Amid rising global trade protectionism and US-China tensions, India faces both risks and opportunities.
Evolving Global Trade Dynamics
- US Protectionism : The US administration under Donald Trump has returned to a protectionist trade stance, reviving uncertainties in global tariff policies.
- Targeting China : The current policies are particularly aimed at China, building on the US-China trade tensions from Trump’s first term.
Impact of Changing Trade Dynamics on India
- Export Surge: With China’s exports facing US barriers, there is a risk of surplus goods flooding other markets, including India.
- Risk of Dumping: Chinese exporters may resort to aggressive pricing and dumping, directly threatening Indian firms in their home market.
- Missed Opportunity: India gained little from the 2018 US-China trade war, failing to attract major trade or manufacturing shifts.
- Strategic Gains: Now, India has a renewed opportunity to benefit—if it can improve competitiveness and reform outdated frameworks.
Challenges Associated with India
- Low Ranking: A recent Competitiveness Index places India at the bottom among five key Asian economies, raising alarm.
- Regional Rivals: Malaysia, Vietnam, and Thailand lead the rankings with strong trade fundamentals and economic efficiency.
- Poor Performance: The index tracks six core pillars, and India underperforms in most, indicating a lack of readiness for global trade shifts.
- Need for Deep Structural Reforms: This lag signals the urgency of addressing policy, regulatory, and economic inefficiencies to compete globally.
- Low Labour Productivity: India has seen the highest workforce growth among its peers, offering a potential labour cost advantage.
- Despite this, productivity levels are the lowest, reducing the overall effectiveness of the growing workforce.
- R&D Deficit: Indian firms rarely invest in R&D or launch new products, limiting their ability to compete in innovation-led markets.
- Malaysia and Thailand excel in R&D and innovation, improving productivity and export competitiveness.
- Lack of Financial Access: Many Indian firms lack access to finance, facing frequent credit rejections that hinder growth and competitiveness.
- Land Scarcity: Land availability is restricted by complex regulations and building norms, raising input costs and limiting usable land.
- Lack of Exporting potential: India scores well on domestic demand, thanks to its large internal market, enabling firms to scale operations.
- This large market also reduces export incentives, with Indian firms showing the lowest foreign demand among peers.
- Oligopolies: India has high firm concentration, where a few firms dominate key sectors, limiting healthy competition.
- Raw Material Monopoly: Monopolies in raw materials raise input prices, impacting downstream sectors’ global competitiveness.
- Complex Regulations: India ranks low on regulatory quality, facing issues like corruption, tax complexity, and judicial delays.
- These regulatory hurdles disproportionately affect SMEs, stifling their growth and innovation potential.
- Protectionist Approach: India’s high import tariffs and absence from key trade blocs restrict participation in global value chains.
- In contrast, Vietnam enjoys cheap inputs and preferential market access via broad trade agreement participation.
- Sectoral Gaps: Indian firms admit to low R&D investment and a heavy dependence on domestic markets for revenues. India’s cotton-focused apparel industry fails to keep pace with rising global demand for synthetic garments.
- Rigid labour laws: It deter firm expansion, encouraging businesses to remain small to avoid compliance burdens.
- Missing Middle Problem: This has led to a persistent “missing middle”, where too few mid-sized firms bridge the gap between MSMEs and large corporations.
- Structural Issues: India’s bottom ranking on the Competitiveness Index signals long-standing systemic challenges, not just cyclical problems.
Conclusion
India must adopt a forward-looking competitiveness strategy focused on productivity, innovation, and trade integration.
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