The recently signed Free Trade Agreements (FTAs) between India and the European Union on the sidelines of India’s 77th Republic Day celebrations are indeed a geopolitical and economic milestone. No longer can the world be divided on longitudes and latitudes; there’s a play of diagonals and dialogues as well, and some good old commonsense.
With India and the EU together accounting for 23 per cent of global GDP and 25 per cent of global population, the deals, if materialised, could amp up the bilateral trade from the present USD 200 billion to USD 500 billion—hopefully to the chagrin of the USA. Incidentally, the ‘Mission 500’, envisaged between the world’s oldest and the largest democracies, had those numbers on paper.
Congratulations to PM Modi and his tireless lieutenants, who leveraged India’s emerging economic heft and its soft power rather astutely. But does it help India become a developed nation by 2047? More importantly, do such agreements shape India as an innovation powerhouse? Or, do they push us back on the value stream? Are we losing out on the value of trade to gain volume?
Tariffs are economic instruments aimed at protecting domestic industries, especially those in the nascent stage, generating revenues for the government and regulating trade deficits. These are the government’s ‘visible hands’ shepherding the market’s ‘invisible hands’, but are best adopted temporarily and rather as corrective measures. As any parent would assert, over-protection of nascent beings can produce weak adults.
Also Read: India-EU FTA: Can The ‘Mother Of All Deals’ Lift Up India’s Fragile MSMEs?
An over-protective regime, as in a complete import ban, not only promotes local monopolies but also artificially shields the incumbents from the best practices and innovations from the industry leaders elsewhere. The communist Soviet Union, (erstwhile) China and several Third World countries harboured sick units under the pretence of protecting livelihood and national sovereignty.
But the gales of creative destruction spare none—the post-1991 fate of our License Raj era PSUs and family-run businesses is emblematic of it. Rather, when thrown open, China’s Legend becomes Lenovo (the world’s largest maker of laptops and PCs), Mitsuboshi Trading Company becomes Samsung (world’s leading patent owner), and Taiwan Semiconductor Manufacturing Company Limited becomes the world’s biggest foundry.
If we look at the current fabric of FTAs India has signed with the developed countries, it’s clear that the high-value-added goods land on the Indian shores cheaply, while the low-value-added goods and services are shipped even more cheaply. The three largest imports from the EU are: machinery and mechanical equipment (21.4 per cent), electrical and electronic equipment (15.5 per cent), and aerospace parts and components (10.3 per cent).
The export side comprise of mineral fuels and oils, organic chemicals, apparel, iron and steel, and generic pharmaceuticals. India is shipping its natural resources (labour included) in exchange of high value add, intellectual property-rich products. What happens when imported high-end cars, branded pharmaceuticals, gourmet confectionaries and electronic goods become cost-competitive in India? There’s a clear (re)distribution of labour. The individuals and companies that aim at producing high-end, premium products get shortchanged, for not only are they unproven in the global markets, but even the domestic turf looks dire. We don’t want to be known for shipping apparel, leather products and fisheries—after all.
An instructive case is India’s IT services industry. Buoyant on cheap and adequate labour, a weak intellectual property regime, language and rudimentary technical skills, and an ever-weakening currency, the industry is merrily at what’s always been its staple. Ushered in the 1980s and gaining pace in earnest in the 90s, the industry has managed to amass employees and foreign exchange in a predictable, linear manner. Even the seismic shock of general-purpose AI hasn’t managed to shake the dominant paradigm of ‘hire cheap and bill high’.
The R&D intensity of about 0.5 per cent and a dismal patent filing record speak volumes about misplaced priorities and comfort with the lower end of the value spectrum. There’s one silver-line though, the easy access of tech leaders and talent to the GCCs, which are calling India their second home. The IT and IT-enabled services companies played to the incentive systems – keep at the low-end, volume game and let the westerners corner the juicy piece. Resultingly, we have no computer maker, or mobile phone producer or even a world-class enterprise software company, which were supposed to be the spillover effects of our IT heritage. Thankfully, there’s no tariff on services (yet).
Sample this: On the news that high-end imported cars will get cheaper, Mahindra and Mahindra’s share price slipped by 4.2 per cent. Isn’t Mahindra the company that has seriously attempted to move up the value index, with its launch of new designs, products and platforms?
Starting with XUV500 to Thar and BE, the surge in Mahindra’s intent and capabilities is visible on the Indian roads, and suddenly it’s asked to compete with the German car industry with a century of headstart. Similarly, when branded pharma becomes cheap, or APIs get cost-competitive, why will an Indian company take a chance? Why shouldn’t the workforce be distributed to the labour-intensive, closer to the source industries, rather than on the more uncertain, long-gestation period domains? Doesn’t India need exactly that kind of an investment to be called ‘developed’ over the next 20 years?
Can FTAs push innovation? Certainly not. Can they defer innovation? Seems to be. The onus falls back on India’s industry captains to move up the value chain and not bank their aspirations on government policies. While the Production Linked Incentives (PLIs) and startup sops are laudable, innovation calls for long-term thinking, deeper commitments, and trench warfare.
Here’s an appeal for Indian companies to up the ante, selling not just to the resurgent Indian market but aiming for the world’s most discretionary. FDAs are best left to the optics; it’s time to invest in developing capabilities, sharpening your world-view and designing world-class products. This calls for capacity building, both by the government and the private sector, tightening the intellectual property regime, and creating incentives for the redistribution of talent. Government can not do it all.
Disclaimer: The views expressed in this article are those of the author and do not necessarily reflect the views of the publication. |
