India is implementing an aggressive style of trade diplomacy, as the government acts on the need for investment in the run-up to elections.
On May 28th Indian Commerce Secretary S. R. Rao launched a three-day trip to China to discuss issues of trade, market access and mutual economic opportunities. This trip comes on the back of a visit to India by Chinese Premier Li Keqiang who told a group of business leaders to Delhi that China was willing to start talks on a China-India free trade agreement. Just a day before Rao’s trip, Indian Prime Minister Manmohan Singh left on a five-day tour of Thailand and Japan where investment and trade will be high on his agenda. India has also been more active in attempting to close the Doha Development Round by advancing a new series of compromise proposals.
This flurry of economic activity is both good and bad news. It is a recognition by the government that India needs to do more to liberalise its economy, attract investment (particularly in infrastructure) and find new markets for its exports. India has run a trade deficit consistently since early 2004 and its current account imbalance is close to an all time low. With GDP growth projected to slow to 4.5% in 2013 and unemployment surpassing 9% it is no wonder the government is looking to do more.
While the government’s sudden aggressiveness in promoting international commerce is a welcome sign, it is also an indication of the political stagnation that has beset the country. There are a host of issues that have contributed to India’s economic malaise and most of them are domestic, not international. The country continues to be plagued by poor infrastructure, red tape and a horribly inefficient judicial system. Starting a business in India requires 12 procedures and 27 days, relatively easy compared to obtaining a construction permit, which involves 34 procedures and 196 days on average. Contractual enforcement is difficult – perhaps impossible at times – and companies can expect to wait for three years or more to receive a judicial ruling. All of this points toward much needed internal reform.
India engaged in a flurry of reforms in the 1990s and early 2000s, which have been credited with turning the much-maligned ‘Hindu rate of growth’ into a relic of the past. But reforms have stalled and political infighting has taken over. A recent IMF report was sharply critical of the government for dragging its feet on liberalising labor and product markets.
Though the Congress Party continues to be India’s largest political party, it has continually lost vote share to regional parties and has been forced into an unwieldy coalition, the United Progressive Alliance (UPA). The alliance is comprised of 11 parties and has informal support from three other parties. The national parliament requires coalitions to hold 273 seats to stay in power. The Congress party has only 205 seats and is dependent on its coalition partners to make up the difference. Compare this to the 1984 general election when Congress had 411 seats, the 1994 election with 244 seats and the 2004 election with just 218 seats. The trend is quite clear.
Despite the fact that today’s UPA remains well above the threshold for power (with 295 total seats), it has been victim to constant changes in membership and a string of defections that mean it has just as many former members as current ones.
The splintered and regional nature of the UPA has led to a prioritisation of special regional interests at the expense of a bold national agenda. India’s federal system, which gives a high level of control to state governments, further complicates the situation. State governments are run by leaders from a multitude of political parties, have differing legislative systems (6 are bicameral while 24 are unicameral), and have control of key levers of the economy including sales tax and state-owned enterprises. Put together, this makes the Indian political system particularly prone to paralysis and incremental reform. It could also be the reason India has begun looking to foreign nations for new economic opportunities.
With a national election due in 2014, Congress is eager to restart the economy by increasing growth and reducing unemployment. Given the difficulty of domestic reform it may be easier to create opportunity by enhancing cross-border flows; economic salesmanship and business networking require no parliamentary approval. Significant trade deals would be subject to ratification, given the financial and budgetary powers granted to the body. Yet by moving to bilateral trade and investment deals India can engage on a more selective range of issues and thus remove most of the politically contentious items, such as agricultural tariffs which have held up WTO negotiations. Finally, the prospect of significant increases in trade and investment could be used by Congress to pressure parliament for action and could lead to increased lobbying by those standing to benefit from new capital inflows and export opportunities.
India’s recent flurry of economic activity should give observers reason for both optimism and pessimism. India’s stagnating economy is long overdue for change. Congress is finally taking the problem seriously but a closer reading of the situation shows its current strategy reflects disenchantment with prospects for domestic reform and that could have dire effects in the future.