“The Recovery of India: Economic Growth in the Nehru Era” by Pulapre Salankrishnan

### **Main Focus of the Paper:**

- Examines the relationship between policy regime and economic growth in India (1950–
1964) – referred to as the **Nehru era**.

- Period spans from the formation of the Planning Commission to Nehru’s death.

- Argues the Nehru era had **policy integrity** – policymaking was relatively independent
of narrow political or economic interests.

---

### **Key Arguments:**

#### **1. Policy Integrity in the Nehru Era:**

- Economic goals were largely free from vested interests and sectional politics.

- Compared to later periods, Nehru’s leadership maintained more **autonomy from

political and economic pressures**.

- Post-Nehru era saw interventions increasingly aimed at **political power retention**.

#### **2. Motivation for the Paper:**

- **Public Interest**: Renewed debate on Nehru’s legacy; often negative, blaming Nehru for
a “wasted past”.

- **Academic Interest**: Understanding **growth transitions** in India’s economic history.

- Researchers like Hatekar & Dongre (2005) point to a significant **growth break around
the mid-20th century**.

---
### **Research Questions & Relevance:**

- What factors contributed to economic growth during the Nehru era?

- How did **state-directed economic policy** affect growth—both positively and

negatively?

- Relevance to ongoing global debates (e.g., Rodrik 2006) on what drives economic growth.

---

### **Significance of the Study:**

- Challenges dominant narratives criticizing Nehru’s policies.

- Seeks to better understand **state intervention** and its role in development.

- Aims to provide insights relevant to both Indian and global economic contexts.

---

Section 2. Nehru-Mahalanobis Strategy

### **Overview:**

- **Iconic to Nehru-era economics** and central to the Second Five-Year Plan.

- Developed by **P.C. Mahalanobis**, rooted in industrialisation as the path to increasing

national income and reducing poverty.

- Often referred to as the **Nehru-Mahalanobis strategy**, as it echoed the vision of the

National Planning Committee chaired by Nehru.

---

### **Key Features of the Mahalanobis Model:**

- Based on a **two-sector economy**:

- One sector produces **capital goods**

- The other produces **consumer goods**

- Assumes a **closed economy** without government.

- Capital goods are used to produce both consumer goods and more capital goods.

- **No diminishing returns** to capital—higher initial investment in capital goods leads to

higher long-term growth.

- **Planner’s task**: Decide the investment share for capital goods to meet income targets.

- Model is a **guide for strategy**, not a rigid formula.

---

### **The Heavy Goods Sector:**

- Strategy prioritized a **fast-growing heavy (capital) goods sector**:

- Includes **machine-building complexes** producing steel, chemicals, fertilizer,

electricity, and transport equipment.

- Recognized that short-term growth would be slower, but long-term gains would be higher
due to enhanced productive capacity.

- **Investment in heavy industry** intended to support eventual consumer goods growth.

---

### **Nature of the Model:**

- Essentially an **accounting framework** estimating growth potential based on

investment allocation.

- **Not value-neutral**: implicitly assumes a low social discount rate (favors long-term
gains).
- Often criticized as **ideological** due to its resemblance to **Soviet models**
(especially Feldman’s model), though Mahalanobis denied direct influence.

- In the 1950s, **Soviet-style rapid industrialization** was admired by newly independent

countries like India.

---

### **Limitations of the Model:**

- It was a **supply-side model** with little recognition of:

- Demand constraints

- Market signals

- Private sector dynamics

- Assumed that all savings are invested—**not realistic in a market economy** like India.

- Worked in theory for a **command economy**, not for India’s **mixed economy** with a
dominant private sector.

- Ignored factors like **unemployment, inflation, and balance of payments**.

---

## **Alternative Vision: Vakil-Brahmananda Plan (Bombay School)**

### **Core Idea:**

- Focused on the **“wage goods sector”** (e.g., **foodgrains and textiles**) as the key to
solving unemployment.

- Believed **employment couldn’t expand without wage goods** to support labor.

- Criticized Keynesian focus on demand as unsuitable for India due to **lack of wage goods
and circulating capital**.
---

### **Importance of Agriculture:**

- Emphasized **agricultural development** as fundamental—regardless of industrial

goals.

