India needs to home in on trade pacts fast
It is critical to review trade arrangements at both the multilateral, regional and bilateral levels to study where it can gain the maximum advantage
The economy seems to be slowly returning to a path of positive growth, but one sector continues to be a laggard and that is trade. Exports which had crashed about a year ago after the onset of the pandemic are slowly inching back on to a positive track. Imports especially of the non-petroleum segment are raising faster, an indication that domestic industrial output is picking up.
The pace of growth for both inward and outward trade, however, is uneven. Exports in January, for instance, rose by 6.16 per cent year on year, while there is now a dip in February by 0.3 per cent. As for imports, these rose by a meagre 2 per cent in January but spurted by 7 per cent in the following month.
Regarding overall exports, the apex export body, the Federation of Indian Export Organisations (FIEO) has estimated there could be a 7.3 per cent decline to $290 billion in 2020-21 from $313.36 billion in the previous fiscal.
The fall is obviously due to disruptions caused by Covid. This is both in terms of lower production within the country as well as collapse in demand in traditional markets like the US and Western Europe. At the same time, FIEO is quite upbeat about the current fiscal and expects exports to reach a height of $350 billion, largely based on the higher order bookings for products like processed food, pharma, medical and diagnostic products, chemicals and electronics.
This ambitious projection is only likely to be achieved in case demand revives sufficiently in developed country markets that have been this country's major trade partners. The dip in exports for February underlines the fact that the path to higher export growth is not going to be an easy one. India's exports, however, need to be viewed in the context of world trade during 2020 and predictions for growth in 2021.
According to the World Trade Organisation (WTO), global trade was expected to decline by 9.2 per cent in 2020, followed by a 7.2 per cent rise in 2021. The International Monetary Fund (IMF), on the other hand, expected a decline of 10.4 per cent in 2020 and a growth of 8.3 per cent in the volume of global trade. Trade in services is expected to grow more slowly given the curbs on cross-border tourism and business travel.
In other words, even the predictions for the current year do not envisage a return to pre-pandemic trade volumes. It will take another year or so for international trade to return to normal levels. For India, therefore, it is critical to review its trade arrangements at both the multilateral, regional and bilateral levels to study where it can gain the maximum advantage. On the regional front, it has already shied away from joining the giant Regional Comprehensive Economic Partnership (RCEP) on the grounds that it was not in its self-interest.
At the bilateral level, it is in the process of negotiating a number of key free trade agreements including with the European Union and the US which have taken an inordinately long time to complete. It has not concluded any new FTA since 2012. But if this country does not want to get left out of the multiple trade agreements that are being concluded by most countries, it will have to become more pro-active in this area.
The spate of regional and bilateral free trade pacts being concluded is largely due to the decline in influence of the World Trade Organisation in recent years. India has been an important player in this forum right from its inception but has not been successful in achieving all its goals on various trade issues. One of the reasons for the declining status of the WTO has been the US withdrawal from the trade body during the Trump administration. In fact, it even stalled appointments to the key dispute settlement panels that have helped in the past to resolve many irritants between member states.
The outlook for the WTO, however, has brightened with the advent of the Biden administration which has pledged to resume active US participation in multilateral fora. As a first step, it gave support to the appointment of the first woman and first African Director-General, the Nigerian-American Ngozi Okonjo-Iweala. Significantly, Ms Okonjo-Iweala held her first bilateral meeting with the Indian delegation. She has also publicly declared her respect for this country and its role at the WTO. At the same time, it is not clear whether she would support many of India's proposals and may actually veer towards supported the developed countries. For instance, she has already said that investment facilitation is an issue that will have to be taken up despite India's opposition to it. It is also not known whether she will support the case of India and other developing economies on agriculture and the need to protect livelihoods. In any case, it is clear a new era has begun at the WTO.
On the positive side, the new DG appears set to revive the dispute settlement mechanism as she has underlined the need for a platform to resolve members' disagreements. Even so, it is clear that India will have to negotiate nimbly to ensure that its interests are protected at this apex trade body. Till such time, however, as the WTO once again becomes an important forum for global trade, it would be wise for this government to build closer ties with other trading partners. Regional and bilateral trade agreements need to be reviewed and FTAs with large entities like the EU and the US need to be put on the fast track. There is no time to be lost if India is to play a significant role in global trade in the coming years.