Monthly Archives: March 2012

Internationalization of India: Of Trade and Connectivity

India Day Parade an event for PHD’s & Politici...

India Day Parade an event for PHD’s & Politicians? Open Letter to Editors of all Indian News Papers in USA (Photo credit: davemakkar)

India Gate

India Gate (Photo credit: aroris)

Why should low-level of connectedness to the world should be a concern to Indian policymakers? Let’s start with ,traditional computable general equilibrium models (CGE) which peg the benefits of complete merchandise trade liberalization at about 0.5% of GDP, more advanced models with a consideration to all policy levers would shoot the number by a high margin. Also accounting for benefits from economies of scale , product and service differentiation, increased competition , normalizing risk, and generating and diffusing knowledge should push the potential gains well past 1% of global GDP, to 2-3%, or maybe more. Also, foreign direct investment offers an avenue for internationalizing even the provision of some “nontradables” ,  and there are substantial gains available from increasing the cross-border mobility of capital, information and people as well.Two decades of reform aimed at opening up the economy have roughly tripled India’s indicators of trade exposure, compared to our past, there has been a significant progress in this regard. That’s the good news. But the bad news is that India still ranks quite poorly in terms of many measures of the intensity of cross-border integration. In terms of measures of inward FDI stock as a percentage of GDP, India still figures in the bottom 10% of the countries. On Information Technology connectivity front India does a bit better, all thanks to Internet but India does substantially worse in terms of trade in publications and print material, intensity of short-run tourist flows and medium-run university students.

India figures in bottom decile of the fifty countries in terms of the extent to which it encourages FDI, according to OECD‘s FDI Restrictiveness Index. So although India has opened much more in past , a lot need to be done. The big problem here is not Manufacturing as one might say , where many barriers have been eliminated, sector where foreign investment is still very much restricted is business services. Take for example the classic case of FDI in multi-brand retail. Opposition to liberalizing FDI in this sector raises concerns about employment losses, unfair competition resulting in large-scale exit of incumbent domestic retailers . Based on international evidence, we suggest that allowing entry by large international retailers into the Indian market may help tackle inflation especially in food prices. Moreover, technical know-how from foreign firms, such as warehousing technologies and distribution systems can improve supply chain efficiency in India, in particular for agricultural produce. Better linkages between demand and supply have the potential to improve the price signals that farmers receive and also serve to enhance agricultural and other exports. Similarly the foreign universities bill also turned out to be a car with square wheels. Indian tertiary education system needs  internationalisation of higher education and policy makers should put in place a policy framework to address the various concerns, if it wants to reap the benefits.

Policies explicitly aimed at boosting internationalization should be backed up with policies aimed at improving the domestic business environment. Another major challenge facing the investment flow is corruption, diverting long term commitments ( like FDI) to short term capital flows which makes it necessary for the government to tackle it. All of this should suggest that there is tremendous potential for further policy measures to increase the internationalization of the Indian economy and, more importantly, Indian welfare.

Some Interesting Public Policy Issues


Wikipedia (Photo credit: Octavio Rojas)

The old RBI Building in Mumbai

The old RBI Building in Mumbai (Photo credit: Wikipedia)

India Against Corruption HQ logo

India Against Corruption HQ logo (Photo credit: Wikipedia)

The SOPA Act in The United Sates: The Stop Online Piracy Act (SOPA) is a United States bill introduced by U.S. Representative Lamar S. Smith (R-TX) to expand the ability of U.S. law enforcement to fight online trafficking in copyrighted intellectual property and counterfeit goods. The bill promises to protect intellectual property market and corresponding industry, jobs and revenue, and to bolster enforcement of copyright laws, especially against foreign websites.

Anti Corruption Body Formation in India (Lokpal Bill):Government failure to propose a strong Lokpal Bill

which is new anti corruption activism in India. It lacks teeth to bite the corrupt and is faulty in many ways.

Reserve Bank of India‘s monetary policy:
Keeping in mind the sustainability of Indian Economy and the growth prospects so that fiscal consolidation takes place , it becomes very difficult for RBI to curtail Inflation in India. Inflation in Asia’s third-largest economy hovered over 9% for 10 straight months to September. A depreciation in the rupee, which has fallen about 11% against the U.S. dollar since April, has made imports costlier, aggravating the inflation problem. While the RBI have persistently raise the rates 12 times in 18 months till September of 2011 as an anti-inflationary policy stance, while completely ignoring the supply side economics. What was need to focus on the supply side economics and not only demand side economics.

Lack of a National Integrated Logistics Policy in India: While roads have improved and express highways created, delays at check posts along the way due to heterogeneous state taxes and regulations have limited efficiency gains.

