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US to end preferential trade agreement with India: Donald Trump's protectionist policy message to New Delhi to repair in-house growth engines

The Narendra Modi government is ending its five-year term in office leaving behind a few big holes on the economic growth chart--both on the domestic and external fronts.

The external sector woes may have just gone up by a notch with US President Donald Trump flashing his protectionist card yet again and threatening to end the preferential trade treatment (that allows $ 5.6 billion worth of Indian exports to enter the US duty-free) with India. It is a no-brainer that ending of this pact would be a major jolt for India, the biggest beneficiary of the Generalised System of Preferences (GSP) program.

Some also see this as a retaliatory action against India by Trump for restricting access to foreigners through the recent changes in the E-commerce policy. It is doubtful whether Indian policymakers could foresee this coming from a so-called friend. This was expected at some point.

But don’t forget that even before the US trade threat, the external sector scenario--the slowing global economy and resultant slow demand--has already been a point of worry for India on account of multiple factors. India’s trade balance has been on a weak wicket with exports dwindling and imports rising. The trade deficit widened in January.

In its February policy review, the monetary policy committee (MPC) too had taken note of the slowing global demand. It said, “Further heightening of trade tensions and geopolitical uncertainties could also weigh on global growth prospects, dampening global demand and softening global commodity prices, especially oil prices.”

It’s not just the global factor that is hurting the growth momentum; the key domestic growth drivers--agriculture and manufacturing--are lagging. The latest GDP numbers for the third quarter shows this. At 6.6 percent in Q3, the economy is at the slowest growth in at least six quarters. In Q1 of FY18, the growth had touched 6 percent but since then this quarter is the lowest. Meeting even a 7 percent target for full year looks tough as of now.

 US to end preferential trade agreement with India: Donald Trumps protectionist policy message to New Delhi to repair in-house growth engines

File image of Prime Minister Narendra Modi and US president Donald Trump. AP

Now, look at this. Growth in labour-intensive (largest employers in the country) sectors have been particularly disappointing over the last two years. Growth in agriculture fell to 2.7 percent in Q3 (October-December 2018) from 4.2 percent in the previous quarter and 5 percent in Q1 . After logging a growth of 7.5 percent in Q3 of FY17, the sector growth pace has been sliding quarter-by-quarter, all the way to 2.7 percent two years later.

The Modi government, which promised to double the farm income by 2022, has fallen short of the target by a large margin. It recently brought in schemes like giving Rs 6,000 cash dole per year to a farmer but none of that has impressed the agrarian workers as a remedy to the developing agrarian crisis. But, faulty market price mechanism, lack of irrigation facilities and tiny landholdings are cited as actual reasons for the farm crisis, where solutions are still awaited.

A similar pattern can be seen in the manufacturing sector too. When Modi administration took charge in 2014, it announced the intention to turn India to a global manufacturing hub launching several schemes such as ‘Make in India’ and Start-up India to give the local push. But, the manufacturing sector in the subsequent years took a major knock with higher input costs and lack of consumer demand.

A hastily planned and poorly-executed demonetisation of Rs 500, Rs 1,000 notes in November, 2016 in fact broke the back of cash-intensive sectors and disturbed supply chains. Growth in manufacturing fell to 6.7 percent in Q3 as compared with 6.9 percent in Q2 and a smart 12.4 percent in Q1 as the Q3 GDP data shows.

The growth worries are not just theoretical constructs; perhaps its biggest evidence lies in the unemployment figures, which are allegedly played down by the government agencies. The unemployment rate for skilled persons in the country has doubled to 12.4 percent in 2017-18 from 5.9 percent in 2011-12 and the number of jobless among educated has also gone up. Literacy rate showed an upward movement at 76.9 percent in 2017-18 from 74.7 percent in 2011-12. The proportion of people who got vocational or formal training in this period was less, said a report in Business Standard based on the NSSO survey.

The India growth story is now largely shouldered by high government spending with the private sector remaining on the sidelines. Calls for land, labour reforms have been recurring. Even Modi’s own officials have been highlighting this part. Donald Trump’s trade threat is a worry for the Indian economy; but that isn’t, clearly, the only one. In fact, the onslaught of cut-throat protectionism tells India it needs to look within and repair the damaged domestic growth engines at the earliest to support its growth story.

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Updated Date: Mar 05, 2019 13:54:23 IST

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