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Indian Economy: Liberalisation gone for a toss?

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India always had an exasperating tie-in with quotas, low tariffs and restrictions. During 1960-85, it had sky-high tariffs but clearly the policies failed miserably. After it borrowed funds from the IMF in 1991 due to the economic crisis, it was compelled to follow the liberalisation policy and thus the regime of permit raj came to an end. The economic policy reforms remarkably upgraded India’s position in terms of GDP growth, quality of life and purchasing power parity. In recent years, it appears that the Indian economy is driving back to the protectionist policies which prevailed the pre-1991 period.

The Protectionism Hypocrisy

At the World Economic Forum meeting in 2018 in Davos, PM Narendra Modi, indirectly pointing towards Trump who have been propelling an “America First” Policy said that some nations were looking inwards and being protectionist. He appealed for more accessibility and free trade. Fast forward to 2019, India opted out of the Regional Comprehensive Economic Partnership (RCEP). The reasons are believed to be the fear of being swamped by imports especially from China, putting the domestic industries at risk. Given that India already suffers from a trade deficit from the members of RCEP of $105 billion and out of that $53.56 billion is from China alone, this decision seems very rational. But is it really?

Piyush Goyal (Commerce and Industry Minister) claimed that this decision will boost “Make in India” and that Free Trade Agreements (FTAs) with countries like Japan, South Korea and ASEAN provided them with duty-free access to Indian markets but domestic goods faced barriers in their territories. But this is not the entire picture. To test whether the FTAs were beneficial or not, the Economic Survey 2019-20 conducted research. For this, it took into account 14 trade agreements signed by India. Only the trade agreements with Korea, Japan and Sri Lanka had a negative impact which means that the percentage rise in imports was greater than the percentage rise in exports. Other trade agreements had either no impact or a positive impact.

Talking about the overall effect with the trading partners, the Indian economy actually gained. The impact on exports was 13.4% for manufactured products and 10.9% for the total merchandise. Whereas the impact on imports were found to be lower at 12.7% for manufactured products and 8.6% for total merchandise. Therefore, from the perspective of the trade balance, India has obviously gained in terms of 0.7% increase in trade surplus per year for manufactured products and a 2.3% increase in trade surplus per year for total merchandise. Although, all the views regarding the fallout of the decision to step back from the RCEP agreement are just speculations at this point and we will get to know about the actual effects in the years to come.

Back in January, when Jeff Bezos visited India, he got no reception from PM Narendra Modi. Piyush Goyal advocated that Bezos was only covering up losses from predatory pricing by investing $1 billion in India and also condemned his pledge to create a million jobs by 2025 arguing that it hardly made up for the millions of Indians put out of work by the e-commerce site. It is a popular opinion that the Chinese were able to build tech giants like Alibaba only because they shut out US-based firms like Google and Facebook. Therefore, it is believed that India should also block them and create its own local champions. But to aid its overall development, the Indian economy needs all the economic vigour it can assemble and that involves attracting foreign investors. With its frequent policy changes, India has already got an image as a troublesome and unpredictable place to invest. The government further signalled the investors about their protectionist intentions through this act and risked a dampening effect on investors globally.

Protectiveness Vitiates The Budget As Well

In the budget 2020, the government not only hiked custom duties on a wide range of goods like grocery items, shoes, dolls and toys, ceiling fans, wooden furniture, kitchenware appliances, hairdryers, shelled walnut but also intends to make changes in the Customs Act 1962 through the Finance Bill. It will be amended to give the government the power to impose safeguard duties and tariff-rate quotas on imports on the pretence of injury to the domestic industry. Since the 1991 liberalisation era, this power was restricted to trade of gold and silver. The procedure for claiming preferential tariff rates under trade pacts has also been made complicated with importers having to give declarations along with the certificate of origin.

These changes will surely increase the scope of corruption by bureaucrats as they get more power. Also, these arbitrary tax spikes will lead to economic distortions and worsen the rent-seeking activities by domestic industries as they will lobby for their preferred tariffs which would have been dampened in a world with uniform taxes. Thus, instead, it needs to adopt the strategy of simplified, uniform and predictable tariffs which will eliminate tariff Inversion (in which intermediate goods are taxed more heavily than the final goods) and distortion costs could be kept very low.