- Stated that **services and industry can't absorb most of the labor force**.

- Argued that **services can only grow with a surplus of wage goods**.

---

### **Critique of the Vakil-Brahmananda Plan:**

- **Strengths**:

- Addressed **unemployment and agricultural importance**.

- **Weaknesses**:

- **Underestimated need for capital goods** in boosting agriculture.

- Proposed exporting wage goods to import capital goods—but this was unrealistic:

- **Wage goods were already scarce**.

- **India lacked export surplus**.

- **Sterling balances** built during WWII had limited post-war relevance.

- Global **capital goods were scarce** after WWII due to European reconstruction.

- **Partition** disrupted supplies of raw materials like cotton and jute.

- **Trade-based development** was limited by global constraints and domestic supply

issues.

### **Critique of the Vakil-Brahmananda Wage-Goods Model**

- **Absence of Engine of Growth**: The model lacks an autonomous investment function—
the essential "engine of growth."

- **Classical in Nature**: Employment is determined in the labour market. There is no

independent demand-side mechanism like the Keynesian multiplier.

- **Lack of Demand Generation**: Brahmananda’s assertion that people can produce

wage goods if food is available sidesteps the source of expanding macroeconomic
demand.

- **Symmetry in Shortcomings**:

- *Mahalanobis Model*: Underestimates consumer goods' importance.

- *Vakil-Brahmananda Model*: Downplays capital goods' importance.

- **Mahalanobis Advantage**: At least incorporated industrialisation as a means to boost

agriculture and envisaged public investment as a driver of industrial growth.

- **No Transformation Plan for Wage-Goods Sector**: Vakil-Brahmananda lacked a

detailed roadmap for wage goods expansion.

---

### **Mahalanobis on Demand and Planning**

- **Holistic Strategy**: Mahalanobis proposed creating demand through planned

expansion in basic industries and social sectors (health, education).

- **Demand-Supply Balance**: Increased income leads to reinvestment, further boosting

demand and production in a planned cycle.

- **Acknowledgement of Real-World Limitations**: Recognised challenges of physical

planning in a private-enterprise economy without full control of prices.

---

### **Nehru’s Perspective and Economic Insight**

- **Active Role in Planning**: Nehru chaired the Planning Commission and closely followed
economic policy.

- **1952 Speech Highlights**:

- Industrialisation was a means to raise incomes.

- Agriculture was seen as foundational for industrial growth.

- Emphasis on irrigation and food security.

- Warning: Weak agriculture would undermine industrial progress.

> *"If our agricultural foundation is not strong, then the industry we seek to build will not
have a strong base either."*

- **Late-Career Speeches**:

- Defended India's unique development path combining democracy and planning.

- Recognised India's problems as distinct; planning could not be copied wholesale from
the US or USSR.

- India’s democratic polity added complexity to implementing economic strategies.

- Emphasised the intertemporal nature of gains—sacrifices today for benefits tomorrow.

> *"The first thing we realized was that it was no good copying America or Russia… The
problems of India are her own."*

---

Section 3 *Record of Growth in the Nehru Era*

#### **1. Comparators for Evaluating Growth**

- Two main comparators used:

- India's own pre-independence (1900–47) growth.

 - Growth of similarly placed economies and advanced economies at early stages of their
development.

#### **2. Growth Performance Comparison**

- Table 1 compares growth rates across:

- Colonial period (1900–47)

- Nehru era (1950–1964)

- Key findings:

- Growth during Nehru era exceeded colonial period.

- Acceleration in all sectors—agriculture (primary), industry (secondary), and services

(tertiary).

- Reversal of sectoral ranking: commodity-producing sectors (agriculture and industry)

outpaced services.

- Faster growth of commodities is preferable in a low-income economy (based on

Kuznets's theory).

#### **3. Parallels with the Industrial Revolution**

- Nehru era resembles European Industrial Revolution in:

- Broad-based, sustained growth.

- Fostered technological advancement.

- Growth became less vulnerable to shocks.

- Joel Mokyr’s insights:

- Post-industrial growth was widespread, sustained, and driven by faster technological

change.

- Even modest increases in GDP per capita (e.g., 1.5% vs. 0.2%) reflect qualitative
differences.

