The good-naturedness of the Modi-Biden summit may have been quiet, but expectations are high, both strategically and in terms of stalled economic relations. The latter has even more contentious issues than the former. Expanding trade and technology ties may have been highlighted as one of the meeting’s great hopes, but success may be limited here.
Bilateral trade volumes have increased over the years, but the obstacles to a strong acceleration appear to be increasing rather than the other way around. The result is that China has supplanted the United States as India’s largest trading partner in the past fiscal year.
In this context, much remains to be done to iron out the many difficulties in trade relations which have stubbornly refused to disappear over the years. These include non-tariff barriers, lack of alignment with international quality standards and a perceived failure to provide access to this country’s huge market. Market access constraints have been a perpetual complaint of successive US administrations.
A new dimension has been added to the plethora of differences between the two countries, with the United States apparently signaling its disinterest in a bilateral free trade agreement (FTA). The prospect of such an FTA has been hotly debated during the Trump administration’s tenure, but no positive decisions have been made. There was talk of a mini trade deal, but that also fell through.
Obviously, it has been recognized that the gap between the two sides is too wide to be bridged now by a bilateral agreement. Although Trade Minister Piyush Goyal has called for moving forward on other fronts, America’s disinterest in an FTA has been a disappointment as India tries to forge more regional trade pacts.
Significantly, Goyal also warned the industry that seeking market access overseas would mean reciprocal opening of markets here. It remains to be seen whether this means that the gradual rise in protectionist tariffs since the NDA took power will be reversed. But there is no doubt that if India is to integrate into global value chains, it will have to stop the creeping tariff hikes that are adding costs to the economy. The economic benefits of being part of the Quad group will also be nullified unless there is a serious effort to open up the domestic market to Japan and Australia, as well as the United States.
Better access is at the heart of Quad’s semiconductor technology cooperation plan – the ubiquitous chips at the heart of all technical goods that are taken for granted these days. The global chip shortage, combined with the fact that the biggest producer, Taiwan, faces the threat of a Chinese takeover, has pushed this item onto the Quad’s priority list. The complementarities in technological expertise, manufacturing capabilities and engineering skills between these four countries can successfully create a global supply chain for semiconductors.
The question is: will this government put aside its Atmarnirbhar policy and its protectionist approach to be part of this value chain?
The answer must be yes if it is to become an integral part of Quad’s semiconductor supply chain initiative. The initiative arose out of the recognition that national self-sufficiency does not work in this sector. The four-country grouping even officially called for a diverse and competitive market, a comment based on the fact that semiconductor production is typically spread across multiple countries. If the initiative is successful, it will lift many countries out of the grip of dependence on China or besieged Taiwan for their critical chip supplies.
So far, India has not played a central role in the global value chains that fuel trade flows around the world. One of the reasons, according to a recent survey by consulting firm Deloitte, is apparently the fact that the attraction of coming to this country for many investors is its large domestic market.
Multinational business leaders, especially Japanese, are interested in investing here despite the current economic downturn, but only to supply the domestic market, not to make India a springboard for exports.
This perception needs to change and Quad’s semiconductor initiative could be the starting point in case it leads to the removal of the current protectionist mindset.
What is interesting, however, is that foreign direct investment inflows have increased despite the 7.3% contraction in growth in 2020-2021. These increased by almost 10%, from $ 74.39 billion in 2019-2020 to $ 81.72 billion in 2020-2021. This is when global FDI flows increased from $ 1.5 trillion to $ 1,000 billion during the same period.
All the better, but these flows are not aimed at making India part of global value chains, as this would require both lowering tariff barriers and measures to improve the ease of doing business. In the absence of such policy changes, the Deloitte survey indicates that Vietnam and Indonesia score higher as investment destinations than India among global business leaders.
For India to reap the benefits of summit camaraderie with the United States as well as other Quad partners, there must be a fundamental policy shift. When the Modi government took power, far-reaching and far-reaching economic reforms had to be put in place. Instead, there has been a gradual phased approach in many areas. Then came the Atmanirbhar policy which was in fact a step back in the era of protectionism.
One can only hope that politics will be sidelined for a more pragmatic approach in line with recent initiatives to reverse retrospective tax laws and support the struggling telecommunications sector. A new approach has been taken in recent times to moribund economic policies, even if they are quite late. This approach must be extended to commerce and technology. Otherwise, the prospect of a positive Quad Summit outcome might be nonexistent.