The current policy choice reflects a highly mistaken mindset that one can cut back on imports while boosting exports, not realising that a reduction in imports, induced by an increase in tariffs, is expected to lead to a decrease in exports of a corresponding value. This is known as the Lerner’s Symmetry Theorem, a result used in international trade theory stating that an ad valorem import tariff will have the same effects as an export tax and is based on the observation that the effect on relative prices is the same regardless of the policy.

A Call To Escalate Exports

According to the World Trade Statistical Review, 2019 by World Trade Organisation (WTO), India’s average annual growth rate in merchandise exports was 5.3% between 2008 and 2018 which is well below Vietnam, Bangladesh and China. The growth rate of India in commercial services export was 8.6% per year on average from 2008 to 2018. This is below many of the developing countries namely China, Philippines, Vietnam, Singapore, Thailand, Qatar and Myanmar. There has been a substantial increase in exports of transport equipment, chemicals and food products which contributed to moving up India to the 19th position in world rankings of top exporting countries.

Although India has achieved many milestones in the last decade, it can do much better given its potential and unexplored territories. In fact, the government should try to increase its exports than constantly trying to decrease the imports if it wants to be a $5 trillion economy. Some scholars argue that the huge trade deficit of India is not because of increasing imports but of decreasing exports.

“Unless India’s exports grow at 15%, we won’t get 8% growth. For that, we should reverse some of the protectionist measures taken. If we turn protectionist, I don’t know how can we be an exporting power. Self-sufficient exporting powerhouse is an oxymoron” – Arvind Subramanian said while speaking at a webcast organized by EY India.

In the Economic Survey, while discussing India’s performance on Ease of Doing Business (EoDB), a series of case studies shows the inefficiency in the Indian system of Trading across Borders. As Italy topped the EoDB ranking in Trading across Borders, they compared India’s performance with that of Italy. India takes 60-68 hours in border compliance for exports while Italy took only one hour. Moreover, the cost of compliance is zero in Italy compared to $260-281 in India for export. Almost 70% of the delays occur due to procedural complexities, multiple documentations and involvement of multiple agencies for approvals and clearances. These inefficiencies, in turn, lead to time delay and end up pushing the cost to trade. Progressing digitalisation and combining various companies in a single digital platform could possibly decrease these inefficiencies and enhance users experience considerably.

Also, a study found that an apparels consignment going from Delhi to Maine (USA) takes roughly 41 days, but 19 of these are spent within India due to delays in transportation, customs clearance and loading at sea-ports. Apparently, the process flow for imports is more efficient than that for exports. In contrast, however, the imports and exports of electronics through Bengaluru airport were found to be top-notch. It thus recommended that the processes of Indian airports should be replicated in sea-ports as well.

It also suggested adopting policies aimed at strengthening its involvement in the export market for Network Products (NP) in order to get linked with the Global Value Chain (GVC). Through observations, it has been found that countries who substantially increased their exports and managed to maintain it did it through linking up with the GVCs. Given our vast labour force with relatively low skill-set, India’s strength lies in the assembly of NP. While the short-term objective is the expansion of assembly activities on a large scale by making use of imported parts & components, giving a boost to domestic production of parts & components should be the long-term objective. Assembly is a highly labour-intensive area that can provide jobs for the huge population of our country, while domestic production of parts & components can create high skill jobs. But for a country like India to transform into a preferred location for manufacturing enterprises, it is imperative that import tariff rates for standard goods are zero or negligible.Thus, India needs to control itself on the tariffs and restrictions. India needs accessibility, it needs foreign investment, it needs the competition to be a world-leader.

