Globalization and Economic Shifts
An era of strong export growth, characterized by globalization and booming world trade, is becoming a thing of the past. The Economic Survey for 2024-25 highlights a global shift towards inward-focused policymaking, suggesting a partial reversal of globalization, a trend that began even before Donald Trump's presidency.
India's Growth Strategy
For India to achieve an annual GDP growth rate of 8% and attain the status of a developed nation by 2047, it must increasingly focus on its domestic market rather than relying on exports. The feasibility of achieving such growth remains uncertain.
Factors Influencing Inward Orientation
- Global Trade Slowdown:
- Non-tariff, trade-restrictive measures are on the rise despite reduced tariffs.
- Technical barriers affect 31.6% of product lines, impacting 67.1% of global trade.
- Export-related measures impact 31.2% of shipments globally, with climate-related non-tariff measures influencing 26.4% of trade.
- Foreign Direct Investment (FDI) Shift:
- Firms now prefer FDI in geopolitical allies, sidelining emerging markets.
- Consequently, these markets experience reduced FDI inflows.
- Current-Account Deficit:
- The tolerable level for India's deficit may decrease, necessitating reduced imports and enhanced import-substitution.
- China Dependency:
- India aims to reduce reliance on Chinese imports to mitigate supply chain and currency risks.
- The focus is on strengthening domestic supply chains and finding alternative sources, even if they're not cost-competitive.
Industrial Policy and Protectionism
The Survey revisits the role of protectionism and industrial policy, suggesting these may not be harmful to growth. The trend of using high external tariffs is observed in both East Asian and European economic successes. Indian policy is aligning with global trends towards greater inward orientation.
- The average tariff rate in India increased from 13.4% in 2016 to 17% in 2023.
- The introduction of the production-linked incentive scheme aims to bolster domestic manufacturing.
- There are domestic content requirements and a preference for domestic producers in public procurement.
Regulatory Environment and Investment
The Survey emphasizes deregulation to facilitate investment, although greater certainty and a stable economic climate are more crucial for spurring investment. The government may need to increase capital expenditure beyond the current budget to navigate uncertain times effectively.