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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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Economy

Role of WTO in Regularization of International Trade

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International trade is one of the main features of the globalized world and global economy. There it needs also a well-organized institutional mechanism to regulate it. World Trade Organization is an international organization established in 1995, whose main objective is to facilitate trade relations among its member countries for their mutual benefits. Currently 164 states are its members. The activities and works of WTO are performing by a Secretariate of about 700 staff located in Geneva, Switzerland, led by the Director General. English, Spanish and French are the official languages of World Trade Organization. The annual budget of WTO is about 180 million dollars.

Since its creation it is playing an important role in the regularization of international trade. It offers a forum and facilitation for negotiating trade agreements in order to reduce the barriers in the way of smooth international trade among member countries. Thus, the role of this organization is playing very important role in the regularization of international trade which is contributing to economic development and growth of member countries in this globalized world. The World Trade Organization also offers an institutional structure and legal framework for the execution and supervising of the international trade related agreements which are very helpful in regularization of international trade. It also settles disputes, disagreements and conflicts occurring during the interpretation and execution of the components of the international agreements related to international trade. During the past 60 years, the World Trade Organization and its predecessor organization the GATT (General Agreement on Tariffs and Trade) have assisted to establish a solid and flourishing global trade system, by this means helping to extraordinary international economic development.

The WTO is regularizing international trade more specifically through negotiating the decrease and finally elimination of barriers to trade among countries and try to make smoothly the working of the rules and principles governing the international trade e.g. tariffs, subsidies, product standards, and antidumping etc. It also administers and monitor the execution of the World Trade Organization’s determined guidelines for trade in services, goods as well as intellectual property rights related to international trade. It also monitors and review the member states international trade policies as well as make sure the transparency in bilateral and multilateral trade agreements. Likewise, it also solves disputes arising among members related to trade relations or related to the explanation of the provisions of the trade agreements. It also offers services to the governments of the developing states in the fields of capacity building of officers in matters related to international trade. WTO is also doing research on matters related to international trade and its related issues and collect data in order to find better solutions of the problems and obstacles in regularization of international trade. It is also trying to bring into the organization the 29 states who are yet not members of the organization aimed to assist and regulate their international trade according to the international standard.

One of the main barriers in way to international trade is disputes between the engaged parties. Since long this was a very critical issue limiting the trade among states. The WTO is playing very good and instrumental role in the solution of trade related disputes. Since the establishment of WTO in 1995 over 400 disputes related to trade have been brought by its member countries to WTO. The increasing number of bringing trade related disputes to WTO is showing the faith of member countries in the organization. Close trade relations have massive advantages but also create disputes and disagreements. With the increase of international trade, the possibility of its related disputes also increases. Previously, such problems and disagreements have caused in severe disputes. But at present, in the era of WTO the international trade related disputes are decreased because the member states have now dispute’s solution platform, and they are turning to the World Trade Organization to solve their trade related disagreements and disputes. Before the World War Second, there was not any such international organization or forum which could facilitate international trade and its related affairs, and there was also noany legal framework for solving trade related disputes among states of the word.

One of The World Trade Organization’s guiding principal is to continue the open boundaries for trade, ensure the Most Favoured Nation (MFN) status among member countries and stop discriminatory behaviour of members towards other member(s) and bring transparency in doing international trade. It is also assisting counties to open their indigenous markets to global trade, with justified exemptions or with suitable flexibilities, promote and support to durable growth, reduce trade deficit, decrease poverty, and promote economic stability. It is also working to integrate different international trade policies and principles. The member countries of WTO are also under the compulsion to bring their trade related disputes to this organization and avoid unilateral actions. WTO is the central pillar of the current international trade system.

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Russia and France to strengthen economic cooperation

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On April 29, Russian President Vladimir Putin held videoconference with leaders of several French companies-members of the Franco-Russian Chamber of Commerce and Industry (CCI France-Russia) to discuss some aspects of Russian-French trade, economic and investment cooperation, including the implementation of large joint projects as well as the prospects for collaborative work.

Putin noted that the Economic Council of the Franco-Russian Chamber of Commerce and Industry is still operational in spite of difficulties, and the late April meeting was the fourth time since 2016. From the historical records, France has been and remains a key economic partner for Russia, holding a high but not sufficiently high, 6th place among EU countries in the amount of accumulated investment in the Russian economy and 5th place in the volume of trade.