Conclusion

There are different kinds of restrictions when it comes to protectionism. We can certainly have the set of duties which seeks to create a level playing field for the MSMEs but it becomes harmful when we instead try to protect the industries which are already in a good position in terms of opportunities in the hope to flourish them. There is just a slight difference between these two kinds and policymakers need to incorporate this idea when drafting policies. For instance, India refused to allow permanent tariff liberalisation on health and farm products at the WTO Council Meeting as an answer to trade disruptions caused by COVID-19 is not harmful protectionism. Every country will bear the brunt of COVID-19, the difference being the level of disruptions faced by each one of them. But we should also keep in mind that the least developed and developing countries need to be guarded given the lack of resources available to defend themselves from the crisis.

India acknowledges the disruptions caused in the flow of medical supplies, food and other goods and services across borders and has been playing a proactive role in combating it but doing so at the cost of its own industries is something India (or for that matter none of the countries) would like to do given the economic crisis they are going to face. At the same time blindly putting up restrictions will only lead to increased prices for competitively produced imports and the customers will end up footing the bill. India committed the same mistake back in the 1970s. In order to be self-sufficient, a country needs to make its industries capable through the competition so that the users do not pay the price by buying some cheap quality or inefficiently produced product. Protectionism is not the ideal approach if we want to grow. We should have an equally or even more efficiently produced substitute ready if we want to raise the tariffs. Thus, India should instead focus on the production inside the country and work on infrastructure, logistics, productivity and lifting the standards of products if it wants to reduce the trade deficit.

Aakash Agarwal is currently pursuing a Bachelor of Science in Economics (Honours) from Doon University, Dehradun, India. He has a research interest includes Global Economy, Financial Economics and IR Theory. His work has been published by the Diplomatist Magazine, South Asia Democratic Forum and the Kootneeti.

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Brighter Future Waits Ahead

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Our footprints on the sands of time are about to be washed up by the next wave. We need to set out new paths, urgently, after all, the real power of wisdom not hidden in knowing it all; but in not knowing enough. Because whatever we may think of our mastery of our own crafts is in reality achieving ‘mastery’ as an acknowledgment of arriving at a point of not knowing enough therefore continuous hunger and craving to search for bigger answers. Otherwise, just a few experts would have been enough for the world. Observe how after two millennia passed, we still have not figured out achieving grassroots prosperity, diversity, tolerance and equalities.

Only if our new wisdom understood will we advance or else stay lost at the beaches. Our new world of today needs new words, new vocabulary, and new narratives to allow correctly knitting the tapestries of our miseries and equally weaving strong and fit enough sails for the coming stormy winds of tomorrow. Muffled in the old-fashioned terms of the past, the double-sided, agenda-centric language used today, already lost its authenticity. Today’s language mummified in bandages of political correctness, already tombed intellectualism and spoken words into deprivations, while whatever enunciated as rehearsed acts via teleprompters is still  undecipherable by the global populace. Realities now demand change to honest words to assemble new narratives, to calm restless citizenry to deliver its truthful meaning in bold progressions.

Loudly enunciated are our acceptances of our victory and defeats or we stay silent to our deceptions. There is a brighter future ahead, indeed, but firstly, if we only accept for a moment that our previous attempts on grassroots prosperity creation were failures of sorts, suddenly pandemic recovery appears meaningful. If we also accept our previous trajectory of economic development spanning the last decade was somewhat hit or miss on targets, suddenly, new horizons appear.  If we accept also that all our power-skills and rich-knowledge almost maxed out, suddenly brighter futures start to appear. Because, only when we discover a window, find some empty spaces tumble into voids, and chasms new things start to pour in, new ideas flourish, the processes start as enlightenment for new discoveries to commence. No matter where we stand on this earth, a new world has once again brought us on crossroads to face new transformation for brand new adventures

