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Navigating India’s Growth Amid Global Trade Fragmentation
Context:
Economists have long emphasised that no economy has sustained growth above 7% without robust export expansion. This was particularly true in the era of globalisation and booming world trade.
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- The Economic Survey for 2024-25 acknowledges a different reality, stating: “Across the world, the focus of policymaking globally has shifted inwards. The promise of shared benefits from a globalised world with open trade, free flow of capital and technology, and sanctity for rules of the game may be behind us. It is as unwelcome and unfortunate as it is real.”
- The trend of geo-economic fragmentation (GEF) and the resulting reversal of globalisation has been evident for some time, predating even Donald Trump’s first tenure as President of the United States.
- Given these developments, a key question arises: If exports can no longer drive growth, how can India achieve the 8% annual GDP growth required to reach its goal of becoming a “Viksit Bharat” (developed nation) by 2047?
- The Survey suggests that India must increasingly rely on its domestic market rather than exports for economic expansion. Whether this approach will successfully sustain 8% growth remains uncertain.
Shift Towards Domestic Growth
A greater inward focus seems inevitable for three primary reasons:
- First: Global trade growth is slowing. Even as tariffs have been reduced, non-tariff trade barriers have surged.
- Currently, technical barriers to trade (TBT) impact 31.6% of product lines, covering 67.1% of global trade as of December 2024.
- Additionally, 31.2% of worldwide shipments are affected by export-related measures, while climate-related restrictions apply to 26.4% of trade flows.
- The Economic Survey cites research estimating the cost of trade fragmentation to global output at anywhere from 0.2% to 7% of GDP, depending on the extent of GEF.
- Second: Foreign Direct Investment (FDI) flows are also being affected.
- Companies are increasingly seeking to invest in geopolitically aligned nations, resulting in a decline in FDI to emerging markets and developing countries.
- Consequently, India’s tolerable level of current account may be lower than before.
- Third: A third significant factor behind India’s inward orientation is the necessity of reducing dependence on China.
- The Economic Survey highlights that excessive reliance on a single country for critical products exposes India to risks such as supply chain disruptions, price volatility, and currency fluctuations.
- While last year’s Survey proposed increasing FDI from China to reduce the trade deficit, the latest edition drops that suggestion, recognising that such an approach would not eliminate India’s dependence on China.
- Instead, the Survey advocates for strengthening domestic supply chains and securing alternative sources, even at higher costs.
Return of Industrial Policy
- Selective Support: The latest Economic Survey challenges argues that industrial policy—which includes selective sectoral support and targeted incentives—is making a comeback globally.
- Historically, the East Asian economic boom was attributed to strategic industrial policies that promoted competitiveness while shielding certain industries.
- Now, it is being recognised that similar policies played a role in the industrialisation of Europe and the U.S.
- India’s Status: India has already been moving in this direction.
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- According to World Trade Organisation (WTO) data, India’s average tariff rate increased from 13.4% in 2016 to 17% in 2023.
- In March 2020, the government launched the production-linked incentive (PLI) scheme to boost domestic manufacturing through subsidies and import tariffs.
- Additionally, domestic content requirements mandate that certain projects use a specified proportion of locally produced components, favouring domestic suppliers in public procurement.
Uncertainty and the Role of Public Investment
- Economic Stability: Reducing regulatory complexity is undoubtedly beneficial, but it is not a panacea for attracting investment.
- The key determinant of business investment is economic stability and predictability.
- Tackling Trump’s Challenge: The Economic Survey acknowledges that Mr. Trump’s vision for reshaping the international economic and political order will introduce significant uncertainty, causing businesses worldwide to adopt a wait-and-watch approach.
- To navigate these uncertain times, the government may need to significantly increase capital expenditure beyond the 10.1% year-on-year rise planned for FY26.
India’s economic strategy is shifting in response to a world that is turning inward. With global trade and investment flows under strain, the country is prioritising domestic markets, reducing reliance on China, and reviving industrial policy. As the world enters a new era of economic nationalism, India’s ability to adapt will be crucial in achieving its long-term development aspirations.
