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Will Narendra Modi's economic diplomacy work?

India's current account deficit has been and continues to be a reason of enormous worry for economists.

twitter-logoShweta Punj | October 10, 2014 | Updated 17:23 IST
Prime Minister Narendra Modi
Prime Minister Narendra Modi (Photo: Reuters)

Driving around Lutyens' Delhi these past few months has been a commuters' nightmare and a Vexillologists' delight -  the city has seen hundreds of flag changes to honour visits by heads of state who have trooped in and out of the city (it's protocol to display the flag of the visiting country head along-side the Indian flag on the road leading up to Rajpath, South Block, airport, and at all meeting venues).

The historic city dotted with its mausoleums, architectural relics, forts has resembled a fortress on several occasions  - with heightened security, traffic checkpoints and choked roads as Prime Minister Narendra Modi, huddled in meetings, realigns India's passage to the world.

The most recent visitor to the capital was the President of China, XI Jinping, who gave a commitment to realise $20 billion investment from China in the next five years and a reduction in the awfully skewed trade balance. China's exports to India were at a paltry $3,019 million, while India imported Chinese goods worth $13,744 million between April-June 2014/15.

India's current account deficit has been and continues to be a reason of enormous worry for economists - CAD is a measure of a country's trade - while the deficit narrowed to 1.7 per cent of GDP in the first quarter of 2014/15 to $7.8 billion from $21.8 billion a year earlier, as exports rose 10.6 per cent compared with a 1.5 per cent decline a year earlier, imports fell 6.5 per to $116.4 billion on the back of a 57 per cent fall in gold imports. Non-gold imports, however, rose 1.3 per cent as against a decline of 0.6 per cent in corresponding quarter of 2013/14.

"Effectively, nothing has changed. A lot of gold is coming through the hawala route, it has shifted from visible to invisible. Industry has grown quite import dependent. We should be able to push exports and explore newer markets. We have been talking about it, we have to match talk with concrete actions," observes Biswajit Dhar, Director General of Research and Information System of Developing Countries.

Professor N.R. Bhanumurthy of National Institute of Public Finance and Policy terms a current account deficit of 1.7 per cent with 4.5 per cent growth "a major concern". "This is despite negative growth in imports. Imports are still high and IIP (Index of Industrial production) is low. A CAD of one per cent would be comfortable with a below five per cent growth rate," he adds.

Successively, over the years, India's leadership has inadvertently pushed services over manufacturing , and reclaiming India's position as a manufacturing hub, as articulated by the Prime Minister on several occasions, to increase the share of manufacturing from 15 per cent to 25 per cent of GDP will also entail reducing industry's dependence on imports, apart from a host of other factors centred around facilitating ease of doing business in a nation where businesses spend anything between 19 and 29 per cent of their total expenses on meeting regulatory requirements, as compared to 10 per cent in business friendly countries.

"From agarbatis (incense sticks) to Ganesha idols, everything is coming from China, because it is cheaper to import than manufacture here. Traders are making money selling these things cheap. In the last decade about two million jobs were lost in the handicraft sector," laments former home and commerce secretary G.K. Pillai. "He (PM) has to take much tougher decisions against those who are only importing, somebody has to feel the pinch," he adds.

While Chinese lights decorate Indian homes during Diwali and Chinese apples deluge Indian fruit marts, China is yet to allow import of India's basmati rice. It is India's ability to wrestle such nitty-gritty that will form the basis of success or failure of Modi's big economic diplomacy push. India is not new to capitalise on foreign relations to further economic interest, but to say that the last few years in particular saw foreign-economic policy hang in a limbo will not be an exaggeration.

Accelerating a foreign-economic policy that had been static for too long has been a job well done. The sequencing of Modi's engagements starting with immediate neighbours, followed by Japan, China and the United States gives out several messages - it's clear that Modi has established India's immediate neighbours as number one priority -a move crucial for India to further its geopolitical-economic interest. Defining an economic policy with our neighbourhood is perhaps something we are doing for the first time.

"The message to Nepal and Bangladesh that we also want to be partners is very significant. Our future lies in how we are able to harness the markets in our neighbourhood, for potential the sky is the limit, the entire East Asian region is very important," adds Dhar.

Observers say that sequencing of the visits is an effort to create competition among superpowers to compete for investment in India. "He has reached out to everyone equally (Japan, China, US), they will be forced to wait and watch which way will India tilt," adds Bhanumurthy.

India's investment in Nepal and Bhutan's hydropower sector would mean that Nepal will be in a position to send surplus power to India, but something can really concretise after Nepal has a constitution in place. With Bangladesh, the Prime Minister will have to change his stance and move forward on the Teesta water sharing agreement rather quickly. Normalisation of trade relations between Sri Lanka, Pakistan and Nepal will remain tricky for border tensions.  

Moreover, the Modi-led National Democratic Alliance will also have to clean up after the largesse of the UPA's free trade agreements signed between India and Korea, Japan and ASEAN. Almost with all the countries, FTAs have meant that India has become a net importer. A review of how India has benefited from these FTAs has been called for by the new administration and some of these issues can be addressed through dialogue.

What adds to the worry of whether India will be able to go beyond talk are doubts on intellectual bandwidth of the  government. While Modi during his campaign had highlighted the need to take the states along, he is yet to call a meeting with state chief ministers who will play an integral role in facilitating and enabling cross-country and cross-border trade. The previous government, economists and policy observers say, was quick to call experts to voice their opinions but this government has been rather frugal with sourcing of expertise in such matters of detail and significance.

But Modi has the rest of the year to convince the naysayers that words do translate into action. Many suspect that the PM will get moving on the reform agenda after state elections in Maharashtra. "He is the first PM born post partition. He is not from a land-locked state, which really frees up India's economic diplomacy agenda," says an optimistic Executive Director of Gateway House, Manjeet Kriplani.

"Mr Modi as CM also would do a lot of economic diplomacy, his was one state which would attract foreign investors. He is a master of art of economic diplomacy-and the beauty of this is that here nobody is a loser," says BJP's Vice President and General Secretary of Bharatiya Janata Party, Ram Madhav, echoing the view of Modi believers.

The spectacle at the legendary Madison Square Garden in the US also drove home the point that the stage is set for India to perform and now is as good a time as any for the PM to get off the rotating stage and get down to nuts and bolts. For instance, details of how's of economic diplomacy could emerge from the new administration's foreign trade policy whose release has been delayed twice.

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