Despite a certain decline in mutual trade in 2020 (it went down by 14 percent compared to 2019) the ultimate figure is quite acceptable at $13 billion. French investment in Russia is hovering around $17 billion, while Russian investment in France is $3 billion.

Over 500 companies with French capital are operating in various sectors of the Russian economy. French business features especially prominently in the Russian fuel and energy complex, automobile manufacturing and, of course, the food industry. “It could have been more if the French regulatory and state authorities treated Russian businesses as Russia is treating French businesses. We appreciate that in a difficult economic environment, French companies operating in Russia have not reduced their activity,” Putin pointed out.

The Russian Government established the Foreign Investment Advisory Council, which includes six French companies. Further, there is an opportunity to discuss specific issues related to the economic and investment climate in Russia, and that opportunity is traditionally provided at the St Petersburg International Economic Forum, which will be held on June 2-5.

French companies are involved in the implementation of globally famous landmark projects, such as the construction of the Yamal LNG and Arctic LNG 2 facilities and the Nord Stream 2 gas pipeline project. This, Putin regrettably said “We are aware of and regret the amount of political speculation concerning the latter. I would like to point out once again that it is a purely economic project, it has nothing to do with present-day political considerations.”

Russia intends to increase assistance to the development of science and technology. Funds will be directed primarily to innovation sectors such as pharmaceuticals and biotechnology, nuclear and renewable energy, and the utilisation of carbon emissions.

“We are interested in involving foreign companies that would like to invest in Russia and in projects we consider high priority. In order to do this, we will continue to use preferential investment regimes and execute special investment contracts, as you know. A lot of French companies successfully use these tools on the Russian market. For example, more than one third of 45 special investment contracts have been signed with European, including French, partners,” he explained during the meeting.

He also mentioned continuous efforts to attract foreign companies to localise their production to state purchases and to implementing the National Development Projects, as well as existing opportunities for French businesses in special economic zones. Today there are 38 such zones created throughout the Russian Federation.

Russia pays particular attention to attracting high-quality foreign specialists. Their employment is being fast-tracked, and their families can now obtain indefinite residence permits. There is a plan to launch a special programme of ‘golden visas’ whereby to issue a residence permit in exchange for investment in the real economy, a practice is used in many other countries.

Taking his turn, Co-Chair of the CCI France-Russian Economic Council, Gennady Timchenko, noted that the pandemic has changed the world, people and business, and that French companies in Russia are responsible employers and socially responsible members of Russian society.

Despite the crisis and the geopolitical situation, a number of French companies have launched production in 2020–2021. Companies such as Saint-Gobain and Danone have renewed their investments. French companies have increased their export of products manufactured in Russia; they are investing in priority sectors of the Russian economy. For example, this year the French company Lidea is launching a plant called Tanais to produce seeds. Russia is dependent on the import of 30 to 60 percent of these seeds, according to various estimates.

Despite the current geopolitical conditions and information field, there are important signals for French business and the Russian side to strengthen economic cooperation, attract investment, and create partnerships on a new mutually beneficial basis.

Co-Chair of the CCI France-Russian Economic Council, Patrick Pouyanne, noted that the meeting has become an excellent tradition, the presence of 17 CEOs and deputy CEOs of French companies shows the importance of these joint meetings, and further reflect the deep interest of French business in Russia.

In addition, Patrick Pouyanne further offered some insights into Russia-French cooperation. By 2020, twenty members of the Economic Council invested a total of 1.65 trillion rubles, supporting 170,000 jobs. These companies have operated in Russia for decades and continue investing in the Russian economy despite the sanctions and the epidemic. These companies help France maintain its status as the second largest investor in Russia. In 2020, France invested over $1 billion in Russia despite the economic difficulties caused by the pandemic.

Concluding his remarks, Patrick Pouyanne stressed that the economic operators believe everyone will benefit if Russia, France and all of Europe are not divided or isolated. This is the challenge today. Indeed, diplomacy has to continue playing an important role in settling differences, and businesses are convinced that meetings like this create bridges between Russia and France to strengthen investment and economic cooperation.

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Iran’s Economic Diplomacy through CPEC

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U.S. sanctions against Iran are characterized by strategic flexibility and adaptability. They are designed to have maximum negative and deterrent effect on Iran’s military, economic and diplomatic growth.  Tehran is exploring ways to counter these sanctions most probably by economic engagements with the regional countries. Iran’s perception of CPEC lends some credit to this argument.