Infrastructure Finance in India: While delays in implementing infra projects due to land acquisition , environment and other issues are well recognised in India, one area where a solution could have been forthcoming much earlier relates to accessing long-term funds needed for investment. India needs to develop long term debt markets and deepen corporate bond markets. This in-turn calls for strong insurance and pension sub-sectors.

Attracting Foreign Investment and Foreign Investors in India: India needs Modern Retail. There could be an argument about FDI in retail , but there is really no debate about the need of Modern Retail Technology . Cold-Storage and faster movement of perishable commodities along with better ways of Supply Chain Management will help farmers and Consumers. All this could be done without FDI , but the entry of Carrefour, Walmart and Tescos of the modern world will accelerate the process.

Energy and Power Sector: No country have higher growth without adequate power. India is especially facing enormous power problems. Bank lending to the sector is at all-time high, but some projects that have borrowed money are stalled because of land, raw material and infrastructure issues. Some states are not in a position to buy power from private generators because they have not raised the power tariffs for a decade are now unable to raise it because of political pressures and vote bank politics.

Dismal Scene and Negligence for India’s Agriculture Sector: There have been hardly any reforms in agriculture. Marketing laws are outdated. Distribution and logistics from the farm to food-bowl are full of inefficiencies and corruption. The cost a consumer pays is too high and cost the farmer gets is too less. This exaggerates the problem of food inflation. The APMC (Agriculture Produce Market Committees) monopoly run by state governments does not allow retailers to buy directly from the farmers.

Labour Reforms: Labour laws must be reformed so as to restore the employer’s right to lay off workers upon adequate compensation to them. In context of India, firms with 100 or more workers have no legal way to exit since they cannot lay off the workers. This works as a major barrier to entry of new firms on a large scale , as they hesitate to enter into a world that no exit doors.

Opaque Political Funding giving rise to more of Politico-Corporate Corruption: Corporate contributions to political parties are shrouded in secrecy, which give chance to more corruption. Electoral compulsions for funds in countries like US and India become the foundation of the whole superstructure of corruption. Transparency in the ways that companies engage in , manage and oversee the political funding, especially in case of India is a first step to cleaning up the corruption problem. Both companies and political parties need to take a lead in this.

WTO and Regional Trade Agreements

“In the last years, we have seen the WTO being stuck, while regional & bilateral trade agreements gained ground, so how would you assess the role of the WTO in the upcoming decade and do you think that the WTO will need to adjust to this new environment, if so, how?”

Global trade liberalization occurs through a variety of channels and not all of them appear to be in harmony with one another. Though every major nation is now a member of the World Trade Organization (WTO) and a participant in its complex process of multilateral trade liberalization; an average WTO member also belongs to six Preferential Trade Agreements (PTAs) (World Bank, 2005). WTO is now facing growing ‘irrelevance’ in bringing multilateral trade agreements palatable to all the members on the table, amidst the growing popularity of Regional Trade Agreements (RTAs) and PTAs.

RTAs on one hand can further the process of globalization through expanding the scope of trade cooperation, whereas, on the other hand, their trade diverting effects may contribute negatively to the process of international economic integration. Their proliferation could create competing blocs, eroding the viability of Multilateral Trading System (MTS). Regional groupings like ASEAN are nothing but a reflection of spaghetti -bowl effect. With the growing number of RTAs and PTAs the WTO needs to change gears and come up as a stronger organization to prevent the harmful effects of regionalism on International Trade and MTS.

The challenge is to ensure greater coherence among PTAs and between PTAs and MTS. The prolonged Doha negotiations suggest that the interest in multilateral agreements have been seriously weakened. Such a situation offers more room for bilateral deals. DDA should be concluded sooner than later, as implementing free trade within RTA is becoming increasingly difficult. From the perspective of normative economics, countries and WTO should work towards removing domestic distortion in Agriculture Sector. An effective competition policy, with an idea to remove market imperfection is needed. There is also a need for conducting joint exercises by the relevant ministries among the partner countries to understand whether the reasons for restricting market access are genuine or not. Predatory pricing is difficult to practise; therefore, anti-dumping measures on presumptions for stopping that have to be verified. RTAs pose a potential risk to the multilateral system, which gives rise to the need for an internationally financed Advisory Centre on Regional Trading Arrangements to provide training, negotiating advice and accreditation to private providers based on an agreed analytical framework.

The world trading system is far from perfect; and many reforms and changes in rules should be under discussion. But to further the cause of trade liberalization, much remains to be done including a defence of what has already been accomplished.