India scored a diplomatic victory recently at the India-EU Trade and Technology Council meeting in Brussels, when Foreign Affairs Minister S Jaishankar neutralised the voices calling for action against India for exporting Russian oil to European countries in violation of the sanctions. Jaishankar pointed to the relevant EU Council regulation to assert that if the Russian crude was “substantially transformed” in India then it could no longer be treated as Russian fuel anymore.
This was an easy victory because of the hypocrisy of European countries who knowingly allowed India to export fuel for more than a year because they faced energy crisis.
But India’s hypocrisy lies elsewhere.
Public good or private interest?
India’s export of cheap Russian oil (after refining) has benefited companies, not the common man, because retail prices of petrol and diesel have remained unchanged. Two companies, Reliance Industries and Nayara Energy, have imported 45% of cheap Russian oil to India in FY23 – far higher than their 35% share in the domestic refining capacity. Western countries capped the Russian crude at $60 per barrel when the Brent was trading over $110 per barrel and Russia also supplied crude below this ($60) price to India.
These two companies accounted for about 95% fuel exports to Europe in FY23 and India emerged as the largest fuel supplier of Europe in April 2023. India has imposed windfall tax on such exports but every such imposition is followed by a cut – virtually a monthly flip-flop loop. Meanwhile, an unknown Mumbai-based private company Gatik Ship Management, registered as an exporter only on March 31, 2023, has emerged out of nowhere to become a giant international supplier of Russian oil – owning 58 oil tankers from just two in 2021.
The last time India cut excise on petrol, diesel and gas for domestic consumption was in May 2022 and it was meant to control runaway inflation. But this cut didn’t lower the retail price of petrol and diesel which has remained unchanged since then. Gas cylinder became costlier the very same May 2022 (when the price was Rs 950 and was raised by Rs 50 in the same month), it is now over Rs 1,100 (Delhi).
Similar is the case of coal import.
In July 2022, Coal and Mines Minister Prahlad Joshi told the Lok Sabha that “there is no shortage” and “production has been going up”. But two months earlier, in May 2022, the government had allowed coal import until March 31, 2023 and changed the coal mix (30% imported coal) for thermal plants unilaterally by invoking emergency power (requiring no consent of buyer states). Imported coal was 10 times costlier at the time.
The burden of higher cost of imported coal is on public –either directly or in state subsidies.
In FY23, coal imports jumped 30% in volume and 56.8% in value (USD) – draining out forex reserve. In February 2023, Joshi again told the Lok Sabha that India had no coal shortage and in March 2023 that India would be exporting coal by 2025-26.
Then there are frequent flip-flops on exports.
In 2022, India banned sugar exports for a year (till October 31, 2023), then limited it and is now contemplating further ban in 2023. India has banned wheat, certain types of rice, imposed and relaxed export duty on steel and iron pellets in the past couple of years.
True, India has to act keeping its interest in mind but whimsical changes – sometimes within days as happened in 2022 when wheat export was banned, then made conditional (May 2022) and then it was contemplating import wheat in August 2022. In April 2022, the Prime Minister had offered the US President to feed the world following the supply disruptions from Ukraine after the war broke out.
The guiding principles of good trade policy are its predictability and stability. Frequent flip-flops erode trusts in both domestic and foreign traders.
No data, analysis to support import substitution
There are many myths swirling around Indian trade. One is that protectionism helps or is helping Indian trade.
Even diehard government backer Arvind Panagariya repeatedly opposed resurrecting the failed policy of 1960s and 1970s. In 2020, he wrote that it was “doomed” to flounder again. In 2022, he wrote there was no economic analysis “whatsoever” to support or justify raising customs duty and argued that “a central principle of public finance is that customs duties should not form a revenue-raising instrument”. In May 2023, he said India would do “a really big favour” by lowering import barriers, thereby preventing trade diversions (switching from less costly to more costly source).
Fortune India has analysed trade data to show both exports and imports have fallen post-high tariff regime (because both are linked). In FY23, (a) exports of “core” merchandise (excluding petroleum products and gems and jewellery which are import-dependent) fell but imports of “core” merchandise went up – which drains forex reserve, raises trade deficits and disables exports as a growth engine – and (b) imports made a new high in FY23 – 26% of the GDP – pointing to the ineffectiveness of import substitution policy.
Also Read: Pricing Power Behind High Inflation?
More recently, Viral Acharya, former RBI Deputy Governor, listed four negative impacts of higher import tariff: (a) high tariff on agriculture (above 35%) with its low efficiency (employing over 40% workers but generating 15% of the GDP) “prevents a market-based rotation of jobs” from low-skilled to high-skilled (b) makes Indian goods costly and globally uncompetitive (c) makes imported goods costlier in India (such as iPhones), forcing Indians to go for inferior domestic products and keeping inflation higher and (d) disincentivises investments in efficiency and builds up market concentration.
In the meanwhile, India’s problems with the EU – with which it is re-negotiating trade – is not over. Last month a WTO panel gave adverse ruling for erecting tariff barriers on ICT products. Two other complainants were Japan and Taiwan. As against 0% tariff on these items (mandated by the WTO), India imposes 7.5-20%. What India does about it will be known soon.
How will India join global value chains?
More trouble is brewing.