Our limitations on our performance are true measurements to qualify us to enter the cockpits.  Historians will recognize this pandemic recovery as a very special moment; declare this era as a small blip in the course of human endeavor and a glitch that ‘possibly’ corrected the role of government administration to allow far more talented and upskilled citizenry at helm to advance.  One: The corporate leaderships of technology companies acquired extraordinary smarts many times more powerful over what their own top national political leadership team displays and thus unable to tackle any technology sides of the economy.  Two: Digitized and technologically advanced vertical sectors across 200 nations and 10,000 cities shut out national political leaderships and local institutional administrators as obsolete and unprepared to deal with the required speed of response and execution and therefore losing future control of the national economic drivers of national economy in global jurisdictions. Frequent flyers know a lot about flying city to city but definitely are not certified and qualified pilots to fly jumbos around the world. The power play of the digital economy once enters the ocean of platform economies of the world will become extremely specialized, therefore, unless prepared, nation-by-nation, top political leadership and government agencies will lose grip on all such technology advancement games and become simply spectators. Study crypto-currency deployments, Space travel and satellite transportation, AI and trading games, Jack Ma and China over ruling financial sectors as a start.   

Our mobilization of hidden resources and talents are proof of what we just learned coming out of fog. For the first time in 100 years, globally speaking, a new world emerges; The pandemic has already prepared the humankind to rediscover “the meaning of life” the purpose of “co-existence” while to the poor of the world “re-learn to survive” and to the rich “re learn to create common good”.  Is pandemic germinating our entrepreneurial intellectualism? Is this the kind of transformation humankind has been waiting for over a century? Why is futurism calling for futuristic literacy?

Our billion hungry every night despite two millennia past, we must show our resolve or our negligence will destroy us. The poor of the world; in neglect, misery and almost buried alive, Millionaires anxiously digging their own graves,  now exhausted, Billionaires digging deeper to find their own legacy if any and Trillionaires buying up heavens in the clouds to block other voices.  The Towers of Babylon going half empty, displaying signs of ‘vacancy’ fires of hell at the base only provide gentle warmth to the upper celestial floors of luxury living. Where sweetness is missing in the bitter medicine of our times ignored but candies alone will never cure; the message in the bottle found on the bloody beaches tossed but the noise of fakery drowns us all. Imagine, if we compressed the last two millennia in two minutes. We just evaporated at the last second. Universe did not even notice.

Wondering, what was the possible message in that bottle, if any? 

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Kickstarting the U.S. Economy: A Rebound or Further Inequity?

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The global economy has seen its fair share of peculiarity in recent years; much attributed to the developing economies rather than the stable sovereigns of the world. However, the wave of the pandemic has toppled the conventional trend unlike ever before. Whilst the developing economies gain traction, the European economies are crumbling under the whelming pressure of the pandemic.

The US economy, however, is on its track to rebound at nothing but an accelerated pace that is optimistic as it is sinister. Forecasters have been predicting an economic boom post the pandemic for months yet the claims were rebuffed as overly quixotic. The economic boom is on cards that could contract the surging unemployment rates and could even push the economy towards a prolonged growth trajectory.

The economic recovery is evident from the jump in retail sales all over the US: levels anticipated to bloom further amidst speculations of a hefty aid package advocated by president Biden. Moreover, the FED has predicted a growth of 4.5% in the US output; the highest predicted level of GDP growth in over two decades. The optimism is matched by the leading economists, likes of Goldman Sachs putting a word in their perspective: ‘We [US] are very likely to get a very high growth rate’.

The budding confidence in the economy is majorly linked to the rollout of vaccines. Albeit slow-paced, the vaccination drives are striving hard to meet targets set by the authorities. Coupled with the shift in the government, the national focus is primarily etched in the campaigns to ensure timely inoculation before the virus strikes again.

However, the inoculation would grip over the country for most of the year 2021, keeping the natural order of the country at bay. The economy, thus, is bolstered by Federal aid packages; pouring trillions of dollars in rental packages and unemployment benefits. The resulting is a pile of surplus disposable income which awaits an opportunity to be expended. Given the mounding pressure of recession and health crisis cumulated over the yesteryear, the income would be sufficient enough to suffice under the newfound rental and mortgage reliefs purported by the federal government. Combined with free public transportation, the added monetary value could be utilized as soon as the country bounces back from lockdowns.