- India's transformation post-1947 was not purely industrial but still substantial.
#### **4. Agricultural Expansion**

- Most significant growth in Nehru era occurred in agriculture (primary sector), often
overlooked.

- Industry did grow, but agriculture led the expansion.

#### **5. Importance of Base Year and Data Sources**

- Comparisons are at constant prices.

- Used Sivasubramonian’s estimates for consistency.

- Alternative estimates (e.g., Maddison) suggest even lower pre-independence growth

(0.04% per capita), implying a stronger post-1947 recovery.

#### **6. Comparison with Asian Economies**

- Compared India with Korea and China (similar income levels in 1950):

- Korea's growth (1950–64) was 50% higher than India's.

- India outperformed China during the same period.

- China’s economic rise began in late 1970s post-Deng Xiaoping's reforms.

- Mao’s admiration in India was likely based on ideological, not economic grounds.

#### **7. Comparison with OECD Economies**

- India’s growth (1950–64) outpaced long-term average growth of many OECD countries.

- Raj Krishna’s view of "Hindu rate of growth" masks Nehru-era achievements due to use of
per capita income, which was lowered by population growth.

- If population had grown at colonial rates, per capita income growth would have exceeded
2%.

#### **8. Population and Life Expectancy**

- Population growth increased due to rising fertility and lower mortality.

- Life expectancy rose significantly:

- 32 years (1940s) → 37 (1950s) → 43 (1960s)

- Public health improvements were key contributors.

#### **9. Methodological Observations**

- Comparing Nehru-era growth with long-term OECD averages may favor the latter due to
acceleration in their long-term growth.

- Initiating growth from a low base is difficult due to low surpluses for investment.

- High growth from a low base is a non-trivial achievement.

#### **10. Nehru’s Realistic View**

- Nehru acknowledged India's low starting point and limited surplus.

- He understood achieving 5% growth would be a tough challenge.

#### **11. Conclusion**

- Nehru era marked by clear resurgence in economic growth.

- Driven primarily by a rise in public investment under the Nehru-Mahalanobis strategy.

----

### **Section 4: Caricature of a Vision – Through a Glass, Darkly**

#### **4.1 The Neglect of Agriculture**

- Two forms of neglect exist:

1. **Policy neglect** – lack of attention in discourse.

 2. **Resource neglect** – inadequate financial investment.

- The author argues that agriculture during the Nehru era received:

- Direct attention and considerable investment.

- 23.5% of public sector investment during the first three Five-Year Plans.

- **Views of contemporary economists:**

- **V.K.R.V. Rao**: Refuted claims of agricultural neglect, showing substantial allocations

to agriculture.

- **Raj Krishna**: Stressed that nearly 20% of public plan outlay was consistently
allocated to agriculture, alongside significant investments in input industries, credit
expansion, and minimum support prices.

- **Agricultural growth**:

- Grew impressively in the Nehru era, reversing colonial-era retardation.

- Colonial policies had caused devastation through over-taxation and commercialization,

leading to famines and low foodgrain output.

- **Conclusion**:

- Industrialization and agriculture were not in conflict under the Nehru-Mahalanobis

strategy; in fact, agriculture benefited from industrial inputs.

- The notion of agricultural neglect is a misperception when viewed in light of outcomes

and historical context.

---

#### **4.2 The Public Sector Enterprise as a Black Hole**

- **Modern criticisms**:

- Poor performance, inefficiency, lack of innovation, and financial drain.

- Alleged to disproportionately benefit the elite, despite being funded by public resources.

- **Original Nehruvian conception**:

- Public sector was a tool for **resource mobilization**, not just welfare.

- Intended to raise revenues and generate surplus for development.

- **Second Five-Year Plan goals**:

- Public sector was to lead industrial development and contribute to financing the plan.

- Emphasized taxation reforms and profits from public enterprises to fund national
development.

- **Independent economists’ views**:

- Supported taxing essentials and higher direct taxes to increase public revenue.

- Called for public enterprises to earn surpluses.

- **Public sector performance**:

- Led a significant expansion in investment during 1950–1964.

- Public sector savings increased, particularly from non-departmental enterprises.

- Savings outpaced the private corporate sector’s growth in this period.

