Opinion: For Its Own Sake, India Should Give Trade A Chance

Atman Trivedi (@AtmanMTrivedi) is a managing director at Hills & Company and an adjunct fellow at the Pacific Forum. He worked on India policy at the Commerce and State Departments, and the Senate Foreign Relations Committee.

The United States and India are gearing up to take another historic step in their emerging security partnership. But when Secretary of State Mike Pompeo and Defense Secretary Jim Mattis sojourn in New Delhi to talk with their Indian counterparts, contentious trade and economic baggage will be lurking not far behind.

In the days leading up to the inaugural "2+2 dialogue" on Friday, a meeting typically reserved for U.S. treaty allies, the Trump administration has insisted that trade issues are a strategic priority. But the combination of India's old habits on trade and the president's transactional worldview complicates the already daunting task of arriving at a shared, high-level picture of the U.S.-India commercial relationship.

A month ago, Pompeo delivered a speech on "America's Indo-Pacific Economic Vision" at the U.S. Chamber of Commerce that inadvertently illustrates the point. The lofty title of his remarks notwithstanding, he didn't offer a substantive agenda with India. That's not too surprising, as the countries share an unenviable distinction: Both show clear signs of disengaging from regional and global trade in a quixotic quest to defy the laws of economic gravity.

To see what I mean, take a peek at this summer's headlines from India's leading business pages. They describe a new government task force with the strange and amusing mission of reducing India's overseas imports. In today's hyper-connected world, a committee on limiting imports may as well try boiling the ocean.

Donald Trump's trade warriors don't see the humor, recently imposing steel and aluminum tariffs on India (on the even more risible grounds of "national security"), restricting high-skilled worker visas critical to its IT sector and threatening to revoke developing-nation trade benefits.

For all of India's endearing qualities as a democracy, burgeoning U.S. strategic partner and potential pillar of stability in Asia, Trump is right to acknowledge the obvious: The country of over 1.3 billion has been downright stingy about granting access to its markets.

Back in 1991, New Delhi capitalized on a jarring financial crisis to launch a package of dramatic, market-opening reforms. It's time to finish what it started. Not to please Trump or even to court global businesses dangling capital, technology and know-how — though in reality, India needs to trade more with America precisely for the latter — but because that's what is required to grow fast enough to create good-paying jobs and improve quality of life for millions of citizens.

India offers intriguing economic credentials. Afflicted by paralysis only four years ago, the country now boasts the world's fastest-growing major economy, a formidable and growing middle class and youthful demographics. Indian Prime Minister Narendra Modi has undertaken smart — albeit incremental — reforms to improve governance, strengthen business conditions, fight corruption and begin digitizing the economy.

His government has, at times, even successfully pushed politically difficult structural changes. It overhauled the bankruptcy code to encourage innovation, instituted a single tax regime to replace a byzantine system of central and state levies, and removed costly fuel subsidies.

Despite these and other noteworthy economic accomplishments, even some of the Indian government's supporters acknowledge it has failed to measure up in an area critical to future growth and prosperity: international trade.

In fact, on trade, India is moving fast in the wrong direction. In 2017, the U.S. and India imposed the most trade restraints of any country — and that was before this year's federal budget featured wholesale tariff hikes for the first time in decades. As eminent economic officials head for the exits, New Delhi is recycling old, debunked policies, like official requirements and preferences that favor domestic goods and services, and pushing costly, new limitations on foreign e-commerce companies, all in a bid to replace imports with homegrown manufacturing.

Why? To be fair, it's not just a case of Washington's recent disappointing example on trade, allowing protectionist impulses to bubble to the surface, though that doesn't help.

About 45 percent of India's workforce toils on ever-shrinking farmland. They regularly vote and face serious headwinds, but agricultural output makes up only around 15 percent of GDP. The country's urgent need to shift frustrated villagers into better-paying and more productive urban manufacturing and services jobs is complicated by a number of homegrown factors and also its own sizeable trade deficit with China.

