Changing economic order

Synopsis: In the absence of a focused approach to exports in the changing global environment, longer-term growth prospects are bound to suffer.

Introduction

India is on track to attain the $400-billion export target this fiscal year. Exports jumped to $33.44 billion in September, registering 21.35% year-on-year growth. India is clearly benefiting from a stronger-than- expected recovery in international trade.

But note that booming international trade may not sustain for long and the world is witnessing a trend of de-globalisation. Hence, India needs to adopt policies that could suit the changing global environment.

Why it is said that the world is witnessing a deglobalisation phenomenon?

International trade has been under pressure for several years and the pandemic has only exacerbated the fault lines.

Large economies are reconsidering their dependence on international supplies and would aim to build domestic capacity.

Corporations are also re-evaluating the resilience of supply chains. All this may affect global trade and growth over the medium term and hasten the trend of de-globalisation.

The trade openness index, which was steadily rising in the post-war period, for instance, started declining after 2008 financial crisis.

The growth of global value chains has stopped, and reforms are stalled all over the world according to an article on the de-globalisation trend last year by the Peterson Institute for International Economics.

China, which has been a driving force for trade and growth in recent decades, started looking inward. Although it is still a dominant exporter, exports as a percentage of gross domestic product (GDP) have fallen from over 30 per cent in 2008 to under 20 per cent.

Trade tension between the US and China during the Donald Trump years also contributed to the process. Strategic rivalry between the two and the evolving geo-political environment would continue to undermine economic openness.

Institutions governing the global order are also under pressure.

How India needs to prepare for the future?

India should not get carried away by the current year’s export numbers. India will not be able to attain higher sustainable growth without higher exports and policy-making should be guided by this basic economic reality.

Need to review of the current trade policy. India has increased tariffs in recent years, which has direct implications for exports. According to the World Bank data, exports as a percentage of GDP have fallen from a high of 25% in 2013 to about 18% in 2020. This needs to be reversed.

India needs to tap more global markets. Recently, India decided to stay away from the Regional Comprehensive Economic Partnership, which will affect longer-term trade prospects. India needs to reconsider such decision and it should negotiate better to get advantageous free trade pacts.

Source: This post is based on the article “Changing economic order” published in Business standard on 20th October 2021.

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