It is often said that Indian economy is standout alone in Global gloom. In 2022. India’s GDP growth will be around 7% against the world’s average of 3.2%. This is a huge margin above others even taking into account that our previous base years were very low during Covid. The economy has so far staged a smart recovery after the devastating impact of Covid virus. Again as a good news, while most of the countries are grappling with soaring inflation, in India it has been tamed down to 4.9% in the previous month. This gives some leeway to the RBI in fixing the bank rates for growth. It looks like India is swimming against the global waves.
However, there is need for caution for policymakers. In today’s global economy, the fate and fortunes of all nations across the world is bound together through complex webs of global trade, finance and production networks. Such is the integration of the world economy that no national economy can insulate itself from the workings of global markets. The data now available shows that the export has contracted 12% in the second quarter of the current financial year. The current account deficit has risen to $35 billion in December. The export is shrinking due to the slowing of economies in other countries reducing the demand outside. But Indian imports remain inflexible mainly due to our crude requirements. The situation has been complicated by Ukraine-Russia war. The rising CAD puts pressure on the value of our currency. While the present depreciation of rupee is mainly due to external factors with the dollar strengthening against all emerging market currencies, the rising current account deficit will add to the worry about the currency. The rupee is the worst performing currency among the emerging market economies in Asia.
There are more than one reasons to strive hard to increase the export. Firstly it will ease the situation of trade deficit. Secondly and more importantly this will mitigate the present situation of jobless growth in the country. Exports can be increased only by increasing our manufacturing sector. Increase in job-intensive manufacturing will provide jobs to rural migrants. The present share of manufacturing in GDP in India is only 15.6%. With some efforts, this can be increased to 21% by 2031. In 2023, India will be tested if it can be a global manufacturing hub. The government has come forward with production linked incentive scheme for 13 sectors in manufacturing. It is also clear that the world is looking for alternative to China in the area of manufacturing. With its vast labour force, low wages and relatively large economic size India has the potential to emerge as a focal point of the alternative supply chains in the region.
But the shift of manufacturing from China to India will not take place without significant changes in the policies. In last two decades, China has heavily liberalised its foreign investment policy by reducing the import tariffs. Its average applied industrial tariff rate has gradually fallen to 6.2% by 2021. Similarly India has to be bold in its approach. We must proceed to systematic rollback of tariffs by a few percentage points each year as we did several years after Manmohan Singh’s initiatives. We should not have too many classification for commodities of imports. Unnecessary classification of ‘Non Essential’ imports in the trade should be removed. Manufacturing is no longer about specialisation in an entire product For examples in stead of producing complete mobile phones we can produce those parts of mobile phones which are economically most viable in India. This is what is happening in all the countries.
The specialisation in product and reduction in tariffs will make India more capable of entering into Free Trade agreements. India should become capable enough to negotiate free trade agreements. We must move with speed and complete the pending negotiations with the UK and EU. Similarly we must strengthen our STF with major trading partners, notably, Japan, South Korea, and member countries of the ASEAN.
The electoral compulsions of democracy make it difficult to adhere to a long-term strategy for economic policies. The populist approach of all political parties for winning the elections has already ruined conspicuously sectors like power and agriculture. We should also stop bothering too much about the devaluation of rupee as a currency and rupee should be allowed to float with the market forces. Any stable government is good for economy. Presently a stable government under Modi has some vision for the future but political consensus, especially in reforms like labour laws, is a pre requisite.