- **Caveats**:

- Aggregate profits don't reflect individual unit performance.

- Profit figures don't account for capital investment or efficiency.

- Many public enterprises were monopolies.

- **Transformation over time**:

- Public sector shifted to a welfare-oriented, job-creating role **post-Nehru**.

- Nehru’s era focused on self-reliance and development financing.

- Nehru saw reinvestment of surpluses (e.g., HMT factory) as a success.

- **Contemporary criticisms (e.g., Bhagwati)** may overlook this historical context and the
initial success of public enterprises in resource mobilization.

---

*Conclusions:*

- **Initial Policy Impact:**

The public policies initiated during Nehru's era revitalized a stagnant colonial economy.
However, over time, issues emerged such as a growing bureaucracy, corruption, limited
foreign investment, technological backwardness, lack of competition, and inefficient
resource use.

- **Post-Nehru Policies and Shift:**

A course correction was possible but instead, policies shifted further left, marked by
increased control over trade and industrial policy. These policies diverged from Nehru’s
original vision, yet were still labeled as “Nehruvian socialism.”

- **Distortion of Socialism:**

The socialist label became misused. Controls and subsidies, intended for equity, often
resulted in inefficiency and backward capitalism. This divergence from Nehru's intent had
significant consequences for India.
- **Misplaced Criticism:**

Critics often misattribute later economic failures to Nehru, although many deviations
came under his successors, particularly Indira Gandhi. The criticism thus lacks proper
historical grounding.

#### **Achievements of the Nehru Era:**

- **Growth and Transformation:**

The Nehru era set the foundation for sustained economic growth. India’s growth, though
slow, was consistent—unlike the Soviet Union’s collapse.

Two major achievements include:

1. **Agricultural transformation:** Marked by increased production.

2. **Public investment surge:** Significant mobilization of state resources.

- **Errors Acknowledged:**

Mistakes were made—like excessive bureaucracy and neglect of primary education.

However, these should have been corrected by later governments. Blaming Nehru solely
ignores historical context.

- **Role of Government in Growth:**

This study connects two themes: the role of government in economic growth and Nehru's
influence on India's economic policy. Despite not detailing Nehru’s direct policymaking, his
views and leadership significantly shaped India’s economic direction.

- **Legacy:**

Nehru transformed India from a colonial economy to one with the foundations for long-
term growth, while maintaining autonomy from global superpowers.
#### **Debates on Nehru’s Legacy:**

- **Varied Opinions:**

- **Hiren Mukerjee (Communist MP):** Praised Nehru as a “gentle colossus.”

- **K.S. Sudarshan (RSS Leader):** Claimed Nehru was a continuation of British rule.

- **Gurcharan Das (Business thinker):** Argued Nehru's distrust of private enterprise led
to inefficiencies, the impact of which still persists.

- **Response to Criticism:**

These divergent views contrast with the economic facts of the era. The actual growth
achieved, despite constraints, challenges modern economic assumptions like those in the
Washington Consensus.

#### **Final Thought:**

- **Mahalanobis’ Prediction:**

Nehru’s economic collaborator, P.C. Mahalanobis, foresaw India’s eventual economic

progress—a forecast that seems validated today.

- **Reframing the "Hindu Rate of Growth":**

The term downplays the dynamic transformation of the Nehru years, which should be
seen instead as a critical bridge toward higher future growth.

India’s Trade Policy in the 21st Century By Batra, A.

Conclusions and Reform Priorities

1. **Global Value Chain (GVC)-Led Trade:**

- The 21st century has seen global trade driven by GVCs, leading to an increase in
merchandise trade due to the dispersion of production across countries.

- Trade grew significantly from 2002 to 2011, but slowed post-2012 as GVCs underwent
consolidation and restructuring.

- Developing countries played a significant role in this trade increase, but India’s share in
global goods trade has been stagnant.

2. **India’s Trade Policy Limitations:**

- India’s trade policy has not sufficiently integrated with GVCs and has been more
protectionist than many other developing economies.

- The lack of understanding of GVCs’ role in global trade has hindered India’s growth in
international trade, especially in manufacturing.

- India’s participation in preferential trade agreements (PTAs) has been limited, and the
country’s policy has not focused on GVC integration.

