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July 02, 2013 1:48 PM Is India the Next Global Bad Boy?

By Ed Gerwin

By 2030, India will be the world’s most populous country, with a projected 1.5 billion people. Its $14 billion economy will be the world’s third largest, trailing only China and the United States. The U.S. National Intelligence Council forecasts that India alone will account for more than 20 percent of global middle class consumption in 2030 and will have a faster growing economy than China’s.

But as India approaches China in size, will it also follow China’s often bad example as a player in the global economy? Since its emergence as an economic superpower, China has increasingly tried to have things both ways—profiting immensely from open markets in the rest of the world through foreign investment and the export of its goods while at the same time protecting its own economy through the theft of intellectual property, the manipulation of trade rules, and unfair favoritism toward homegrown companies at the expense of foreign competitors.

India appears to be at the same crossroads, facing a similar temptation to have its economic cake and eat it too.

On the one hand, India has made major progress over the last two decades in opening up to foreign trade and investment.

In its first 45 years of independence, India’s growth was stunted by a state-run economic model that severely limited foreign investment and unsuccessfully sought to build domestic industries—including computer and electronics sectors—through high tariffs and local production mandates. Beginning in the early 1990s, India radically changed course, opening its economy to foreign investment and trade, and experiencing growth rates averaging close to 9 percent over the last decade.

Last year, to combat growing deficits, high inflation and slowing growth, India undertook further economic reforms and is now considering reducing or ending caps on foreign investment in telecom, aviation, retail, and other sectors.

But there are also troubling signs that India is following China’s example by increasingly shutting out foreign (including American) companies seeking to sell into India. In several key industries—including information and communications technology, solar energy, and pharmaceuticals—new Indian policies hearken back to the days when India was a largely closed economy.

For example, India is increasingly adopting “buy Indian” requirements - so-called “forced localization requirements” - that often run afoul of international trade law.

In the communications and computer sector, for instance, India has adopted “buy Indian” on most Indian government procurement contracts and has even recently proposed extending these requirements to private-sector telecom firms. These new restrictions could potentially shut foreign vendors out of a $4 billion national project to bring high-speed fiber optic Internet connections to rural India.

Similarly, under rules challenged by the United States before the World Trade Organization, India is demanding that solar power producers use Indian-made solar cells and panels and is subsidizing producers that use Indian solar equipment. India may extend these rules to “thin-film” solar panels, a restriction that would block hundreds of millions of dollars of American solar exports to India. India is also thinking of extending these requirements to private procurements in other sectors, including transport, retail, and banking.

India is also giving its domestic manufacturers a leg up by ignoring foreign patents and allowing Indian competitors to copy innovative products still under patent with no penalties. This trend is especially common in pharmaceuticals, where early access to innovative foreign drug patents is giving an unfair windfall to India’s significant generic drug industry.

Indian courts have revoked, denied, or broken patents for almost a dozen innovative drugs, including drugs like the cancer drugs Sutent and Glivec, that enjoy patent protection in the vast majority of global markets. For instance, India recently forced a foreign manufacturer to license a drug patent to an Indian generic drug producer because the patented drug was not produced in India—a practice that violates established international norms.

While India is using these tactics to block American access to key sectors of its market, it continues to benefit significantly from America’s largely open economy. For instance, at the same time as Indian generic manufacturers are seeking to undermine U.S. patents, they are pocketing half of their global sales revenues from sales to America.

Given India’s size and economic potential, the loss of access to India’s market is bad news for American companies who are looking for new markets overseas to drive sales and create new jobs at home. American businesses are in fact mobilizing early to cry foul. Mike Froman, the new U.S. Trade Representative, recently told Congress that he’d consider bringing a new World Trade Organization case against India’s discrimination against foreign suppliers, a move that should also garner strong support from Europe, Japan and others.

But the biggest victim of India’s protectionist practices could be India itself. To meet its enormous economic potential, India will need significant foreign investment, vastly expanded trade, and considerable technical support to expand its infrastructure and productive capacity. But foreign investors and innovators are less likely to engage with an India that is increasingly blocking innovative imports and investments. Indeed, India’s restrictive policies are one reason why foreign direct investment in India plummeted 67% from 2011 to 2012.

Rather than emulating China, India should abandon its protectionist detour and chart its own course—as a democratic and increasingly open counterweight to China. This will maximize India’s growth and influence, and give the world a greater stake in India’s success. And, ultimately, it will help assure that India achieves its destiny as a prosperous country and global economic leader.

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Ed Gerwin is a trade policy consultant and President of Trade Guru LLC. He is the author of “Boosting Exports to China” in the current issue of Democracy: A Journal of Ideas.

Comments

  • H on July 02, 2013 7:17 PM:

    "In its first 45 years of independence, India’s growth was stunted by a state-run economic model that severely limited foreign investment and unsuccessfully sought to build domestic industries—including computer and electronics sectors—through high tariffs and local production mandates."

    Look, I'm no fan of India's post-independence economic policy, but this statement is utter nonsense. Heavy industry was non-existent in India prior to independence, and India built a full heavy-industry chain from scratch after independence. India did successfully build a lot of domestic industries, and portraying it this way is nonsense.

    And this statement completely elides that fact that through a combination of tax, trade and monetary exchange policies by the British, virtually all local hand-industry had died out in India. Further, the economic incentives of the British Raj were completely skewed against any sort of domestic-Indian industrialization.

    So, India was in an economically disastrous situation at independence, and there's no way that you or anyone else can know if the post-independence policies stunted growth or not. For all we know, adopting a liberalized market-based approach too early might have plunged the newly independent India into further economic disaster. Or it might have destabilized the government politically, and unstable governments aren't exactly a great recipe for economic growth.

  • JG on July 09, 2013 2:31 PM:

    But.... like free markets, man.

  • Tom Marney on July 13, 2013 5:56 PM:

    $14 TRILLION economy, I think. :P