Trading ties, learning afresh

The past week saw two sharply contrasting messages: the UK publicly expressed satisfaction with Indian trade ties (via a celebratory signing ceremony of the long-pending FTA), while the US, our largest trading partner, has censured India’s trade practices apart from announcing its intent to impose a 25% tariff on select Indian exports and levy a penalty for our trade ties with Russia.

This divergence could be traced to internal policy perspectives. The UK, post-Brexit, is looking to recreate new growth avenues by leveraging the Indian growth story. On the other hand, the US under Donald Trump has MAGA-driven aspirational challenges to show improvement in an economy with a $2-trillion export base, despite a growth slowdown in the global economy. So, it is attempting a combination of strategies based on how it reads its partner’s strengths/weaknesses. Together, these two events indicate that economic stability in this fast-changing world will be feasible only if we become an economic counterweight that commands, not pleads for self-respect, by wielding our countervailing power. This requires us to examine our possible weaknesses.

A clue exists in how we conduct trade relationships. We have, so far, signed over a dozen FTAs, but with patchy results. The growth rate of India’s exports to RTA partners over the past decade or so is more or less similar to the trend growth of exports to non-trade partners, both averaging about 13% y-o-y. Our trade deficit with ASEAN, South Korea, and Japan widened post-accord as our imports grew much faster than our export growth. A recent NITI Aayog report reveals that the second quarter of 2024/25 witnessed a further 23% y-o-y increase in trade deficit with FTA countries to $26.7 billion. It needs acceptance that though trade accords are negotiated with extreme care, somehow our companies have not been able to leverage them to secure deeper penetration into partner markets.

We need an environment where it is easy to do business so that not only manufacturing but technological change also happens. This, as frequently witnessed, is easier said than done in a subcontinental-sized economy. Yet, the world is moving to ‘China plus one’ and we must quickly utilise this momentum to aspire to become the standalone pole in some sub-segments by deepening our manufacturing capabilities and improving logistic efficiencies, based on locational planning efficiencies. Why not start with the unexploited potential inherent in the 12 industrial cities announced last year but not yet operationalised? To create scale efficiencies, they must each focus on pre-identified sub-segments. They could be placed under the long-pending DESH Bill, to keep them out of the mesh of laws and bureaucracies, which have choked our systems, with a trusted, fully empowered city head with a growth budget. This experiment will take time to deliver results. In the interim, we need to separately discuss shorter-term responses.

These are best discussed with reference to the UK deal. It has a lot of positives as it offers duty-free access to 90% of tariff lines covering almost the entire trade basket, creating a 12% cost advantage over China and parity with the earlier duty-free nations. We should attempt to exploit this by strengthening our pre-existing USPs. Our largest exports to the UK are in the textiles and apparel and gems and jewellery market segments. In textiles/apparel, we are the 4th largest, supplying 6.6% of the market, lagging China (25%), Bangladesh (22%), and Pakistan (6.8%) in a $25 billion market. In gems and jewellery, we are an important player in a $60 billion-plus market where we lag China, Thailand, Turkey, Belgium, UAE, etc.

To seize this opportunity, we must scale up/create higher efficiencies in our successful garment clusters like Tirupur, Surat, and Ludhiana, and Jaipur, Surat, and Kolkata for gems and jewellery. We should upgrade training and capacity-building to create robust digital marketplaces, enhance design and quality standards, hallmarking, and traceability standards as per UK-friendly norms, apart from simplifying compliance, logistics, and documentation. Furthermore, some sort of project ownership needs to be actioned so that the UK-India trade doesn’t follow the ASEAN, Japan, S Korea trade pattern.

Alongside, we need to revisit our entrepreneurial signalling mechanisms. The tax-rate reductions have not yielded results in the form of even manufacturing investment, despite attractive PLI and R&D support schemes. Perhaps fiscal treatment could differ for import versus export orientation and/or technology manufacturing versus low technology-oriented companies to help reorient entrepreneurial decision-making. If fiscal signalling improves and project ownership is created in separately fixed economic spheres, we might get better traction on our policy intentions.

Disclaimer: The views expressed above are the author's own. They do not necessarily reflect the views of DH.