3. **Preferential Trade Agreements (PTAs):**

- Globally, PTAs have been designed to promote deeper integration, incorporating trade,
investment, and services. India has been slow in engaging with these agreements.

- Countries with strong GVC integration have signed multiple PTAs, including mega
regional trade agreements like RCEP and CPTPP, which have further strengthened regional
trade.

4. **India’s Missed Opportunities in GVC Participation:**

- India has missed significant opportunities to integrate into regional GVCs, especially in
Asia (e.g., RCEP), leaving it disadvantaged.

- India has not effectively leveraged its FTAs to enhance its domestic trade environment
and integration into GVCs.
5. **India’s Trade Policy Approach:**

- India’s reluctance to engage in FTAs is rooted in its protectionist stance and uncertainty
in trade policy.

- Higher tariffs on inputs, especially in key sectors like electronics, textiles, and
automobiles, have hampered GVC participation, limiting technology spillovers and
competitiveness.

6. **Backwards and Forward GVC Integration:**

- India’s backward integration in GVCs (importing inputs for manufacturing) has been
consistently low and declining.

- Forward integration, where domestically added value is exported, remains

underdeveloped, limiting India’s potential in global markets.

- In comparison, countries like Vietnam and China have increasingly integrated into global
value chains, leading to higher productivity and export competitiveness.

7. **Trade and Sector-Specific Analysis:**

- India’s share in global exports in sectors like automotive, textiles, and office equipment
has remained small or stagnant, while other emerging economies have gained market
share.

- For instance, India’s automotive sector share remains minuscule compared to Thailand
and Turkey, which have benefited from regional trade agreements and improved local
supplier networks.

8. **Challenges in Domestic Manufacturing and Protectionism:**

- India’s approach to encouraging domestic manufacturing through tariffs has not been
effective, especially in high-value sectors.

- The country’s policy of high tariffs on imported inputs restricts integration into GVCs and
reduces the potential for increased value-added exports.

9. **Comparative Advantage of Countries like Vietnam and China:**

 - Countries like Vietnam and China have been proactive in engaging with GVCs and have
gained substantial market shares in dynamic sectors like textiles and electronics.

- Vietnam’s success, in particular, is linked to its FTAs, low tariff barriers, and strong GVC
integration.

10. **Need for Policy Change in India:**

- India’s trade policy must be revised to focus on GVC integration, lowering tariffs on
intermediate goods, and enhancing the export competitiveness of sectors like electronics,
automobiles, and textiles.

- Active participation in PTAs and mega-regional agreements should be prioritized to

access global supply chains and facilitate growth in key sectors.

11. **Emerging Opportunities Post-Pandemic:**

- The pandemic has accelerated trends of GVC diversification, offering India another
opportunity to integrate into global trade and improve its manufacturing sector
competitiveness.

- Wage convergence and horizontal firm-level specialization could lead to greater supply
chain trade opportunities for India.

12. **Key Reform Priorities:**

- Redesign trade policies to facilitate deeper integration with GVCs and regional hubs.

- Reduce tariffs on intermediate goods to enhance backward and forward GVC linkages.

- Strengthen India’s participation in PTAs, ensuring access to larger trade networks and
more favorable conditions for trade and investment.

Preparing for an Evolving Global Trade and GVC Context

1. **Self-Reliance vs. Global Value Chains (GVCs):**

 - India should recognize that self-reliance doesn’t mean building entire supply chains
domestically.

- Technological advancement allows geographical dispersion and specialization through

GVCs.

- GVC integration offers a faster path to manufacturing competitiveness and export

growth compared to import substitution.

- Developing countries, especially in East and Southeast Asia, have already benefitted
from GVC integration.

2. **Sectoral Focus for GVC Integration:**

- India must focus on sectors with significant backward linkages like **electronics,
automotive, and textiles/apparel**.

- These sectors are labor-intensive, offering potential employment for India’s large low-
skilled workforce.

- The COVID-19 pandemic has increased unemployment, making GVC integration even
more crucial for job creation.

3. **Supporting Policies for GVC Integration:**

- India should implement complementary trade and investment policies to support GVC
integration in key sectors.

