Decoupling From China Has Given India A Final Chance In Manufacturing, Says Arvind Virmani

India is striving to attract trade from high-income developed countries when many nations seek alternatives to China. The effort aims to structurally transform India’s economy through manufacturing, which might be its last opportunity to do so, according to Arvind Virmani, member of the central government’s policy think-tank Niti Aayog and former chief economic advisor to the Government of India.

In an exclusive interview with Outlook Business, Virmani touched upon several aspects that are critical to the vision behind Prime Minister Narendra Modi’s campaign of making India a global manufacturing hub. “Since the global financial crisis, international trade is not growing (as a ratio to world GDP). It is an unfavorable environment, which means you have to attract (trade). They are not just going to come because overall trade is growing. So, India is trying to attract them from China,” he says.

The idea to attract trade aims to address the dichotomy within the production chain for goods produced in India. “In the middle of these production chains, where you have things like engineering, there is a mixed bag. There are some who are making low quality and some who are capable of making very high quality. But once you introduce one or two little parts of low quality in the chain, the whole product is destroyed. This is where imports become critical,” he explains.

Experts both within and outside the government believe that India needs to better leverage trade agreements to strengthen its production chains, so that it does not put a strain on its trade deficit and currency.

Past trade agreements signed by India have yielded mixed outcomes, leaving economists and bureaucrats divided on their effectiveness. India’s imports from its 21 free trade agreement (FTA) partners, between 2018-19 and 2023-24, grew by 37.97 per cent from $136.20 billion to $187.92 billion, while exports saw a meagre increase of 14.48 per cent from $107.20 billion to $122.72 billion.

Virmani says countries scouting for alternatives to China have provided India the gateway to better opportunities. “FTAs are not something economists have recommended traditionally. Some of the FTAs we did, have more trade diversion than trade creation, and therefore, it can be argued that they should not have been done for economic reasons. The strategy should be to partner with high-income developed countries because in some way they are cooperative with us and not competitive, which will lead towards more trade creation than trade diversion. It is a win-win situation which aligns better with our manufacturing interests,” he adds.

From approximately 2011 to 2020, India did not sign a single FTA. The situation would change only after the Covid-19 pandemic when it signed FTAs with Mauritius, the United Arab Emirates (UAE), Australia, and the European Free Trade Association (EFTA), which includes Switzerland, Norway, Iceland, and Liechtenstein.

To put things in perspective, India is involved in a total of 14 trade agreements with 25 countries and is currently negotiating 50 new deals, including major FTAs with the European Union (EU), United Kingdom (UK), and the US-led Indo-Pacific Economic Framework. “This is our last chance when these countries are trying to diversify. It is a golden opportunity and India cannot miss,” he says, while adding that the window of opportunity is for to re-structure the economy and not to become another China.

Former governor of the Reserve Bank of India (RBI) Raghuram Rajan, who has been the most die-hard critic of India’s current manufacturing push, argues that the world does not have room for another economy similar in size to China to export manufactured goods and the country should rather focus on services, which has always been its strength. Virmani disagrees.

“India is 28 states. There are different stages of development. We are not one Korea (South) or Taiwan or Thailand. We are 28 Thailands. Some will do agriculture, some will do manufacturing, and some will do services. Why do you have to choose? ,” he responds.

For 2023-24, the manufacturing sector in India contributed approximately 17.4 per cent to the country’s GDP, compared with China’s 27.2 per cent. According to a report by CRISIL, India’s share is expected to touch the 20 per cent mark for the first time by 2031. Its average manufacturing growth which has been around 6 per cent, between 1980-91 and 2023-24, is projected at 9.1 per cent between 2024-25 and 2030-31.