Protectionism is not the answer

India cannot shy away from the global trading system

India is among the countries most vulnerable to rising protectionism warns the most recent Global Financial Stability Report of the International Monetary Fund. Most of the demand that drives the international trading system remains in the developed countries and as they raise the drawbridge against imports, the biggest losers will be emerging economies like China, India and South Africa. The knock on effect on India will be not merely in terms of falling exports. It will also be in increased financial pressure on local corporations and non-performing assets in the banking sector. Among six emerging economies that the IMF looked at, India has the most vulnerable banking sector. The report does not dwell on what can be done to salvage the global trading system. But it is an issue to which the government should give some thought. India is a nation that has long been gripped by export pessimism, a term applied to countries who believe they cannot compete and opt out of international trade.

Yet almost all countries who have pulled themselves out of poverty and into the ranks of high-income states have done so on the back of international trade. The Modi government has run away from negotiating even the smallest free trade arrangements, ripped apart existing foreign investment treaties and run interference at multilateral trading talks. This is unfortunate. New Delhi’s reluctance to more actively support the multilateral trading system – and in fact act as a spoiler to its success – is a remarkably short-sighted policy. India’s future growth continues to heavily depend on foreign investment and trade. Also the ability of India’s homegrown companies to become global players is tied strongly to their success in tapping the larger world market.

The Modi government’s reform measures, like “ease of doing business” and the Goods and Service Tax, will be important in making India more competitive. Perhaps the government plans to re-engage the international trading system when it feels domestic industry is competitive enough. That may be a long time coming: Protectionism breeds mediocrity. Worse, there may not be much of a trading system to rejoin if countries like India are not prepared to lend it support when it is under attack.