The Indo-Pacific Economic Framework (IPEF) is seeking advance notices from members on all tariff changes and exports restrictions. India is not part of its trade pillar but that of other three (supply chains, clean economy and fair economy). How India handles the fallout – restrict India’s ability to join their “supply chain”.
The biggest challenge for India is to integrate with global value chains (GVCs) to boost exports.
India’s share in global exports is miniscule – merchandise exports below 2% and services exports 3-4%. The extraordinary success of Bangladesh and Vietnam (also China) as exporters of apparel and textile products – the three beat India – owes it to “greater integration” with GVCs and despite not being top producers of cotton and synthetic fibre. India (along with China) is among the top 10 producers of cotton and synthetic fibre but of no use because it is not part of the GVCs.
Vietnam is a member of all three emerging multilateral trade blocs – RCEP, IPEF and CPTPP – but India has kept out of all three.
In fact, seven countries are members of all the three bloc – Vietnam, Australia, Japan, Malaysia, Singapore, New Zealand, Brunei. Three are part of two blocs – South Korea, Thailand and Philippines. China not only leads RCEP but is seeking membership of the CPTPP (earlier called TPP) too.
Are bilateral FTAs better than multilateral FTAs?
Does becoming part of mega trading blocs help? Yes, it does.
Economist Ashoka Mody recently wrote that most MNCs looking for alternate homes to China (China+1 strategy) are either “friend-shoring” to Vietnam (which is part of all three mega trade treaties) and other Southeast Asian countries “which (along with China) are members” of the RCEP and that most US multinationals are “near-shoring” to Mexico and Central America. India is not a major gainer (except for iPhone plants).
An IMF paper recently warned that “geoeconomic fragmentation” is “intensifying” after the Russia-Ukraine war (it began when US President Trump began de-globalisation) along the two power blocs – the US and Europe on one side and Russia-China on the other. It said, this new alignment would directly impact trade, investment and technology transfers. By keeping out of mega trade blocs, India is likely to harm its cause.
Is there any advantage of having only bilateral FTAs and by keeping out of multilateral FTAs?
Trade experts vouch there is no study or analysis to prove this.
Logically, multilateral FTAs make more sense because of wider canvas (bigger GDP and trade shares) and ease of doing business. In contrast, bilateral FTAs call for individual negotiating and every time a partner plays truant (like India imposing tariff barriers or flip-flops on exports and imports), all bilateral FTA partners need to take out their spreadsheets.
India is opting for bilateral trade because three reports say that India didn’t benefit from its earlier trade treaties – which flies in the face of data and reasoned arguments of Arvind Panagariya and Arvind Subramanian (who first warned against it in 2020).
The latest is the Exim Bank report of Mach 2022.
This report recognises India’s loss from not joining the RCEP (loss of a huge market and loss of opportunity to join its value chain, “especially for hi-tech goods”) but also notes the “potential threat to many domestic industries, primarily from China”. It flags concerns about trade in general: (i) “preferential tariffs” offered by India are “significantly lower” than its trade partners and (ii) “technical barriers to trade” (TBT) to widen its access to foreign markets. But then, it also recognises that if India raises its “preferential tariffs” it would lose out on exports and the TBT problems (technical regulations, standards, and testing and certification procedures) can be taken care through the WTO.
The second is the Economic Survey of 2021-22 (of January 2022), which advocates re-negotiating bilateral FTAs, but without talking about multilateral ones and without explaining how protectionism will help. It talks about the need to join global value chains, but only in the context of what India is doing to improve its chances of doing so (addressing infrastructure, tardy business processes and labour market reforms and the PLIs “to create the capacity to integrate with the global value chains” etc.).
The NITI Aayog’s 2018 report (“A note on free trade agreements and other costs”) is on similar lines. It recognised that China moved up in value chain and is more diversified – leaving India far behind. It proposed “a second thought” on joining the China-led RCEP (being negotiated then) because of the looming presence of China.
But not one of these reports said India’s exports suffered because partner countries were unfair or despite quality goods from India. On the contrary, they pointed to India’s disadvantages because of uncompetitive products.
Not one of these reports even mention protectionism either, let alone suggest it as a solution.
It is often forgotten that India is also a part of a series of smaller regional trading blocs like ASEAN (AIFTA), APTA, TIG, SAFTA, among others.
Export of electronics and automobiles?
Often the rise in exports of electronics and automobile are said to have resulted from protectionism but such claims are questionable.
In the case of ‘electronic goods’, the trade deficit is consistently rising – from (-) $30.6 billion in FY15 (when import barriers started going up) to (-) $53.7 billion in FY23. That is, exports may be up but imports continue to surpass by higher margin.
In the case of automobiles, India imported all technologies – for the Ambassador cars to Hero Honda bikes. Besides, the SIAM data doesn’t prove much. It shows:
Export of passenger vehicles (passenger cars, UVs and vans) in FY23 was 6.6 lakh units – far lower than FY17 (7.6 lakh), FY18 (7.5 lakh) and FY19 (6.8 lakh).
Export of two-wheelers have risen but at 36.5 lakh units in FY23, it was lower than 44.4 lakh units in FY22 and closer to 35.2 lakh units in FY20.
Total auto exports (PVs, two and three wheelers, commercial vehicles etc.) fell from 56.2 lakh unit in FY22 to 47.6 lakh unit in FY23 (marginally ahead of 47.5 lakh units in FY20).