The surplus income could further expand if congress approves the magnanimous aid package proposed by the democrats under the plan of president Joe Biden. As vaccinations continue to immunize the population and income blooms within common households, approaching summers could prove to be a haven for the US economy to shine bright. Peak demand for hotels and transport is expected in the second and third quarter of 2021; unemployment is predicted to level down to 4.1% due to surging demand for labour in the HoReCa sector whilst simultaneously kickstarting the dormant business of airlines and smattering of other means of transit.

Even the most experienced economists, however, have pitched reservations to the envisioned rebound of the US economy. The prime facet impeding that prospect is the intermittent campaign of vaccination. The inoculation has been slower than expected and the adverse effects of the jabs have instilled a fear that threatens to further stall the efforts to vaccinate the population. With the ensue of new virus variants in California and irregular vaccination drives, the expected recovery could defer to late 2021 and even 2022. This could make the US vulnerable to the 3rd wave of Covid as per the pattern of cases observed last year.

The political standoff is another factor that could push economic prosperity into despair. The simmering tensions post the impeachment trial of Donald Trump have surfaced over the last two months. The demarcation in the senate is as clear as it has ever been over decades and even the split in the republicans has brewed post the acquittal of Trump. Both parties locking horns this early casts a confusion that stood out in the recent energy crisis in Texas; the federal and state governments bumping heads whilst the state drowned in stark darkness and bitter cold. This disparity paints a bleak picture for the United States given Mr. Trump could stir more instability with the prospect of running the election again in 2024.

The escalating oil prices also indicate a tough road for nearly the entirety of the manufacturing sector of the economy along with any lucrative opportunity to the airline industry in the forthcoming months. As the world still reels from the pandemic, the crush in the oil supply from the US has rendered the valuation at high levels; a contrast to the plummeting prices just last year. The Brent index has surged more than 28% since December 2020, pushing the prices up to as high as $66 per barrel. With the forecasts expecting Brent to further climb up the trajectory and the subsequent production crunch from Russia and OPEC members, oil prices could rise up and beyond $70 per barrel. This price surge, as a result, could convert the booming economy into hyperinflation since the US would continue to rely on imported petroleum until it regains the economic traction to be self-sufficient again. Thus, the pilling income could transition into sky-high prices post the pandemic.

Mirroring the recession of 2001, while the economy started to expand within a year, the unemployment rates remained high for the better part of the decade. Drawing parallels from that period, while the growth is projected to touch the 5.8% mark later in the fiscal year of 2021, a congruent projection could not be made on the front of economic recovery. Although high inflation has never been an issue for the US in the past, unlike the developing nations, sluggish recovery in employment, brimming tensions in the political arena, and irregular inoculation rates could widen the gap of wealth in the country. Inequity, thus, is inevitable as an opportunity cost of growth at the expense of an inflating economy. The affluent strata of the society would reap the benefits much more rapidly than the working class. Whether it would be of long-term virtue or despair: time is the deciding factor for the common citizens of America.

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EEU: An Irrelevant Anachronism or a Growing Digital Enterprise Dynamo?

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A commonwealth of interests

The search for a stable Eurasia depended on the effectiveness of a durable system for the post Soviet space which could easily descend into an arc of instability if was not properly managed. Moscow had to be careful not to view these ex Soviet countries as its natural hinterland to be taken for granted and to upgrade its relations with each of them to preserve a communality of interests that had eluded it in Ukraine. The world of the command economy centred on Moscow would be made over on an entirely new basis that reflected the fast moving 21st century digital economy. Where common standards and freedom of movement of people and capital was meant to create a climate of openness and facilitate cross border business not to seal off Eurasia from the outside world. The fragile nature of post Soviet identities meant that a sense of commonwealth and common citizenship rooted in an overarching Eurasian identity would be more appealing to a growing entrepreneurial class disillusioned with the results of narrow ethno- nationalism as a ruling idea. The danger was that the more the Eurasian Union grew in stature it would have to navigate roadblocks deliberately placed there by powerful nationalist interests who perceived it as threat to their power base. And by stoking tensions with Russia periodically these former Soviet states could remind the outside world that they were not tame satellites of Moscow or artificial constructs but were free to decide their own destinies.

