The Indian economy faces increasing challenges as the government seeks ways of further integrating it, especially with the East Asian region. The most immediate of these challenges are being posed by a potential mega-regional trade agreement, the Regional Comprehensive Economic Partnership. Drivers of this proposed agreement are keen to conclude these negotiations by the end of 2019, and hence the urgency on the part of India to develop coping strategies. In this context, Finance Minister Nirmala Sitharaman's maiden Budget was an important statement by Modi Government 2.0 in response to the challenges of regional integration.
Ever since India began implementing three of its most significant free trade agreements (FTAs), with ASEAN, Korea and Japan, there have been unambiguous signs that the Indian businesses were unable to compete with their counterparts from the FTA partner countries. Not only have they been unable to find effective market access in these countries, they have increasingly found it difficult to survive in the domestic markets. The inability of Indian businesses to perform adequately in international markets means that India's exports have not been able to cope with the rising tide of imports, thus expanding the trade imbalance. And this has put pressure on the current account deficit.
Despite these warning signs about the lack of competitiveness of Indian businesses, past governments were unable to address this issue. The situation has become so grave that it has almost reached the tipping point. Efforts must be made to reverse the declining fortunes of Indian businesses, so that they can become competitive. Failure to realise this would make the current account deficit a binding constraint for the Indian economy. Under these circumstances, Sitharaman's Budget proposals evoked interest for two reasons: one, its ability to address some of the short-term concerns of trade and industry, and, perhaps more importantly, the road-map that Modi Government 2.0 would be laying down that would enable Indian businesses to quickly reverse the prevailing situation.
Over the past couple of years, the Modi government has been using tariff protection for safeguarding the interests of domestic manufacturing. Former finance minister Arun Jaitley had declared his intention of using tariffs as an instrument for incentivising manufacturing in critical areas like mobile phones by limiting the import competition. The current FM has walked the path of her predecessor by announcing customs duty hikes in several products to provide domestic industry a level playing field. It needs to be emphasised that the steps that Jaitley and Sitharaman have taken are necessary, but not sufficient to ensure that India has a competitive manufacturing sector that helps in increasing domestic value addition and provides fillip to sagging exports.
In order that value addition takes place in the country in an efficient manner and to participate in the export markets effectively, complementary policies like making the infrastructural facilitates efficient and more responsive to the needs of the manufacturing sector would be necessary. Although the FM has indicated that the government would focus on these issues, she has to ensure that she is able to back her intent with adequate financial resources, which is not clearly evident in her proposals.
Besides its importance of enabling India to participate in global markets effectively, exports must be in government's focus for at least two other reasons. The first is that export subsidies have become passe as the WTO rules do not allow any middle-income country to provide these subsidies. Secondly, India's biggest export destination, the US, has become less attractive after President Trump authorised removal of India from the list of developing countries that enjoy preferential market access.
Sitharaman's Budget proposals for the current financial year could have done well to resonate with at least some of these challenges faced by the exporting community.
The writer is a professor at School of Social Sciences, JNU.