Since the initiation of CPEC, the regional perception has already started to change as many countries have begun to see the project within the domain of their national interests. Iran has expressed its long-standing interests to join the CPEC viewing the corridor as a cornerstone for the country economic prosperity and regional connectivity.

Iran solely focuses more on the economic aspect of CPEC. Regional connectivity through CPEC can boost Iran’s stake in the global output. In 2015, on the sidelines of the United Nation General Assembly (UNGA) address, Iran’s President Hassan Rouhani expressed a desire to be the part of CPEC. He emphasized the importance of connectivity projects for the region. Iran’s initial reluctance to CPEC was transformative in nature and heavily came down with the unfolding of new geoeconomic realities.

Iran’s inclination for the CPEC project even becomes the part of official discourse. Iran’s ambassador to Pakistan Mehdi Monardost showed keen interest to participate in the CPEC and named it as one of the greatest projects in the history of the region. He envisioned a great boost to bilateral trade between Pakistan and Iran under the framework of this regional connectivity corridor. In 2017, Iran’s economy minister Ali Tayyebnia participated in the New Silk Road summit. He praised the New Silk Road concept for regional connectivity.

Iran’s economy is already clutched due to the international sanctions invoked by the Trump administration after pulling back from the Iranian Nuclear Agreement formally known as the Joint Comprehensive Plan of Action (JCPOA) in May 2018.Downplaying the perception of geopolitical competition between Gwadar and Chabahar, Iran higher officials negated the impression of competition falsely exaggerated by International and India media and insisted on the complementary nature of two ports.

In 2016,Iran and India signed an agreement for the development of Chabahar port and it was view as the counterweight to Gwadar port. Without explicitly mentioning India by name, Iran’s ambassador to Pakistan Syed Mohammad Ali Hoseeni defended the decision of his country to drop out India from the project in Chabahar by stating “when some foreign governments found reluctant in their relations with Iran and need other’s permission for even their normal interactions, for sure they would not be capable of planning and implementing such long-term cooperation contracts”.

The same rhetoric appears in the views of Chinese leadership. Brushing aside the allegations of Iran’s perceived resistance to CPEC and Gwadar port, Iran’s foreign minister Jawad Zarif dismissed the allegations and supported growth and development anywhere in Pakistan.

Chabahar is often seen as a rival to Gwadar port. However, Indian discourse has got an altogether different lease of life in the media compared to the Iranian one. Iran’s ambassador to Pakistan Mehdi honardoost utterly disregarded the narrative of competition of two ports. He invited both Pakistan and China to closely work in Chabahar port.

China considers Iran as an important country for its energy security, BRI and in the larger context of global competition with USA. China dual role both in Gwadar and Chabahar, according to the analysts, will likely reduce the impression of competition between two ports. Chinese stance on the Chabahar port also complement the Iran’s position on Chabahar. Chinese premier Le Keqiang rejected the notion that Chabahar port is in competition with the Gwadar. He is convinced with the idea that both ports have the potential to complement each other.

Tehran global status goes upward with the emerging financial and diplomatic backing of China. Beijing openly backs Tehran in the face of U.S. might.  On March 26, 2021, China and Iran signed an agreement expressing a desire to increase cooperation and trade relations over the next 25 years. Wang Yi, Chinese foreign minister, said that USA should rescind the sanctions against Iran. The 25 years deal is considered as part of the Belt and Road Initiative (BRI). According to Tehran Times analysts Peyman Hassani and Ammar Hossein Arabpour, this deal is considered a relief to Iran’s gas and oil sector against USA sanctions.

USA sanctions forcefully bar the countries from purchasing oil from Iran. The US Department of Defense’s report notes that China Pakistan Economic Corridor (CPEC) focus on pipelines and port construction. Pakistan’s reluctance to follow the Iran-Pakistan gas pipeline which is stalled due to American pressure can be reviewed, too much sigh of relief for Tehran’s energy export.

Triangular relations of China, Pakistan and Iran will likely put Iran on the strong footing. Richard Caplan, a professor of international relations at the university of Oxford, notes, “The agreement which predates Biden, undercuts U.S. efforts to isolate Iran economically and, to some extent, diplomatically.

Diplomatic and economic isolation remain at the center of Iran’s foreign policy under the severe U.S. sanctions. Iran’s perceptions of CPEC revolves around the same fact that through regional engagements under CPEC and BRI, it can tackle its global problems to some extent.

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