India should take the lead in regional connectivity and integration

If India has to progress towards deeper engagement under the ‘Neighborhood First’ policy, it has to integrate some of the genuine concerns of its strategic regional partners, writes Kumar Deep for South Asia Monitor 

Kumar Deep Feb 16, 2020

India's Union Budget 2020-21 has come at one of the toughest times for the economy. Domestic demand for goods and services, export order books, gross domestic product (GDP) and growth projections, are all depressed. Added to this are binary issues of inflationary pressure and burgeoning fiscal deficit. Finance Minister Nirmala Sitharaman did a tightrope walk on February 1, when she presented the Budget to Parliament, but spectators weren’t impressed.

The markets tanked on budget day and, particularly players who have significant cross-border interests, didn’t think the trade and industrial policy directions announced in the budget were progressive, bold or reformist. How does it translate for business and trade, especially in the South-East Asian region? What went wrong and is there scope for course correction?

Analysts in India point out that despite the current regime coming in with a promise of making India investment, business and trade-friendly, it has actually erected taller tariff walls around its companies, markets, products and small and medium sector enterprises. Coupled with this has been a steady stream of ambiguous to opaque regulatory and policy frameworks, which leave little space for businesses and trade to breathe easy.

The usual rhetoric heard in many government circles are: India’s small and medium sector businesses need to be cushioned, indigenous manufacturing of products is mandatory and, with or without a life-threatening virus, China’s march into domestic and South-East Asian regional markets has to be contained.

The Economic Survey makes a strong case for free trade, by stating “as an India that harbours misplaced insecurity on the trade front is unlikely to grab this opportunity, our trade policy must be an enabler. In fact, contrary to recent fears, careful analysis of controls for all confounding factors show that India has gained from trade agreements”.

Even if one were to avoid getting into the details of the Economic Survey, just reading the chapter headlines like ‘Undermining  Markets: When Government intervention hurts more than it helps,’ Privatization and Wealth creation’ and finally, ‘Wealth Creation: The invisible hand supported by the hand of trust’, are clear indicators of reformist, out of the box, economic welfare paths to prosperity.

Contrast this with the budget document which states that imports under Free Trade Agreements (FTAs) will be scrutinized for adherence to rules of origin clause. Similarly, import tariffs on countless items have been scaled up each year, without  status check on readiness of domestic producers to supply similar quality products at the same, if not cheaper, rates. Add to this the promise of reviewing  customs duty exemption lists.

How far will changes made to the added scrutiny process under FTAs add to regional trade woes? India imports huge quantities of refined, bleached and deodorized palmolein oil, paper and paper products, to name a few from the regional markets. Most of these items enter India at zero or lower customs duties due to existing regional trade agreements. Domestic manufacturers have often raised the bogey about the dumping of goods in the local Indian markets, without substantial value addition from exporting countries. 

They have pointed to ‘origin of goods’ from other countries redirected to India through low or zero barrier wall countries taking advantage of regional trade agreements. This is a compelling argument for revenue loss for the government which found mention even in the budget speech, punched with terms like, ‘imports through free trade agreements’ pose a ‘threat to domestic industry’ and many instances of ‘undue claims of benefits have been found’, all of which are harbingers to open a new bureaucratic line of checks and penalties, plus an additional delay at ports of entry. Coupled with this could be significant market access opportunity losses in impacted countries, which could rupture the delicate fabric of bonhomie experienced by India in its neighbourhood.

If India has to progress towards deeper engagement under the ‘Neighborhood First’ policy, it has to integrate some of the genuine concerns of its strategic regional partners. India’s economic policies, of which the budget is a key document, has to reflect flavours of the rich and diverse South-East Asian ‘thali’. Stalled regional economic partnerships must be reopened and clearly chalked out by an inter-ministerial team, headed by a cabinet minister. The path towards a USD 5 trillion economy is possible only through greater regional connectivity where India can take the lead in integration. Populist, protectionist policy measures have to be discarded for a pro-market pro-reforms mindset. Equal partnership responsibilities along with sweet rewards once in a while will do a lot more towards creating millions of jobs and billions in investments than appearing nonchalant to large investors. Investor guarantees, more important with strategic trade partner companies, coming up with tailor-made solutions for each, will be a game-changer.

The answer perhaps lies in what the Economic Survey suggested and the Budget endorsed ‘Assemble in India’ as part of ‘Make in India’. India has huge potential to emerge as an assembly hub of electronic products, also known as networked products. Companies on top of networked products are Sony, Apple etc. All these companies do not manufacture their entire finished products consisting of thousands of smaller parts in one factory. Their component production layout is a countrwise mosaic, with each contributing to one task or stage of final product. The various components finally are assembled together for a global market in one or two geographies for rest of the world. India’s proximity to many South-East Asian countries and, in many cases , shared cultural heritage and great renewed diplomatic relations opens a whole possibility of ‘Assembled in Region’ for the world, advantage.  India can enter into bilateral or in some cases cluster multilateral agreements with certain countries in the region, based on its choice of assembly lines of products it wants to value add on. It can then allow zero or low tariff imports of components of the final product from these South-East Asian neighbors while itself creating a robust assembly line with huge investments coming in and lakhs of new jobs being generated. 

This is win-win situation for all as more jobs and more investments come in for each country while contributing towards a peaceful prosperous neighborhood.  This can be complex country by country agreement specially in the region where each deal has to be negotiated keeping regional domestic lobbies in mind. Equal partnership responsibilities along with sweet rewards once a while will do a lot more towards millions of jobs and billions in investments than appearing nonchalant to large investors. Investor guarantee, more important with strategic trade partner companies and coming up with tailor-made trade solutions for each will be a game changer.

(The writer is Country Manager, ITI Council)


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