India needs to trade with China, not pushed into a war with it

India’s imperative is trade with China, not war. India (6%) has no option but to trade with China (18% of global GDP), US (16%), EU & Japan (15%).

China is 18% of the global GDP, the US is 16% of the GDP, and Japan and EU put together make up another 15%. Between these three, India are at 50% of global GDP. Given our need for export markets to provide jobs for our people, the first and foremost imperative is to preserve preferred access to the markets of China, US and EU. Under no circumstances can India afford to lose access to these markets.

Note preferred market access is different from opportunistic trading access based on price. The latter is like tramp shipping where a ship competes only on price, often going idle for lack of opportunity. Preferred access is like a conference line, with regular ports of calls and schedules, where rates are long term and stable. Preferred access means your exporters build relationships and marketing partners for distribution, even have a brand name, and are committed to supplying the market regardless of price. This makes exports more stable, more profitable, and attracts investment from large players. It is a virtuous cycle you need to create for export led growth.

So, the first order of business should be to repair trade relations with RECP. India should sort out our faulty exchange rate mechanism that inflates the value of the INR making protectionism necessary to shelter domestic producers. Local producers must be assured that adequate level of protection will be assured to them through exchange rates, come hell or high water. A high-powered committee in RBI with industry representatives must be put in charge of exchange rate management, along the lines of MPC, and this committee should be tasked with ensuring that exchange rates stay as close to REER as possible.

The Central Govt must provide the RBI with budgetary support to manage the exchange value of the INR, regardless of ups and downs in FDI and portfolio flows. Exchange rates must become a more important tool of economic management, just as the interest rate, under a new policy regime. And RBI's claims of relative productivity gains vis--vis our 3 main trading partners should be subject to detailed scrutiny, using an independent panel of economic and industry experts, every 5 years.

Once you fix your exchange rates at appropriate level, detailed planning, industry by industry should commence, to ensure there are no disruptions, and everybody is on the same page. Agriculture, dairy farming, fishing, … everything must come under the new policy regime. All export subsidies must be eliminated with the exchange rate ensuring that exports are not only viable, but also profitable, in local currency terms.

This will ensure India join RCEP without any disruption. This will also sort out our trade dispute with the US, and restore our MFN status. This is not something new. A similar exercise was undertaken at the time India joined WTO. The model is available for use. There is no alternative to such an exercise. It is a strategic imperative.

15% of the global cotton textile market

Once India have repaired trade relations with China using RCEP, and the US, economic diplomacy must go in high gear to open up world markets for textile exports, as demand for cotton explodes due to climate change. India should go the whole hog - from the best seeds, the best varieties of cotton, target the best acreage, build godowns, modernize spinning and Indiaaving mills, and switch to a full VAT in the textile sector to eliminate conflict of interest.

India should also discipline monopolists in synthetic yarn, by allocating an export obligation on pro-rata basis [using capital employed as the base] so that they can either reduce monopolistic margins, or buy from the small garment manufactures for export. The idea is to get big names into exporting. Our goal should be to capture 10% to 15% of the global market.

Armed with this, India should approach the US/EU with an offer. Remove export quotas on textiles for our exports because India have 50% of our workforce idle. In return for your open access, India commit to buy X number commercial planes, Y number of 6th generation EU fighters, and Z number of subs. India are open to joining partnerships at design & development stage. The same offer should be made to US as Indiall. Do one such deal, and the world will open up respectfully for you. It is not difficult, and time for such strategic deal making is just right.

Strategic autonomy is always with respect to an overall strategy that makes achievement of your goals as its center piece. Defined this way, it then becomes a way to protect the national imperatives, within a range of outcomes that one cannot always control. Nevertheless, such an exercise is not blind. It can provide for a realistic assessment of what other players will do, and cater for that in your strategy.

Source: NHI