imports and through implementing the GST ahead of schedule.
This is also an excellent time to raise FDI limits in several sectors and open up the education and retail sectors. India should approach the US with these reforms in hand and ask it to reciprocate by allowing temporary relocation of labour, encouraging offshoring, promoting greater access in goods, services and investment by removing existing non-tariff barriers, and help secure preferntial sourcing arrangements with US companies for large infrastructure projects. This will cement India as a strategic partner of the US, a thing for which both sides worked hard in the past decade.
Â—The author is principal adviser, CII. These are his personal views
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