While these and still other reasons for protectionism may be defensible, if India continues to emulate Trump in building a wall against imports, the consequences for many millions trying to escape varying degrees of poverty will be severe. The evidence shows that when developing nations increase their ratio of trade to overall output by only 1 percent, that typically achieves more than a 1 percent decline in poverty. Economist Arvind Panagariya recently pointed out India's GDP grew 8.2 percent annually from 2003-2004 to 2011-2012 — a period that coincided with deepening trade and other economic liberalization efforts.

New Delhi appropriately touts India's recent growth trajectory, but the country's per capita GDP tells a different story. The World Bank estimates that figure at under $2,000 last year – about five times less than workers in China. Only after 30 years of 8 percent or more economic growth (which is above current levels) would India graduate to middle-income status. In the near-term, the country's consumers would benefit from more and cheaper choices resulting from expanded trade.

More fundamentally, employing rural youth who are flooding cities at a rate of a million a month requires India to export more labor-intensive products. But New Delhi is struggling to help create enough quality jobs without lifting trade barriers and pressing ahead with deregulating land and labor markets and privatizing the economy.

Walk the halls of government and you might witness the positive, new Indian attitude toward international business. Yet, the improvement hasn't buoyed a practical measure of India's global economic competitiveness: The country's labor-intensive exports were flatter than a chapati over the last three years. Rising oil prices and escalating global trade tensions mean India can ill-afford complacency.

To improve its modest share of world trade and enhance labor productivity, India needs to open markets and join global supply chains, while accelerating complementary domestic reforms. These steps can and should be taken alongside official measures to assist the poor and vulnerable confronting related economic dislocation. More robust public investment in education and health care is a critical element.

But dodging imports (which are increasingly used to make finished goods — think iPhones and modern passenger jets — in today's international economy) while embracing exports poses inherent contradictions for emerging as a high-value, international manufacturing hub and also complicates the case for industrialized countries to tear down their own barriers to Indian goods and services.

At roughly half China's factory wage levels, India has an opportunity, especially with U.S.-China trade and geopolitical tensions, if it can manage its own economic disagreements with the United States and harness manufacturing capacity. But India isn't well-positioned to fill its giant neighbor's shoes as an alternate supply source for more advanced industrial products hit by U.S. tariffs. That's partly because of trade policies intended to shelter domestic firms from Chinese and other overseas competition.

Rather than badger India over a manageable and decreasing trade deficit of almost $30 billion, Washington should encourage it to find creative solutions that satisfy its needs, such as the country's recent proposal to swap in an alternative methodology for price controls on medical devices. The new, more nuanced approach seeks to account for the substantial markups apparently charged Indian consumers by local hospitals and businesses on the original manufacturer's products, without penalizing the latter.

Both governments face important national elections, with India's next spring. Political reality calls for nuanced approaches — discussed in a civil way befitting close partners — to reconcile "Make America Great Again" with Modi's "Make in India" initiative. So far, India's recent approach, while wary, has emphasized pragmatism and restraint. Will the Trump administration continue to reciprocate?

If India can somehow resist the magnetic pull of populism drawing in Washington, it could hasten its transition to a developed economy. While much of the world turns inward, why not seize the chance to get its domestic house in order and show how to emerge as a global trading nation in the 21^st century — before it's too late?

Mandarins in Delhi, not to mention officials in both of India's major, national political parties, will require convincing. It may be fanciful to hope for a trade policy makeover when official criticism of free trade agreements wins loud applause — even before an Indian business audience. Despite his incredible popularity at home and his party's outright parliamentary majority, Modi has been cautious and, in recent months, heeded protectionist calls from economic nationalists in his base.

To truly be a transformational leader, sooner or later, he will need to address these supporters still chanting the mantra of self-reliance that unfortunately guided India's economic relations with the world for almost a half-century after the country's independence in 1947. It probably won't happen — if it does — until after parliamentary elections.

New Delhi's back-sliding is a pity. India's still-significant human need should provoke the government to rip off the Band-Aid and revise its playbook on trade.

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