Viksit Bharat may hinge on deeper economic ties with the world’s most vibrant free market

There are two basic elements to any successful development strategy: growth and redistribution. Over the last decade, the Narendra Modi government has been very successful with policies of redistribution. Indeed, India’s record on inclusive growth has likely been among the best in the world.

On economic growth, however, the record is not good. India is the fastest growing major economy in the world, and unlike some, I believe Indian data accurately reflect the underlying reality.

So what is the problem with annual growth at around 7.8% for the last five years? Growth has occurred via robust expansion of infrastructure investment. Both private investment and net foreign direct investment (FDI) have been depressingly low; net FDI as a proportion of GDP is the same as last observed in 1990 and private investment is 10 percentage points lower than its peak around 2010. Both are in the doldrums because of a bad climate for private investment.

This is where the real mother of all trade deals comes into play. I am talking about the India-US rather than the stepmotherly India-EU deal. Our trade deal with the EU is welcome, like those with the UK and Australia, but the real Enchilada is the India-US agreement.

One of many indicators of the relative importance of a US deal: in constant dollar terms, the joint contribution of India and the US to world growth is the same as China’s; India’s is 10%, the US’s 24% and China’s 34%. (The EU’s share is also 10 %.)

Geopolitics and geo-economics both suggest that our choice in the new G-2 world is to partner either with the US (with which we have a lot in common, starting with democracy) or with China-Russia. The US across all dimensions is the most open economy in the world; China is open for itself, not for other countries. The two economies offer very contrasting models of trade, investment and growth.

For the last couple of decades (at least), all one had to do is name an important country and it has had a large trade deficit with China. The same country would have a large trade surplus with America.

Why this ‘equivalence’?

Because the Chinese model is a me-first growth model that is not constrained by democratic compulsions. The China model aims to be the first (and only) manufacturer for the world; the US model makes it the first consumer for world output.

Here is an easy prediction from these orthogonal economic philosophies: the US will run large trade deficits; China will run large trade surpluses. This has been a consistent story of the last three decades, especially after China deeply undervalued its exchange rate in the early 1990s.

Since India needs to run current account deficits while obtaining capital and technology through foreign investment, there was never any alternative to an India-US deal.

Why did the obviously beneficial and necessary India-US trade deal take so long? One possible explanation is a misunderstanding of the rationale of Trump’s tariffs. Most economists have interpreted them as having something to do with economic principles and trade.

An alternate view is that they were entirely about international politics with two primary goals. First, that Europe should pay more for its own defence (and this has happened), and second, that China’s expansionist and mercantilist tendencies should be both contained and reduced.

The India-US trade deal will do what no other deal can do—revive private investment in India. The country and its people will gain; and the losers will be our policy bureaucrats. In the language of economists, major reforms will now be endogenous. What does one mean by ‘endogenous’? Policymaking will now no longer be controlled by bureaucrats but by market forces—with the state playing a facilitative role. Good policy will now emerge from a pool of actors acting in their own best interests, rather than via the Kafkaesque diktats of bureaucrats.

This advocacy is as old as Adam Smith and more recently, Frederich Hayek, both of whom advocated economic freedom. The India-US trade deal signals a historic dual pivot—from bureaucratic control to market reform, from a closed world to an open-market world. India will now be market-forced to be open to much-needed capital, technology and trade exchanges.

The trade deal is fit for the times and world we live in. These are difficult times for diplomacy, sure. But good diplomacy is to engage, not avoid. It is easy to be a ‘successful’ diplomat or policymaker when there is no tension in decision-making. Remember that the mark of a good economist is what she does with bad data. Ditto for diplomats and all shades of policymakers.

Viksit Bharat can now be a possibility rather than an impossible dream. India needs foreign capital and foreign technology, and no one can provide it as effectively as the US (no, not even the joint contributions of the EU, UK, Australia and forthcoming Canada). Only a trade deal with the US can lift today’s cloud over investment in India and end an adverse business climate visible in the capacity of non-market forces to ‘discipline’ investors.

Vive le deal!

These are the author’s personal views.

The author is chairperson of the Technical Expert Group for India’s first official Household Income Survey.