Global Integration of Indian Economy: Challenges Ahead
Speaking at a workshop titled ‘Foreign Trade Policy and Letter of Credit Operations’ organized by NCR Chamber of Commerce & Industry on 6th October at Gurgaon., FIEO Director General Mr. Ajay Sahai identifies the new economic challenges that the country is facing as a result of global integration and suggests how to combat these challenges. Excerpts from his speech:
In the 21st century, there has been a dramatic shift in India’s approach to external sector management in tune with the changing circumstances. Firstly, with the emergence of marginal current account surplus, the sustainability of India’s current account deficit may not be a problem though the deficit on trade account persists and has been widening. In the first five months of the current financial year, trade deficit surged by 63% (from US$ 19.92 billion to US$ 32.50 billion). Secondly, the main contributors to the positive outcome in India’s current account are workers’ remittances and export of software, both being a result of process of global integration, though the appreciation of Rupee is exerting pressure on both the segments. Thirdly, the exchange rate regime as well as external debt management has served India well, especially the avoidance of sovereign debt through commercial borrowings. The new policy regime helped India withstand several global crises while maintaining a respectable growth. Fourthly, a judicious integration with the global trade regime has imparted competitive efficiency and confidence to the domestic industry and perhaps, even to commercial agriculture though to a limited extent. Finally, it has become evident that the management of the external sector is closely linked to the domestic sector and the major thrust of Indian public policy is now on managing the integration.
In brief, India has moved from managing external sector to implementing an optimal integration of domestic and external sectors, and the global economy.
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Mr. Ajay Sahai, Director General, FIEO addressing the workshop. |
More recently, however, a debate in the rest of the world has been on the challenges likely to be faced by the global economy on account of progressively increasing global integration of the Indian economy. There is a need to have an ongoing appreciation of how the global economy is responding to the challenges of our integration while we move forward with our own agenda of securing an optimal integration.
Further, the simultaneous emergence of China and India with significant competitive strengths in trade in goods as well as services will have to be accommodated by the global economy. Thus, the issue for the immediate future is that both correcting current global imbalances and integrating the two Asian giants may have to take place simultaneously in the global economy.
One sector where the industrialised economies continue to show considerable strength and dominance is the financial sector, partly attributable to the confidence factor in financial markets that favours the industrialised economies and traditional international financial centres. It is essential for India to carefully monitor the developments in both real and financial sectors, and to modulate her policies in accordance with the global developments so that global integration continues to be a positive sum game for all the countries. Global economic integration is technology induced and policy-managed. While the economic integration of India with the global economy will continue to take place, a successful integration, with due regard to the interests of a vast majority, particularly the poor, would be possible only through sound public policies - evolved and redesigned from time to time.
Significant liberalisation of external trade has taken place smoothly, which has imparted competitive efficiency to the domestic sector, almost upto the global best standards in many of the sectors. There has also been demand for credit and creation of employment due to this. However, there exist several trade restrictions within India even as there has been progress in liberalising external trade. Eliminating trade restrictions can have adverse impact on vulnerable sections, but a straight forward subsidy to the poor might well serve as solution. There is another well recognised distortion, vestiges of which still continue, in the form of reservation for small scale industries. With liberalisation of external trade, it is anomalous to persist with such distortions, even if on a reduced scale. Thus, there is still an unfinished agenda on trade reforms, especially in regard to domestic trade and a policy commitment to remove such distortions in a defined short timeframe would be ideal.
It is interesting to note that the two sectors where India is globally most competitive, namely, software and pharmaceuticals, are not power intensive and do not require bulky transportation. The competitiveness of the manufacturing industry is admittedly a function of the availability of reliable power supply at reasonable cost. The cost of power in India is about two and a half time the international benchmark. The importance of power, airports and seaports needs to be emphasized but there is need for implementation at a pace significantly faster than we have ever achieved in any sector so far.
There is universal recognition of the need to improve both productivity and output in the agriculture and related activities, which is still the mainstay of two-thirds of our population, to meet the objectives of growth and employment. Yet, despite the best of efforts and excellent results, there will have to be a massive shift of the workforce from agriculture to non-agricultural avocations. The quality of urban infrastructure even in the metropolitan cities is not conducive to globally competitive economic activity. The inevitable large scale redeployment of the migrating workforce would, therefore, need institutional arrangements, be they in public or private sector, for skill-imparting and skill upgradation.
The quantity and quality of water, education and healthcare infrastructure are far from adequate, and are not even at the minimum level consistent with a modern society. India with huge population spends about 5% of its GDP on healthcare where US spends about 16% of its GDP on the same. Any tangible reform in this area would require action on several fronts, i.e., legislative, executive and judicial and at several levels - Centre, State and local.
Moreover, there are regional inequalities in growth. One should hope that the demonstration effect of a few high-performing States will spur the other Sta0tes, in the medium term, to compete for better governance and economic performance.
Finally, enhanced investment activity, particularly in the infrastructure area, would necessitate higher domestic savings, especially in the public sector coupled with efficient financial intermediation. In addition, foreign savings need to be attracted and absorbed with a strong preference to Foreign Direct Investment in all sectors though in some sectors like banking, a calibrated approach may be warranted. At the same time, our enterprises should be enabled to attain a strong global presence in all sectors.
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FIEO Ahmedabad Chapter becomes functional
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