Global supply chains make atmanirbharta take a back seat

Subir Roy

Senior Economic Analyst

INDIA signing free trade agreements with four countries that make up the European Free Trade Association (EFTA) — Norway, Switzerland, Iceland and Liechtenstein — is being seen around the world as an initial signal that it is willing to open up more on trade. As a quid pro quo, these four nations, which are not members of the European Union (EU), have made a commitment to invest $100 billion in India over the next 15 years.

India had earlier signed an interim deal with Australia and key negotiations are going on with the EU and economically important countries like the UK and Israel. A deal with Oman is ready for signing. The perception is that the government is seeking to capitalise on increasing global interest in what is now the fastest-growing major economy in the world. There is also a perception that India may ease a little in negotiations with the UK, with which it has historical trade linkages. The new government that will come to power may give the deal a final push so as to see it through.

The new interest in multilateral trade is a climbdown for the present government, which began by seeking to make the country atmanirbhar or self-reliant. Unless import tariffs come down, which has to go hand in hand with greater embracing of trade, the government’s attempt to raise manufacturing activity through the production-linked incentive (PLI) scheme will be negated. For example, high import tariffs on components for cellphones are hindering their local manufacturing, which is a key component of the PLI scheme.

What the government needs to prioritise is becoming a major beneficiary of the ‘China plus one’ policy, which global companies are adopting in order to reduce their huge dependence on manufacturing in China. Right now, Vietnam and, to an extent, Malaysia are often winning at the expense of India as global firms find that these geographies deliver lower costs and score on the ease of doing business.

Additionally, India cannot expect to be a global manufacturing hub unless it becomes a key link in global supply chains. No country manufactures all that goes into today’s complex electronic and engineering products. Raw material and components which make up the assemblies and sub-assemblies have to go in and out of the country across minimal tariff barriers so that the final products that cross the shores are competitive across the world.

Today, you cannot be self-reliant in the sense of growing and producing most of what you consume and still aspire to become a global manufacturing powerhouse. For example, India is the global leader in the production of off-patent pharmaceuticals, but it is a major importer from China of active pharmaceutical ingredients that go into the manufacture of the formulations. The sooner the country gives up old simplistic notions of being atmanirbhar, the better it will be for its economy and the income and welfare of its people.

The rapid economic growth that the country was able to enjoy from the 1990s resulted from the liberalisation policies that did away with licensing and lowered import tariffs. The latest trends in official thinking will hopefully take that liberalisation forward.

Tariff is not the only element that has gone into the trade and investment deal with the EFTA. It also indicates that India is willing to live by the new norms that are seeking to drive developed countries in areas like labour, environment, sustainability and gender. To take the last element first, India must turn itself into a nation where women do not hit a glass ceiling in seeking to rise up to the level that their talents will take them.

India will also have to live with the commitments it has made to cut down on emissions and participate in the efforts to reduce global warming. A key element in this is to stop setting up coal-fired power plants. India is not just a big miner of coal but also a heavy importer of crude oil. There needs to be in place an aggressive programme to tap solar and wind energy, as also the production of green hydrogen. The move to raise the domestic manufacturing of electrolysers, which produce hydrogen, is the right kind of policy to follow.

There is also the key issue of adopting globally accepted labour standards. Workers need to be able to follow reasonable working hours — not having to work 12 hours a day, as do security guards in housing societies and gig workers. They also need to enjoy social security benefits that today only a job in the organised sector of the economy comes with.

If new labour codes end up creating a higher proportion of temporary workers, the matter needs to be seriously looked into. Workers also need to be able to enjoy the benefits of medical insurance. The PM Jan Arogya Yojana seeks to deliver this to the poor, but it still has a long way to go in order to become fully operative for all those who need to be a part of it. India’s trade partners will not take kindly to competitively priced exports by Indian firms which engage workers without adhering to labour standards.

A breakthrough in trade negotiations will be beneficial for a range of industries. The foremost is the textile sector, which employs 45 million people. Also waiting to catch strong tailwinds are sectors like marine products, auto and engineering components, chemicals, leather, and gems and jewellery.

According to the government’s projections, 80 million new jobs can be created by 2030 by actively seeking to link India with global supply chains. Should even some of this were to happen, the wages that the new workers will earn will give a boost to private consumption expenditure, which will create demand for corporate sector FMCG (fast-moving consumer goods) biggies that continue to experience sluggish volume growth in rural areas.

Rising consumption expenditure will lead to greater capacity utilisation in factories and prompt businesses to create fresh capacity. This will lead to greater investment in plant and machinery, thus enabling the private sector to take over the mantle of capital investment from the government, as signalled in the Interim Budget.

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