India, explained.
The costal road in India's financial capital Mumbai (Punit Paranjpe/AFP via Getty Images)
Pivot to the West: India’s changing trade strategy
Even for a country of India’s economic size, not prioritising exports is unviable.
India, explained.
The costal road in India's financial capital Mumbai (Punit Paranjpe/AFP via Getty Images)
Even for a country of India’s economic size, not prioritising exports is unviable.
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Pivot to the West: India’s changing trade strategyPivot to the West: India’s changing trade strategy
Between 2009 and 2011, India entered into a flurry of trade agreements with countries to its east. Successive deals were signed with South Korea, ASEAN member states, Japan and Malaysia. The conventional wisdom in Delhi at the time was simple. The economic centre of gravity of the world was rapidly shifting east. The geography of India’s northeast meant national prosperity was linked to the proliferating bazaars of Hanoi and Surabaya.
Regional observers announced the arrival of Asia’s teeming middle class. The old days of rowing your own canoe were over. Prosperity in Asia was now interlinked. The midgets and the mammoths would sail together. The floodgates of milk and honey were open.
Cut to early 2020, Delhi was miffed. Trade deficits with Asian partners were bulging. When prodded about the merits of free trade agreements, India’s External Affairs Minister Subrahmanyam Jaishankar said, “Look at the state of the economy, look at the state of the manufacturing, then look me in the eye and say, yes, these FTAs have served me well. You won't be able to do that.”
By late 2020, Delhi trod a lonely path out of the Regional Comprehensive Economic Partnership, a trading bloc of 15 Asian nations that cumulatively represented a third of the global economy. Concerns about incessant dumping from Chinese producers and the prickliness of India’s agriculture sector were major reasons. Economic policymakers in India opined that “self-reliance” was crucial. Instead of relying heavily on global markets for economic diversification and exports, “decentralised localism” would help national industry.
Delhi’s role in the world deeply depends on the state of its economy.
How could the strategy be wrong? China next door was trumpeting a similar tune with its policy of “dual circulation.” The implicit belief in Delhi was that a colossal domestic market would suffice to propel India’s manufacturing dreams. If only the cobwebs of regulatory cholesterol, entrepreneurial diffidence and bureaucratic inefficiency could be removed.
A latent realisation has infused Raisina Hill these days. Even for a country of India’s economic size, not prioritising exports is unviable. Integrating with international markets is a necessity.
Even in 2020, some economists warned that India’s domestic market size is not as big as it is assumed to be. It is only 2-5% of the global market.
Moreover, India has a large population of middle and lower-middle-class earners who are cautious consumers. The proportion of high-income consumers, while concentrated heavily in most urban and some semi-urban areas, is relatively small. This disparity is slowly changing for the better. Yet, pockets of prosperity exist amidst swathes of stagnation.
Tending a rice paddy on the outskirts of Varanasi (Niharika Kulkarni/AFP via Getty Images)
Since 2022, there has been a perceptible shift in India’s trade posture. Free trade agreements are no longer frowned upon in Delhi’s officialdom. While India has reverted to economically reconnecting with international partners, it now prefers “like-minded” economies with a Western economic orientation. Insurance against supply chain shocks and natural complementarity in goods and services inform Delhi’s changed trade strategy. From May 2022, India has signed trade agreements with the United Arab Emirates and Australia, and has concluded an FTA with the United Kingdom. Negotiations have been fast-tracked for a long-delayed FTA with the European Union. A bilateral trade deal with the United States is temptingly close to completion. India’s largest investment destinations also tend to be countries like the US, UK, UAE and Belgium.
The gradual bifurcation of the global economic trading order between one centred around advanced Western economies and the other centred around China is another factor in India’s trade calculations. In recent years, China has penetrated markets in Asia, Africa, and Latin America at a faster rate than the United States.
Leaving aside the rhetorical flourish of the “Global South” aside, India is closely aligning itself with advanced Western economies. The desire to coordinate on strategic issues such as critical minerals, advanced technologies, semiconductors, and cutting-edge defence manufacturing is central to India’s westward economic orientation. In an unusual yet refreshingly candid admission, India’s commerce minister, Piyush Goyal, recently rebuked the Indian private industry. While lauding Chinese startups working on semiconductors, batteries, robotics, and automation, the minister said:
“I know at least three or four billionaires whose children make … very fancy ice cream and cookies … I have no complaint against that. But is that the destiny of India? Is the future of India satisfied with that?”
While the overall direction of India’s trade strategy is clear, some issues persist. Take the United States, for example. In recent years, political leaders from across the aisle in Washington have focused on building domestic manufacturing capacity. Delhi envisions the same for itself. The American medical device, pharmaceutical, agriculture, and dairy industries have complained about India’s entrenched protectionism. Agriculture and dairy are politically sensitive sectors in India.
Delhi’s role in the world deeply depends on the state of its economy. While its total size matters, India lacks a deep reservoir of industry-oriented scientific research and innovation. Despite favourable macroeconomic conditions, private investment has lagged in recent decades while merchandise exports have slowed. The picture, however, is not all bleak. The Indian economy has performed well in sectors including electronics, pharmaceuticals, digitalisation, banking reforms and the rapid growth of Global Capability Centres.
For now, it is too early to reach any conclusions about India’s trade trajectory. What is perhaps clear is Delhi’s westward economic orientation.
About the author
Ved Shinde
Ved Shinde is an incoming doctoral candidate at the University of Cambridge. He has previously been associated the Asia Society Policy Institute and the American Enterprise Institute.
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