The path to some kind of durable Eurasian concept was obstructed by the reluctance of many Eurasian states to give up on the idea that eventually find a place in the west. The Eurasian union might be a useful stopgap while they waited to the privileged world of the west where they felt they ultimately belonged. Even though the chances were slim that it would ever happen. The Russian view of the Eurasian Union was that it would be a modernizing force which would have the express aim of bringing the region closer to the world and transforming it into a forward thinking technological giant. It would not be a repeat of the “Soviet experiment” which was a parallel universe closed to outsiders with information tightly controlled. And with the official version vastly at variance with the grim reality. Its core vision this time around was to effectively connect the region to the outside world and be at the forefront of new innovation. It would not depart from international standards and go off on its own tangent or conduct its affairs with guarded secrecy. But happily embrace new ideas and fresh thinking. Russia’s objectives were to circumvent parochial state leaderships and local bureaucracies and create a global brand that would capture the imagination of high net worth investors and provide a real alternative to pro western orthodoxy. With first class transport, logistics and a digital economy that would be the envy of the world, it would be first and foremost technocratic and meritocratic and not so much ideological in nature.

The Russian leadership concentrated on achieving maximum consensus in decision making and adopting policy positions where the weaker states would not be unfairly disadvantaged. While Russia would be providing the bulk of the digital infrastructure and at its own expense it would be considered common property of the Eurasian economic union in many ways. Russia’s contribution was based on a more generous model than its Chinese partner which took the form of loans that could result in forfeiture of assets if loan payments were not met in time.

Digital future

Thus Russian prime minister Mihail Mishustin recommended at a meeting of the inter Government commission implementing a “digital project” across the whole Eurasian union. This would provide a “specialist information system” in the sphere of “migrant labour” that would better serve the needs of business and the migrant communities. These measures would seek to gradually phase out and replace the patchwork, confusing system of regulations with a common framework. So for example in future the EEU would receive powers that would promote standardization. The Eurasian commission adopted a new technology based system of labelling products that “would apply in future in relation to new categories of labelled products.” The prime ministers of the EEU states approved a document that would “establish a time limit by which member states would be notified of the intention to introduce labelling on their territory.” And would give them a “period of nine months to outlaw unlabelled products.”  The new system should eventually be incorporated fully at the national level so that business could “escape unnecessary burdens” caused by “different systems of control.” and gradually filter out bureaucratic anomalies.

The priority was to create a level playing field so that the EEU was not perceived as just an exclusive club for Government connected state companies. But that it would also create conditions for small and medium enterprises to thrive and expand and ease substantially the costs of doing business. As well as reversing the favouritism traditionally shown to large companies by making the ability of SME’s to operate in an environment that was transparent and equitable more concrete. For example the prime ministers of the EEU states agreed to a “unified ecosystem of digital transport corridors”. The total cost of the scheme would be around 10 billion roubles. The cost divided between the union and the member states. It would provide a “service for the access of electronic route maps, international transport charging rates” as well as electronic protocols that would give updated information on interior ministry regulations etc. This unified system was especially useful to SME sector who were often reliant on “outside platforms” which were often “not connected to each other” and ” the absence of coordination added to their logistical costs.”

Open banking

Similarly the five member states of the EEU have agreed to form a common financial market by 2025. A key role in this is played by financial technology which will be deployed to make financial services “more accessible, cost favourable and safer”. Private and business customers can expect “financial services of higher quality and greater choice to be available”. And with such a hi tech financial monitoring tool at the authorities disposal “credit and financial institutions will have to reveal the origin of their capital”. An important element was the Application Programming interface which gave the programme the capacity to conduct biometric identification and to connect IT systems together so “they can exchange information between themselves.” Also a pilot project was launched which the AFT system together with 13 Russian banks were undertaking. “The aim of it is to improve automated online credit lending for small and medium businesses.” And create a level playing field. This was another example of how the Eurasian Union was preparing the ground for a greater role for the more dynamic and innovative SME sector in anticipation for a shift from a resource based economic model to a more diverse demand and consumption one.

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