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    India Must Invest in a Credible Growth Strategy

    GovernanceFinance and EconomyIndia Must Invest in a Credible Growth Strategy
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    India Must Invest in a Credible Growth Strategy

    Embracing foreign demand, capital and technology should be the pillar of a new growth strategy that can improve India’s economic competitiveness and help it to achieve its ambition for economic growth.

    EAF Editors   l   The Australian National University

    In the 77 years since gaining independence, India has faced many challenges — but a shortage of ambition has never been one of them. Prime Minister Narendra Modi wants his nation to become a developed economy by 2047, the centenary of self-rule, and aims for India to increase its GDP and GDP per capita seven-fold to US$30 trillion and US$18,000 respectively. While the exact targets are new, the underlying belief that India’s cultural legacy, massive population and geostrategic location ought to yield greater economic clout and global influence has been shared by all its leaders.

    What’s been missing so far is a coherent plan to achieve this vision, one that properly utilises India’s tremendous potential while remaining cognisant of the significant constraints under which it labours. Any growth strategy needs to be aligned with India’s demographic realities. The country has a vast young population that is still growing, with 1 million Indians turning 18 every month. To contribute to growth, and to maintain social harmony, these young people will need jobs. But impressive economic growth rates have not been matched by productive generation of employment, with 45 per cent of the population still stuck in low value agricultural work.

    Harnessing its abundant but on average low-skilled labour endowment must be the cornerstone of India’s growth strategy. The government has sought to promote domestic manufacturing but has invested in high-skilled capital-intensive sectors like semiconductors and electronics, which have failed to create jobs.

    Political Problem

    As Shruti Rajagopalan and Shreyas Narla write in the first of our two lead articles this week, published in the latest edition of East Asia Forum Quarterly, the government ‘has embraced a more inward-looking stance … through new production subsidies, tariff increases and a reluctance to join multilateral trade agreements’. Aside from a few episodes of flirting with liberalisation, New Delhi has tended to be sceptical of openness to global markets. Together with post-colonial ideological underpinnings, the economic rationale has been that its domestic market is large enough to look inward. But market size is about consumption, not just population. Less than 5 per cent of Indians earn US$10,000 a year or more, and 800 million economically insecure people receive free grain rations from the government. Focusing on the domestic market is putting the cart before the horse — growth must come first. Given domestic constraints, a credible strategy must tap into foreign demand, capital and technologies. 

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    There is a clear route into global value chains, with RCEP members keeping the door open for India’s entry into the world’s largest trade agreement. This would be a significant step towards reaping the benefits of the China+1 shift, which so far has seen investments flow mostly to Vietnam, Mexico and Malaysia. The political problem is that policymakers have conflated the success of FTAs with their impact on trade deficits, assessing an agreement to be a failure if it results in India importing more than it exports. Such analysis ignores the benefits of imports in giving consumers access to goods that are not being supplied at competitive prices by domestic producers; and indeed, helping domestic producers become more globally competitive by using cheap high-quality inputs manufactured abroad.

    Resilient Supply Chains

    India’s trade deficits are a symptom of its lack of competitiveness, and a product of its domestic savings and investment imbalance. It has all the endowments necessary to become a manufacturing powerhouse but its model of ‘subsidies and protectionism without the disciplining of global competition’, as Rajagopalan and Narla argue, enables not development but ‘a form of cronyism that, in turn, demands greater protectionism’. There is no doubt that acceding to RCEP would invite stiff opposition from domestic lobbies, but this is a consequence of the status quo which is hamstringing the economy and requires major reform.

    Some argue that India has missed the value-chain boat and should instead focus on joining ‘resilient’ supply chains which exclude China. Yet even if global trade slows down, India makes up such a small fraction of world merchandise exports (2.2 per cent compared to China’s 17.6 per cent) that taking over others’ market share provides an important engine for growth. It is also not clear that joining ‘resilient’ supply chains would be conducive to trade-driven growth. Trading at the exclusion of China would likely involve paying hefty premiums, given that China is often the global cheapest producer of what India needs to become a successful manufacturing nation. As External Affairs Minister Jaishankar was quick to point out in defending India’s purchase of discounted oil from Russia, India’s income level is an important constraint in its foreign policy. Second, China is so integrated into global trade that it may not even be possible to fully exclude it — for example, EVs made domestically by Indian firms such as Mahindra use battery cells made by Chinese company BYD.

    Nationalistic Sentiments

    A big hurdle to an externally oriented Indian development strategy is the sensitivity around the China relationship. As Harsh Pant and Kalpit Mankikar write in our second lead article this week, the ‘June 2020 clash between Indian and Chinese soldiers in Galwan marked an important inflection point in their relationship’. The border had been an area of contention for decades but the conflict resulted in fatalities for the first time since 1975. India interpreted this as China’s commitment to more aggressive enforcement of its territorial claims and retaliated by restricting Chinese apps, investments and tourists, leading to the current impasse in China-India relations: China wants to repair the wider relationship before resolving the border, while India is determined to resolve the border issue before repairing the wider relationship.

    But completely shutting out China is a non-starter, given it supplies 15 per cent of India’s imports — twice as high as the next largest source. Continuing to block engagement will also see no progress being made. Pant and Mankikar argue that ‘Indian attitudes toward Chinese investment stem primarily from a surge in nationalistic sentiment’ after the conflict. 

    New Delhi must now resolve this conflict between economic and domestic political imperatives.

    Chinese Investment

    The economic goal of making firms more competitive and integrated into global value chains requires foreign investment, and lots of it. But as Pant and Mankikar point out, FDI inflows have ‘dropped to US$26.5 billion (2023-24) from US$42 billion (2022-23)’. Though the Commerce Minister poured cold water on proposals coming from Ministry of Finance bureaucrats to encourage Chinese investment, ‘there seems to have been a recalibration of India’s stance on economic engagement with China’ with some investments granted conditional approval.

    With international sources of investment seemingly drying up, India is recognising that it may need to rethink its economic relationship with China. For a more credible development pathway, a rethink of its growth strategy is in order too.

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