Modi Says India is the Most Open Economy. Reality is Far More Complex.

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With the re-calibration of economic globalisation, there may not be any merit, per se, in being the “most open economy in the world”.

South African president Jacob Zuma, with Prime Minister Narendra Modi of India during a visit to New Delhi in 2015. Credit: PTI

South African president Jacob Zuma, with Prime Minister Narendra Modi of India during a visit to New Delhi in 2015. Credit: PTI

Prime Minister Narendra Modi declared India to be one of the most open economies in the world while addressing the CEOs of South Africa during his four-nation Africa visit last week. The PM first made this claim after the NDA government further liberalised foreign direct investment in sectors such as defence, aviation and pharmaceuticals recently. He said India had become the most open economy for foreign direct investment. However, the question is whether liberalising the existing FDI regime alone is enough to make the claim of being the most open economy?

The more crucial question is whether being the most open economy for FDI will necessarily benefit India in all sectors. For instance, all these years policy makers had been regulating automatic buyouts of homegrown pharmaceutical companies which have won worldwide acclaim for capturing the international market in generic drugs. Today, India has over 30% share of the US market in the off patent, generic medicine space. Indian companies also export cheaper AIDS medicines to Africa and other developing countries. Little wonder that during their visit for the India-Africa summit last year, the African heads of state made a special plea to Prime Minister Modi that India must not change its current drug patents  regime which had enabled it to export cheaper drugs to Africa. The African leaders said this against the backdrop of the US pharma lobby pressuring India to alter its IPR regime in a way that would result in higher prices and profits for the global drug companies. Is this also part of the much celebrated opening up of the economy?

The pharmaceutical industry has turned out to be a spectacular “Make in India” success story even before the NDA had launched the project under its present avatar.  So the question is in what way would it help to open up foreign investment up to 74% in brownfield Indian pharma companies?

Consequently, there need not be any merit in opening up for its own sake which does not result in net benefit to India in terms of more jobs and strengthening of the domestic industry where India has true potential. Similarly, India had earlier allowed 100% FDI in cutting edge defence technology. This made sense because India would need such technologies to beef up its national security. However, in the latest policy, 100% FDI has been opened even for middle or lower end defence technologies which Indian private firms are in the process of absorbing through foreign partnerships. Now these homegrown companies will become easy takeover targets of their foreign partners. Recently, while receiving an award for successfully supplying a small but important defence component to the US army, a Bangalore-based promoter of a technology company lamented that the new FDI policy would prove to be a disadvantage to small home grown companies which have begun developing indigenous capabilities. Of course, this process cuts both ways as indigenous capacity gets developed only when foreign investment bundled with technology is allowed in the first place, as had happened with the auto industry in India. The auto industry ecosystem took about 25 years to fully develop. Can this be replicated in defence and other tech-intensive sectors?

A proper strategy

The question then becomes whether the Modi government has a proper strategy for how to open up certain sectors of the economy such as defence, high end electronic/ telecom hardware, pharmaceuticals, financial services etc.  Interestingly, even as the PM claims India to be one of the most open economies, the ministry of commerce and industry appears to be signalling the opposite. India is currently rethinking the terms on which it should sign new regional free trade agreements which will enable freer movement of goods,  investments and services, including skilled labour.  There is a more nuanced policy narrative developing under the NDA which suggests  that various comprehensive economic cooperation agreements with ASEAN economies have not helped India’s domestic economy to the extent envisaged.

Consequently, India is seen as treading very cautiously on negotiating mega free trade arrangements like Regional Comprehensive Economic Partnership (RCEP) , an ambitious attempt to create a regional free trade area between 10 ASEAN nations and their 6 separate FTA partners including India, China, Japan and South Korea. The idea of RCEP was born at the East Asia summit in Cambodia in 2012.

There is a justified fear among Indian policy makers and businesses that the RCEP block, comprising 50% of world population and over 25% of global GDP, could become a platform  for an unbridled entry of Chinese businesses into India. India was naturally a bit defensive during the RCEP negotiations recently. India has said it will openly engage in negotiations if the RCEP nations agree to a very liberal regime for the movement of skilled manpower, which is India’s key strength. However, the other RCEP economies probably want to prioritise merchandise trade and investments, which would help China and  ASEAN economies more. Similarly, India is treading cautiously on its FTA negotiations with the EU. India is also renegotiating its bilateral investment treaties with the US and EU nations to ensure foreign companies involved in tax litigation with the Indian government first exhaust the judicial remedy in India before going to international arbitration/courts. This will also be seen as a protectionist move by the global investors.

So, the PM’s claim that India has become the most open economy needs a more nuanced examination. The reality is after the 2008 global financial crises the world economies — both developed and developing– are still smarting from the various ill effects caused by the excesses of the boom period. We are seeing the slowest recovery ever in history. World GDP growth is down to about half of what it used to be. World trade growth is close to zero. As the Brexit vote also demonstrated, there is a growing trend of de-globalisation of trade and investment. Given these realities, major economic players are trying hard to create new regional trade arrangements keeping their own national interest in mind. The intent is to create new openings to enable higher global trade, investment, growth and employment. With the WTO virtually dysfunctional, the US concluded its most ambitious Trans-Pacific Partnership Agreement (TPP) in February 2016 among 15  Pacific Rim nations. But there are serious doubts being harboured by sections of the US political class over the real benefits that TPP might bring. There are studies which show net GDP gains to the US by over 1 percentage point. Equally, other studies show contrary findings such as substantial loss of jobs, encouraging skepticism among the Republicans.

So, even major world economies are riven by self-doubts over new global and regional arrangements. India is in the same boat. Therefore,  the current phase of self-introspection and rethink in India’s policy narrative is emblematic of what is happening around the world. But India must remain alive to the opportunities that may arise as the world adjusts to a different template of economic growth and inter-dependence. Every government is now watching how global growth in trade and investment will impact jobs in their own back yard. India too will have to adjust its policies accordingly. In the current phase of  re-calibration of economic globalisation, there may not be any merit, per se, in being the “most open economy in the world”. But at the same time prudence would dictate that India remains open at all times does not miss new opportunities.

Featured image credit: Reyner Media, Flickr CC BY 2.0.

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