China can be countered by moving global value chains here. But we have high trading costs

The first in-person Quad Group leaders summit last week yielded a promising outcome that combines economic integration with overall strategic motivation. India is an immediate beneficiary of this momentum. Quad Vaccine Partnership Funding Manufacturing Expansion of National Vaccine Maker Biological E. Joint statements from the summit highlighted other potential areas of collaboration. The Clean Hydrogen Partnership, a semiconductor supply chain initiative, and telecommunications are three areas where India will potentially have opportunities to take a technological and economic leap forward.

If the economic potential of the Quad is to materialize, it will depend on the collaboration of the private sector. In economic terms, Quad economies are the antithesis of China, private companies operating in rules-based market economies are getting things done. It is certain that agreements between governments will create an enabling environment. The potential will however have to be exploited by private companies. In other words, if the Indian economy is to take advantage of the opportunity resulting from the realignment, private companies need enough incentives to invest here.

Concretely, this translates into closer integration of India into global value chains (GVCs). An important factor influencing integration is the level of trade costs in India, through tariff and non-tariff barriers. India’s trade policy in the recent past has driven up costs through tariff increases. WTO data shows that the simple average of the MFN (Most Favored Nation) tariffs applied by India fell from 13% in 2014-15 to 15.4% in 2020-2021. At a more granular level, the percentage of tariff lines in the 10-30% tariff category increased from 12.1% in FY15 to 22.1% in FY21. There has been a marked shift towards protectionism which has, on average, increased trade costs. This will only discourage potential investments in GVCs. The prevailing favorable strategic environment requires favorable trade policies that persuade GVCs to come here.

India’s FDI inflows have recently increased in absolute terms, but an examination of the nature of the flows suggests that access to the domestic market has been a major pull factor. There will be more positive spillovers if a growing incidence of capital inflows lock domestic firms into GVCs. This will lead to the diffusion of advanced technologies and increase productivity at all levels. Therefore, the historic opportunity resulting from the closer ties of the Quad group can be realized if India reorients its trade regime to attract FDI that largely links the Indian economy to GVCs. India is a more stable and reliable alternative to China for GVCs.


This article was published as an editorial opinion in the print edition of The Times of India.


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