India is again at the centre of global foreign policy discourse, and not for good reasons. The present government’s proclivity to sacrifice reforms at the altar of short-term political expediency has given rise to unkind remarks about India being a delusional great-power-to-be and suffering from a surprisingly xenophobic attitude.
Unsettling as disdain can be, it’s the current disaffection with reforms and liberalization coupled with populism at both the centre and the (majority) state levels that has made the country its own worst enemy. Asinine priorities have sapped the government’s ability to invest in meaningful projects and their manifestation in the country’s recent budgets has seen an explosion of the nation’s deficits. As a recent Citigroup analysis puts it: “India has always had deficits, but now they are no longer small. The rising deficits—(1) current account, (2) fiscal (government profligacy), (3) governance (self-inflicted) and (4) liquidity (cyclical, with strains of structural)—are feeding on themselves and have contributed to a derating of the India story.” Not surprisingly, S&P’s recent sovereign outlook downgraded India from stable to negative, with a proviso that “there is a one-in-three likelihood of a(nother) downgrade over the next 24 months” (current rating is BBB-).
The downgraded outlook has its basis in the recent sad performance of the economy. For FY12, core sector growth was 4.3% against 6.6% in the previous year, with the crucial areas of Index of Industrial Production growing at dismal rates owing to a contraction in the energy and electricity sectors. In the circumstances, even the projected revised outlook of sub-7% gross domestic product (GDP) growth in FY13 seems optimistic, and could see a downward adjustment of up to a percentage point. The year started poorly with an insignificant headline Purchasing Managers’ Index rise that is easily reversible given the negative inventory trends, and looking ahead, strong headwinds indicate difficulties in achieving better economic performance in the months to come.
Simultaneously, India’s trade performance has come under a cloud. The official position appears optimistic, as despite challenging economic environments in major markets such as the US and Europe, India reportedly crossed the merchandise exports target of $300 billion for 2011-12. However, India’s trade deficit touched a record high at $184.9 billion for 2011-12 (about 10.6% of GDP) as imports outpaced exports by a huge margin. Government data also showed that exports for the month of March fell 5.7% to $28.7 billion compared with a year ago, while imports rose 24.3% to $42.6 billion.
More worryingly, India’s global commercial service sector prowess is already under challenge and will be entirely overshadowed unless our policymakers wake up from their current complacent slumber quickly. This is significant since India’s particular development path has relied on fast-growing services. But the outlook for some of the dynamic service sectors in the economy is now linked to the global economy and the unfolding events in the euro area could lead to further sluggishness in the export-oriented parts of the sector. Doomsday forecasters could, in fact, be forgiven for postulating a recurrence of the balance of payments crisis a couple of decades earlier which had brought the country to its economic knees.
But is that fate inevitable? It would appear that the government is hard at work to reverse the trend on the trade front, especially in view of the many free trade agreements (FTAs) under negotiation. The concern, however, arises from India’s ability to negotiate meaningful market access in both goods and services (either multilaterally or through FTAs) in a world which for all purposes is deglobalizing. Even at the recently concluded Unctad XIII meetings the Organisation for Economic Co-operation and Development countries never showed any sign that they are prepared to break the current World Trade Organization (WTO) deadlock and discussions centred more on matters of principle than on practical accommodation of concerns.
A recent trip to Brussels has made me aware of how utterly hesitant and insular the sentiments in individual European Union (EU) member states have become, despite their public assurances to the contrary. The financial crisis and ongoing recession-induced deglobalization of the financial markets have already found their parallels in trade (though maybe not in tariffs, unlike the 1930s), as was apparent from my discussions with functionaries in the European Commission as well as individual European parliamentarians. It is thus unlikely that India-EU trade negotiations will be concluded anytime soon, the latter requiring progress that the negotiating heads of states can proudly showcase to their electorate. India’s trade deal with the other regional blocks to its east is also stuck, facing serious roadblocks over the issue of movement of professionals.
Course correction, therefore, calls for urgent interventions from the polity, and action lies solidly at home. It may be recalled that China’s recent commercial services export boom has been based on impressive growth in its infrastructure and trade-related services, liberalized as a part of its accession to WTO. India too must find ways to speed up domestic liberalization and regulatory reforms, both in traded and non-traded services sectors.
Source : livemint.com