- **Special Economic Zones (SEZs)**: India can learn from East and Southeast Asia’s
successful SEZ models.

- These zones have evolved from labor-intensive manufacturing to high-tech, R&D-

focused zones.

- India’s SEZs have not been as successful, and policy reforms are needed to enhance
their effectiveness.

- Focus on sectors like **technical textiles** in trade policies instead of handlooms and
coir, where global demand is growing.

4. **Market and Product Strategy for GVC Participation:**

 - India should align its market diversification strategy with **proximate Asian
economies** and GVC-intensive sectors.

- Central and Eastern European countries increased their global trade participation
through GVC integration with Western Europe, particularly in the **motor vehicle** sector.

5. **Strengthening Integration with East and Southeast Asia:**

- India must deepen its trade relations with the **East and Southeast Asia** region, a GVC
hub.

- The **Regional Comprehensive Economic Partnership (RCEP)** could intensify

production networks in the region.

- India should prioritize concluding **India-ASEAN FTA** reviews and reconsider joining
RCEP.

- **ASEAN’s centrality** in GVCs offers India opportunities for knowledge and technology
spillovers, especially in sectors like **electronics**.

6. **Reconsidering Trade Deals with Developed Economies:**

- India’s focus on trade deals with the **EU** and the **UK** should be carefully
reconsidered.

- EU investments are less oriented towards GVC relocation compared to US counterparts,

and EU GVCs tend to stay within the integrated region.

- **MNC reshoring** trends may shift high-tech production back to developed

economies, which may not suit India’s low-skilled labor force needs.

7. **Adapting FTA Negotiations for GVC Trade:**

- India should recognize that FTAs are now designed to facilitate **GVC trade and
investments**.

- Trade agreements must go beyond tariff liberalization and focus on **rules of origin**,
**regulatory frameworks**, and **investor protection**.

- **Tariff Structure Review**: India needs to lower applied tariffs in manufacturing sectors
where there is global trade dynamism.
 - Review the **Customs Act** amendment (2020) on rules of origin to simplify trade.

- Rework India’s **Bilateral Investment Treaty (BIT)** to balance investor protection and
regulatory independence.

8. **Goods and Services Liberalization:**

- India must push for **goods and services liberalization** as part of an integrated trade
deal, not as separate tracks.

- This will address India’s challenges in services sector negotiations and reduce time
delays in FTA negotiations.

9. **Adapting to Sustainability and New Regulations:**

- India should upgrade its regulatory framework to address **new age sustainability
concerns** such as:

- **Environmental** issues.

- **Clean energy** use.

- **Social governance** standards.

- **Labor standards**.

- These issues are likely to define future mega-regional trade agreements like the
**CPTPP**.

- Continuous improvement in **logistics performance** and **land and labor market

reforms** is necessary to remain competitive in global trade.

10. **Conclusion:**

- A redefined trade policy based on the above priorities will help India align with global
trade trends and enhance its participation and share in global trade.

World Bank Global Economic Prospect, June 2024 – Notes

#### **1. Executive Summary**

- **Global Economic Overview:**

- Global growth softened to **2.6% y-o-y** in 2023, slightly above previous expectations.

- Several major economies, including **the United States** and **Saudi Arabia**,
outperformed expectations.

- Inflationary pressures eased, and global commodity prices saw a notable downturn.

- Despite this, monetary policy remained relatively restrictive, and geopolitical tensions
persisted.

- **Global growth is expected to remain muted at 2.6% in 2024**, well below pre-COVID
levels.

- **India’s Economic Performance:**

- India remained the **fastest-growing major economy**, with growth increasing from
**7.0% in FY22/23** to **8.2% y-o-y** in **FY23/24**.

- Growth was driven by a significant expansion in **public infrastructure investment** and

**private investment in real estate**.

- On the supply side, the **manufacturing sector** rebounded, benefiting from a buoyant
construction sector and low input costs.

- **Labor Market and Inflation:**

- **Urban labor market** improved in 2023, particularly for women and youth.

- In **Q3 FY23/24**, the urban unemployment rate reached its lowest level since **Q2
FY17/18**, although **youth unemployment** remained high at **16.5%**.

