Reform in Practice: Shekhar Aiyar (ICRIER) on Trade Liberalization

So I thought I would focus today on trade liberalization. Let me start with the somewhat obvious point that the multilateral rules-based trading system is facing hard times. There was an explosion of tariff and non-tariff barriers which long predated President Trump's second term, and the WTO's trade adjudication mechanism lies in tatters.

Against this somewhat grim backdrop, there's been a lot of interest in the field of geoeconomics, which looks at how countries can serve as connector countries between rival ideological blocs. And here the good news is that India is actually one of the most connected countries in the world. So for example, if you look at a metric like our geopolitical distance from our trade partners, and you weight that by trade shares and take the standard deviation, you find that India is very, very well connected.

The bad news is that we don't trade enough. So we are not taking advantage of this enviable spread of trade partners that we have across the ideological spectrum. We could be doing a lot better.

So let me focus on three areas in particular. First, we should be laser focused on cutting red tape and on cutting non-tariff barriers. Remember that imports are the lifeblood of exports.

So the more costly, the more difficult and cumbersome it is to procure imports, the more difficult it is for exporting firms to have access to cheap inputs, the more difficult it is for them to procure cutting edge technology. In India, the numbers are dismal. It takes an average of 30 days for a manufacturing firm to obtain customs clearance for an import.

Compare that against 12 days for the average G20 country, 9 days for the universe of emerging markets. Unsurprisingly, this is reflected in the very small proportion of Indian firms that use foreign inputs. It's only 11% for India, compared to over 30% for G20 countries and over 40% for emerging markets. So we can do a lot better. The reason for these dismal indicators is not hard to find. Very complex regulatory burdens, a lot of mandatory paperwork, a lot of license requirements.

In addition to that, there is the unpredictability of policy. Sometimes there are sudden import bans or quality control restrictions, even for essential inputs like steel. This makes it difficult to sustain our place in supply chains or even to establish a place there to begin with.

Then there is the regulatory overlay between different agencies, for example, GST, customs, RBI, that adds a lot of duplication and complexity to the process. All of this is especially difficult for small firms because small firms, unlike large corporates, cannot hire armies of lawyers to sort of wade through the compliance requirements and make sense of them. Secondly, we should be focusing on reducing import tariffs, which remain among the highest in the world, and signing a lot of free trade deals.

So we're already doing good work in this area, but we need to redouble our efforts. In particular, if you look at regional trade within South Asia, it's very anemic compared to other parts of the world. Regional trade within South Asia, even excluding Pakistan, is a tiny fraction of regional trade between ASEAN countries in Southeast Asia, to take one obvious comparative group.

So we should be lowering intra-regional trade barriers and taking advantage of obvious opportunities like cross-border trade in energy. We should also be signing a lot more regional free trade deals. One example is the CPTPP.

This is an agreement between countries' major economies in the Asia-Pacific region, and it is so big and so important in the global trading system that even unlikely candidates like the UK and Canada have successfully applied for membership. So there's really no excuse why India shouldn't follow suit and also negotiate entry. This is especially the case if we want to take advantage of the China plus one strategy that a lot of firms and countries are pursuing because the CPTPP excludes China.

Finally, let the rupee float. This is an area where we've already made tremendous progress recently. The exchange rate acts as a shock absorber and it can substitute for much more painful adjustments in the real economy.

Keeping the rupee artificially strong comprises a tax on our export competitiveness and is very burdensome for exporters. So it's very heartening to see the RBI governor come out recently and say in no uncertain terms that the Central Bank of India does not target a particular level for the exchange rate. So with these three policy reforms or areas, I think India can unlock the tremendous unrealized trade potential that we have and help to propel us a little bit closer to the goal of a Viksit Bharat.