Eight months after coming to power, what has Narendra Modi done for Indian trade? Finbarr Bermingham asks the question.
When Narendra Modi was elected as the 15th prime minister of India in May 2014, the world held its breath. For decades India was whispered of as one of the next major economies, but the reality was often found to be lagging behind. Now, here was a leader with truly global ambitions. Here was a leader who presented himself as pro-business, pro-trade and pro-development.
But while the initial rhetoric was encouraging, some of his earliest stances at the top table of trade made some question whether or not he could deliver on that promise. World leaders had rejoiced as the World Trade Organisation (WTO) came close to finalising the trade facilitation agreement (TFA) in December 2013. But months after coming into office, it appeared that Modi’s government was determined to throw a spanner in the works of an agreement that had been described as “the greatest achievement in the WTO’s existence”.
Modi demanded that India be permitted to continue to subsidise grain purchases for its poorest citizens and that the subsidies be allowed to continue well beyond the WTO’s deadline for phase out. He would not ratify the TFA until this had been agreed upon. In effect, he was holding the 160-strong WTO to ransom. On the heels of this, Modi announced that he would re-evaluate all of India’s existing free trade agreements and that he would pause negotiations on new ones. Any agreement, he declared, would have to be to the benefit of India’s swollen populace.
“There was concern in the international business community and the WTO that it indicated a more negative attitude towards the WTO and the architecture of international trade agreements,” Patricia Hewitt, the chair of the UK India Business Council and former UK Trade Minister tells GTR. “There really were genuine concerns.”
These concerns have been allayed, for the most part. While it initially looked as though Modi was hell-bent on derailing the most significant global trade deal in history, it now looks like a canny piece of realpolitik. In November, he got what he wanted when the US – which was leading the negotiations on the WTO deal – yielded to his demands over the TFA. Modi got his extension and he won the right to subsidise grain purchases for India’s poor. At home, he was toasted as a hero.
He has also, however, cemented his position as a shrewd operator on the international stage. On the back of the WTO deal, he reopened negotiations with the EU and Australia on respective bilateral free trade agreements, with his Australian counterpart Tony Abbot speaking confidently of sealing a deal by the end of 2015: a complete break from India’s traditionally slow negotiating tactics. The agreement with the EU, for example, has been under negotiation for seven years.
“It demonstrates India’s growing importance to the global economy – Modi was gambling that the US would come back to the negotiating table rather than push India into the background, and he has been proven right,” says Mike Jakeman, commodities editor at the Economist Intelligence Unit.
He also announced that, despite the loggerheads at which they found themselves over the TFA, he would deepen trade ties with the US. Days later, US Exim had entered into a US$1bn agreement with the Indian Renewable Energy Development Agency (IREDA) to facilitate the use of US goods in India’s power sector.
“He is a man of considerable intellectual and political self-confidence and power,” Hewitt says. “The succession of foreign visits that he’s made to China, Japan and Washington DC, reaching out to the immediate neighbourhood before inauguration, reflected a very clear geopolitical strategy and will have given him an additional sense of what he was looking for at the G20 and how he wanted to present himself in India.”
Modi’s grandstanding on the WTO may have stolen the headlines, but some say that it has detracted from what needs to be done on a domestic level in order to boost trade. As he prepares to round off a year at the helm, what do we know about Narendra Modi’s trade strategy? And what might this mean for companies hoping to do business in India?
Jayant Menon is the lead economist for trade at the Asian Development Bank. He sees potential in the Modi administration to improve trade conditions in India, but has yet to be convinced that his government has started tackling the most important issues. He is also relatively scathing of India’s “aggressive” pursuit of bilateral free trade agreements, “all of which are shallow and riddled with exemptions”.
The missing free trade agreement, says Menon, is the one between the states of India, rather than with any particular country.
Tariff and non-tariff barriers continue to exist internally and, while pursuing their removal on an international basis should be welcomed, Modi needs to get his own house in order first.
“Expectations are high that the Modi government will address India’s trade policy challenges as an important component in its overall foreign policy programme,” he tells GTR. “But it needs to do so from a national reform programme perspective as well, as the major barriers limiting India’s export potential are behind the border. These relate to the whole host of trade facilitation reforms, many of which vary by state, and the notorious red tape and licensing restrictions.”
Some movement has been made to develop the trade environment, domestically. Central to Modi’s strategy has been the “Make in India” campaign, which was announced in September 2014. The campaign is designed to make India a manufacturing hub and to attract companies to invest and, naturally, make in India. It will make it easier to invest and do business in India, to eliminate cumbersome barriers to trade and to roll out transparency initiatives across 25 sectors and across all of India.
While the ultimate aim is to provide work for every Indian citizen, it’s clear that for international companies frustrated by not being able to operate in India due to obtrusive legislation, there are lots of benefits to be gained. The progress, alas, is slow and much of the red tape remains.
“Two of the biggest constraints holding back exports are difficulties in land acquisition and labour market rigidities, as these prevent firms from investing in India and then subsequently exporting goods out of the country. The progress in reforming these two areas has so far been underwhelming. This appears to be shown by the latest data – exports fell by 5% year on year in October, and have remained virtually flat for the past year,” Shilan Shah, India economist at Capital Economics tells GTR.
Build it up
Alongside the more nebulous “Make in India” campaign is a more concrete commitment to improve the country’s infrastructure. This will result in an upgrade of the intercity roads system, as well as the creation of 100 “smart cities”. Led by the Smart Cities Council, this initiative will combine the challenge of catering for India’s 590 million-strong urban population by 2030 (twice the size of the population of the US) with that of upgrading the currently weak infrastructure and public services.
The council says that “all the data that is collected from sensors – electricity, gas, water, traffic and other government analytics – is carefully compiled and integrated into a smart grid and then fed into computers that can focus on making the city as efficient as possible”.
Within each of these areas can be found opportunities for international companies. Furthermore, given their intrinsic importance to Modi’s blueprint for India, it’s likely that financiers may find themselves a willing guarantor for commercial loans in his government.
“I’ve been very impressed by the clear strategy and the very thoughtful way in which the government is approaching a whole set of problems, including the transformation of the ease of doing business in India. They’ve removed lots of the areas in which licenses and permits are required, but more important is the unblocking of hundreds of projects that had got into a logjam under the last administration, including some very large infrastructure projects,” says Hewitt at the UKIBC.
British firms are already heavily engaged in the construction of the Bangalore-Mumbai economic corridor, which is being undertaken with the help of both governments and which is one of a number of proposed economic corridors in India.
“Clearly that’s one area, and smart cities is another, where there are a large number of British companies with enormous expertise ranging from urban development, the design of new cities, the redevelopment and restoration of industrial heritage cities, sustainable urban development in its various forms, right through to large-scale consulting engineers like Arup,” Hewitt tells GTR.
She envisions the Indian government assisting in the financing of these projects, through both loans and guarantees, since “the interest rates in India are a real challenge to investors looking to obtain a decent return on investment”.
In the UK, as the coalition government moves towards the end of its tenure, it is still blaming its predecessors for the fact that much of its deficit tackling targets have been missed and that UK exports are still lagging well below where they should be. Thus, it seems slightly unfair to cast any true judgement over Modi’s reign, less than a year after he came to power. His short time in office, though, has shown that he is a man with international ambition. If he didn’t have the attention of the world of trade, he certainly has it now.