Open Forum

New Delhi, 21 May 2025  

Widening Trade Pacts

DOES INDIA STAND TO GAIN?

By Dhurjati Mukherjee 

The global trade scenario is complex and the situation is unlikely to improve shortly. With the US imposing tariff barriers, it is unclear which countries stand to lose and what willbe India’s position. India reached a favourable free-trade agreement with the UK which has been hailed by business and industry groups as it is expected to facilitate trade, boost jobs and growth for both economies. Analysts are of the opinion that such treaty augurs well at a time when Indo-US trade agreement is under negotiations to substantially reduce tariffs. Not just India but countries like Indonesia, Brazil and South Africa have also to come to the negotiating table.    

After the successful trade deal with the UK, it has also firmed up an economic partnership agreement with Chile to build upon the preferential pact that was signed several years ago. The new deal will cover a broader set of sectors, including digital services, investment promotion and cooperation, MSME and critical minerals. Meanwhile, the negotiations with New Zealand have already started and are expected to be finalised shortly. Additionally, the one with EU, which has been in the pipeline for nearly two years, is also expected to move faster, specially after the Union Commerce Minister’s Piyush Goyal parleys with Marcos Sefcovic, the EU Commissioner for trade and commerce earlier this month. 

India which has a trade surplus with the US must face a big challenge given its dependency on Washington. Though the spectrum of India’s trade has been widening, it has not been successful in penetrating the global market due to lack of proper technology and efficiency in manufacturing. Some sectors such as handloom textiles and hand-knitted carpets endured on the strength of tradition, skill and labour intensity. But many others struggle against efficient and cost-competitive imports. 

Skilling gaps, limited access to capital, high power costs and outdated regulations left manufacturing hovering at around 15% of GDP, a figure that has barely shifted in a decade. Though the license permit raj has been abolished, there’s corruption in getting clearances from the government. India has the capability to benefit from the changed trade scenario, but substantial measures are needed to make this effective. Challenging China at this juncture is obviously not possible but India may try to come near it through technological collaborations with Western companies. 

The automotive sector has been the focus with a target to achieve production of 30 million units by 2026. Similarly, the electronics sector was given importance as the target was to reach production of US$ 190 billion worth of mobile phones and components by 2025. By aiding the production expansion, leading to higher exports from the country, the ‘Make in India’ initiative has boosted investment in India. But manufacturing to the extent desired has not picked up. 

According to the World Bank, India’s exports of goods and services as a percentage of GDP stood at 21.9% in 2023 as compared to 13% in 2000. The enhancement of the export sector improves foreign exchange reserves, stabilizes the national currency and aids the financial health of the country. Achieving a target of US$ 2 trillion in exports holds great significance for India in terms of the social and economic aspect. The objective of this goal is not just about the US$ 2 trillion value but also about the overall growth of the country in being a global force.   

Experts believe that in the near term, the change will yield a more fragmented global economy where efficiency may be subservient to strategic alignment. India has to gain advantage. But for this, it has to concentrate on technological skills and better infrastructure to create a conducive business environment. While the country is working hard to weave out a favourable trade deal with the US, it needs to withstand American pressures to buy more military hardware, which would obviously affect developmental expenditure, specially infrastructure development. But India to develop better economic relations with China for the latter’s technological prowess. 

The expectation that more opportunities will come India’s way remains to be seen. India’s manufacturing sector growth has remained stagnant at 15% of GDP over the years, which should have improved with new policies and incentives of the government. However, it is interesting to note that almost 30% firms plan to invest in upgradation, supporting the robust increase in capital spending for the year despite challenges such as weak demand, geopolitical tensions and high borrowing costs, as per a survey of private sector capital expenditure released by the statistics ministry.  The slightly lower capex for 2025-26 at Rs 4.9 lakh crore, though still above 2023-24 levels of Rs 4.2 lakh crore reflects cautious planning after a strong 2024-25 when the intended capital expenditure was estimated at Rs 6.8 lakh crore. 

No doubt, India will struggle hard to make its presence felt in the international scenario. There should be sharp focus on gearing up manufacturing, facilitating proper infrastructure development and ensuring supply of high-skilled personnel so as to make products competitive and at the same time cost-effective. Another issue relates to the poor R&D spending by the private sector which is imperative to improve quality of products. Though the government has been focusing on these aspects and also urging the private sector to concentrate on R&D, what is necessary is a more integrated strategy that needs to be evolved, preferable in consultation with the industry associations. Only then will Indian products make its presence felt in the international market. 

India, apart from industrial products, should focus on labour-intensive items that have a good market in the West. In this connection, Indian artisans need to be trained to improve the quality of their products. Also, promotional work has to be organised throughout the year, not just by the trade organisations but also by the government.  

Meanwhile, the destruction of the liberal international order doesn’t presage multi-polarity but rather consolidates the bipolarity that will subsist amid increasing entropy in global politics. Trump’s policies will not reduce the conditions for China’s continued rise but increase its legitimacy as a responsible power. The recent Washington-Beijing accord demonstrates that pressure tactics helped China to reduce tariffs as also its capability and expertise in the technological realm. 

Finally, by focusing on high tariffs, Trump appears to have won the battle of perception against India and other developing countries. Experts believe that a new form of colonialism has taken shape through dominance of the western world, primarily the US. Analysts have rightly pointed out that India should focus on national interest in finalising the deal with the US, or for that matter any other country or even the EU.The UK agreement has given the country much leeway specially for labour-intensive sectors and apparel where India will be in a position to challenge Vietnam and Bangladesh. Only time will tell the nature of the trade agreement with the US and the extent of tariffs India will have to reduce.---INFA 

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