Two major global changes in the past year; the ‘Brexit’ referendum and the advent of Donald Trump, writes Sandeep Kaur Bhatia
By Sandeep Kaur Bhatia
Two major global changes in the past year; the ‘Brexit’ referendum and the advent of Donald Trump; have impacted world markets.On 23rd June 2016, Britain voted to leave the European Union, probably the most successful regional bloc in the world. On November 7, 2016, Trump was voted in to become president of the world’s largest economy.
As he assumed office, and his first presidential act of pulling out from the Trans-Pacific Partnership, de-globalization in the 21st century appears to have become a reality. As Joseph Stiglitz pointed out, this phenomenon would be extraordinarily costly to the world economy.
The EU and the US are both significant trade partners of India, so both changes would substantially impact the Indian economy. India’s share of services exports in the world is 3.35 percent, while it is just 1.65 percent in merchandise exports. The overall global trade share is 2.1 percent.
The target for India’s Foreign Trade Policy 2015-20 is about 3.5 percent by 2020. Given the rising protectionism in the world’s largest economy, this is a major challenge.
The US is India’s top export partner in goods. Also, India had a trade surplus with the US of $24 billion in 2016. The US economy is India’s major market for software services; rising protection has already knocked out Indian IT services, by placing a limit on H-IB visas. The manufacturing sector is likely to be next. Medical devices,mangoes, IT professionals and others have already been targeted.
In such a scenario, India’s deficit is a major concern. Data from the RBI Handbook of Statistics on Indian Economy shows that India’s merchandise trade deficit has increased from US$ 7.4 billion in 1980-81 to US$ 112.7 billion in 2016-17. The manufacturing trade deficit is continuously increasing due to reliance on imports of industrial goods. The primary challenge is to reduce this. The recent appreciation of the rupee has adversely affected the county’s exports and has increased the current deficit.
On the other side, the share of primary products in Indian exports has declined, from 26.1 percent in 1987-88 to 11.5 percent in 2015-16, while the percentage of manufactured goods has witnessed a rising trend, from 68 percent to 70 percent during this period. There is a significant rise in petroleum products, from 4 percent to 12 percent. The share of textile products went down and reached a level of 13 percent, while the share of chemical products doubled, from 6 to 13 percent.
The recent Economic Complexity Index, developed by Haussmann from the Centre for International Development, Harvard University, has shown that India’s exports are diversifying. India’s rank went up two places to 48, while China’s rank came down six places to 26.The challenge is to maintain this complexity, which will automatically decrease the ongoing deficit.
To increase its share in the world market, ‘High Technology Exports’ is another option. India’s share of high technology exports is 11 percent, while 49 percent is low technology and 21 percent medium technology exports. The immediate requirement is to raise the share of high technology exports. This requires R&D expenditure intensively as well as extensively. But India’s R&D expenditure is very low compared to many other emerging economies. It is only 0.6 percent of GDP, while in China, it is 2.1 percent.
Half of India’s overall deficit is with China ($ 51 billion in 2016) is due to high technology imports, including mobile phones, machinery, and electronic products. R&D investment will play a double role, by creation of exports and a reduction in imports.
In contrast to merchandise trade, India’s services trade mostly remains in surplus. But in last two years, imports of services have increased, which has decreased the surplus. In service exports, software services have the major share, followed by business, travel, and transportation.
Brexit has affected Indian IT services, as Britain is the gateway for these services to the EU. India’s manufacturing exports include distribution services; other services like transport, travel, education, etc. must come forward in this value chain.This will decrease our manufacturing trade deficit, which in turn would make India’s global position strong in services. If a proposal on Trade Facilitation in Services submitted by India to the WTO in February 2017 is accepted, it will benefit the Indian economy.
The World Bank ‘s Ease of Doing Business Report 2018 shows that India has got the 100th position byimproving 30 places following an improvement in six indicators; dealing with construction permits, gtting credit, protecting minority investors, paying taxes, enforcing contracts and resolving insolvency.
For other indicators; like starting a business, trading across borders, getting electricity and registering property; the rank has actually come down.Time and the high cost involved in these transactions led to a sluggish performance in these indicators.
China has maintained the 78th rank in the current year. Though the gap is narrowing, India lags behind much in many indicators, especially in starting a business and trading across borders. These aspects must be eased through solid domestic economic policies in the current global scenario of reverse globalization.
It is also imperative for India to explore other regions for markets. Its trade deficit with Latin America has been narrowing. Also, its trade with Mexico, Colombia and Guatemala has increased, compared with some Asian markets, eastern and western European Countries.
Before signing a Regional Comprehensive Economic Partnership (RCEP), India must take into account its trade deficit with ASEAN, Japan, and Korea, which has increased after signing free trade agreements with them. These countries are all members of RCEP.
At present, India’s Trade - GDP ratio is only 12 percent. This was 17 percent of GDP in 2013-14. To raise it is a big challenge for the economy with increasing global protectionism.
Tackling these challenges is not only a sufficient condition for India to grow in the international market but a necessary condition. The country has a substantial potential, which can be explored through the creation of a cohesive and stable environment. This will expedite the process of altering the lower middle income status of our country.
(The author is an assistant Professor, Department of Economic Studies, Central University of Punjab, Bhatinda. She can be contacted at email@example.com)