- **Headline inflation** decreased from **6.7%** in **FY22/23** to **5.4%** in

**FY23/24**, and further moderated to **3.5%** by **July 2024**.

- **Core inflation** reached a record low of **3.0%** in **May 2024**, before slightly
rising to **3.4%** in July.
 - The **Reserve Bank of India (RBI)** maintained its **”withdrawal of accommodation”**
stance and kept the **policy rate unchanged at 6.5%**.

- **External Accounts and Fiscal Deficit:**

- **Current Account Deficit (CAD)** narrowed to **0.7% of GDP** in FY23/24, from

**2.0% in FY22/23**.

- The improvement was driven by **decreased merchandise trade deficit**, a decline in

**global oil prices**, and **strong export growth** in **electronics**, **iron ore**, and
**pharmaceuticals**.

- **Foreign Portfolio Investment (FPIs)** inflows offset a moderation in **Foreign Direct

Investment (FDI)**.

- The **general government fiscal deficit** decreased to **8.5% of GDP** in FY23/24, with
the **central government fiscal deficit** narrowing to **5.6%** from **6.4%** in the
previous year.

- **Capital expenditure** surged by **28%** while **current expenditure** grew only

**1.2%**.

- **Public debt** rose to **83.9% of GDP** in FY23/24, slightly up from **82.5%** in

FY22/23.

- **Medium-Term Outlook:**

- India’s growth is projected to remain strong at **7.0% in FY24/25**, despite external

headwinds and the dissipation of post-pandemic rebound effects.

- The medium-term outlook remains **positive**, underpinned by robust public

investment, recovery in agriculture, and declining inflation boosting private consumption.

- **Fiscal consolidation** is expected to continue, with the **central fiscal deficit**

projected to narrow further to **4.9% of GDP** in FY24/25.

- **Debt-to-GDP ratio** is expected to decline to around **82% by FY26/27**.

- **Current account deficit** is projected to stabilize at **1.5% of GDP**.

#### **2. Special Focus: India’s Trade Opportunities in a Changing Global Context**
- **Diversifying Exports to Reach US$1 Trillion Target by 2030:**

- India needs to **diversify its exports** and enhance its participation in **Global Value
Chains (GVCs)**.

- Despite economic growth, India’s trade in goods and services has declined as a
percentage of GDP, and **participation in GVCs** has fallen.

- **Trade-job linkages** are underutilized due to the concentration of exports in **non-

labor-intensive goods and services**.

- **Rising import tariffs** on key intermediary inputs have increased production costs,
making Indian producers less competitive internationally.

- To achieve the **US$1 trillion export target** and boost **job creation** through trade,
India must:

- **Diversify its export basket**.

- Enter new markets.

- Participate more actively in **GVCs**.

- **Trade Policy and Protectionism:**

- India’s trade policy includes both **liberalizing measures** and **rising protectionism**.

- Proactive steps such as the **National Logistics Policy** and digital initiatives aim to
reduce logistics costs and enhance trade facilitation.

- However, the resurgence of protectionist measures, such as increased tariffs and non-
tariff barriers, is limiting India’s **trade openness**.

- Recent **FTAs** with countries like **the UAE** and **Australia** signify a move
towards preferential agreements, but India does not yet participate in **mega trade blocs**
like **RCEP**.

- **Recommended Reforms:**

- To achieve the export target, India could focus on the following areas:

1. **Reducing Trade Costs:**

 - Simplifying customs procedures, increasing transparency, and reducing red tape.

2. **Lowering Trade Barriers:**

- Reducing both **tariff and non-tariff barriers**.

- Relaxing restrictions on **services trade** and making trade policies more

predictable.

- Supporting exporters with access to **intermediate imports**.

3. **Reevaluating FTAs and Trade Integration:**

- Continue pursuing FTAs with a focus on assessing their impact and adjusting
strategies as necessary.

- Reevaluate India’s approach to **trade integration**, including the options for

**RCEP**.

### **Trade Policy Priorities: Reducing Costs, Lowering Barriers, and Re-strategizing
Participation in FTAs**

India could consider a **new strategic trade plan** to diversify exports and leverage the
changing geopolitical landscape.

#### **1. Reducing Trade Costs and Improving Trade Facilitation**

- India can **reduce trade costs** and continue improving **trade facilitation** to boost
export competitiveness. Shifting geopolitical, demographic, and environmental realities
call for a **new strategic trade roadmap**.

- If India aims to leverage its strengths and appeal as a business-friendly alternative (or
complement) to **China**, it should focus on:

1. **Continuing to reduce trade costs** and improve **trade facilitation** to enhance

export competitiveness.

2. **Reducing trade barriers**, including tariff and non-tariff barriers, and relaxing
**service restrictions**.
 3. **Reevaluating trade integration approaches**, including India’s stance on **RCEP**,
given the potential benefits of greater plurilateral and multilateral cooperation.

- A **comprehensive approach** to reduce trade costs and improve trade facilitation can
be achieved through ongoing reforms, including:

- **Simplifying and streamlining customs procedures**.

- Increasing **transparency and predictability** in regulations and policies.

- Reducing **bureaucratic red tape**.

- For example, automating customs procedures via **digital platforms** can reduce
clearance times and improve efficiency.

- Improving **infrastructure at ports and logistics hubs** will streamline goods

movement.

- Establishing **single-window clearance systems** will minimize bureaucratic delays.

- **Enhancing transparency** by providing accessible, up-to-date information on trade

regulations and tariffs can support businesses in compliance.

- Strengthening **regulatory coordination among agencies** will ensure consistency and

predictability in trade processes, fostering a more conducive environment for international
trade.

#### **2. Reducing Trade Barriers and Promoting Diversification**

- Reducing **tariff and non-tariff barriers**, relaxing **services restrictions**, and

increasing the **predictability of trade policies** are essential steps to improve
competitiveness in both goods and services sectors.

- **Trade policies** that help exporting firms access imported **intermediate goods and
services** would significantly improve their performance. Empirical evidence for India,
**Bangladesh**, and **China** suggests that access to imported inputs promotes
**product diversification** and increases the **productivity of domestic firms** (Kee,
Forero, and Fernandes, 2021).

- Trade promotion policies could include:

 - **Tariff and value-added tax reductions**.

- **Duty drawbacks** on imported materials.

- Expanding access to **trade financing**, particularly for small exporting firms.

- **Rationalizing tariffs** on intermediary inputs is crucial, particularly for **labor-intensive

sectors**.

- These reforms can create a **conducive environment** for both **foreign and domestic
investments**, increasing access to **capital goods** (e.g., machinery and equipment)
that are essential for upgrading production processes and participating in **Global Value
Chains (GVCs)**.

- India’s trade opportunities could be further expanded by:

- Integrating **rural products and services** into GVCs.

- Supporting **small-medium enterprises (SMEs)**, promoting **organic and sustainable

agriculture**, and enhancing market access for **rural artisans**.

#### **3. Reconsidering Regional Integration Options**

- Assessments of **regional integration scenarios** suggest the highest gains come from
**comprehensive integration** that includes **trade facilitation**, **services**, and
**foreign direct investment (FDI)**. Therefore, in addition to reducing tariffs and other trade
barriers, India should:

- Focus on improving the **ease of doing business**.

- Reduce barriers to **trade in services** and **FDI**.

- India’s recent focus on **bilateral FTAs** with countries such as **Australia**, **UAE**,
**US**, **UK**, and the **European Union** is a step in the right direction. These FTAs aim
to secure greater **market access** for goods and services as well as **high-quality
imports**.

- However, the impact of these new FTAs remains to be seen. For example:
 - The **India-EFTA Trade and Economic Partnership Agreement (TEPA)** is relatively
**limited in scope**, excluding critical areas like **digital trade** and **e-commerce**,
and offering no preferential measures for these sectors.

- At the same time, India does not participate in **mega trade blocs** like the **Regional
Comprehensive Economic Partnership (RCEP)**, while other South Asian countries, such
as **Bangladesh** and **Sri Lanka**, have recently shown interest in integrating with this
East Asian regional trade and GVC hub.

- As smaller regional economies consider trade agreements beyond South Asia, India may
want to **reevaluate** its trade integration strategy, including its options regarding
**RCEP**.

- In an ideal scenario, **more emphasis on plurilateral and multilateral cooperation**

would be beneficial.