The relative dynamism of Asia and the big potential of intra-south trade/investment are at least partial answer to the threat of a deep global recession looming large.
With the 15% drop in merchandise exports in October, it is all the more clear that the US and EU, the main markets of Indian exporters, especially those from labor-intensive industries, will find a compelling need to tap Asian markets more aggressively over the next several months, if not a couple of years.
Conversely, other Asian countries mainly China and the 10 Asean nations would look at the Indian market more closely to offset the impact of the slump in western markets.
Given this situation, India would do well to try and make use of the free trade pact with Asean (due to be in force from January’09). At least in certain sectors like automobiles, pharmaceuticals, electronic components etc, this would help boost Indian exports to certain Asean countries. India-Asean trade is a good $30 billion now and would accelerate thanks to the forthcoming pact.
India’s proposed economic liberalization agreements with Korea and Japan are still being negotiated and it is hard to get full benefit of these pacts for India during this recession, even if the agreements come into force sometime in 2009.
True, increased imports from China and Asean would deepen India’s current account deficit. But the world is about to witness a period of deflation – prices of most commodities, including industrial raw materials and food items have already crashed.
Therefore, the negative impact of a likely surge in import bill caused by greater intra-Asia trade on the current account would be rather moderate. Indian ability to export to these countries is lesser than their capacity to sell goods in Indian markets and these relative positions can not change suddenly. A steep and prolonged fall in exports would be nightmarish for India’s policymakers given the fact that most of the major export sectors are labor-intensive and consist of small firms.
Giving a greater thrust to intra-South trade is not merely to be reckoned as a transient policy option to tide over the present crisis. This is, in fact, the long-term strategy India should adopt. The US and EU markets especially the merchandise markets are rather optimally developed and would anyway grow at a much slower pace than Asian markets in the years to come. This is irrespective of how fast the US and EU economies could come out of the current crisis. IMF has projected that the G3 economies would shrink by 0.3% in 2009.
Creeping protectionism in the developed world is another reason for India’s policymakers to focus on boosting intra-South trade. Given the prolonged impasse in Doha Round talks, there are also doubts about WTO’s ability to liberalize the world trade further under a fair, rule-based multilateral system.
Importantly, a major re-configuration of India’s export basket read a bias for the Asian markets can materialize only if the industry embraces the idea whole heartedly. Conventionally, Indian exporters have had a liking for the Western markets. They must review that strategy. Hopefully, the incipient economic recession would give them an opportunity for making the strategy shift.
The potential of intra-South trade can not be overstated. Different countries and even sub-regions within (Asia) are at vastly different stages of development. Thus, the complementarities within the group have increased tremendously.
In recent years, south-south trade has grown at a rate that is twice as fast as the growth of world trade (in recent years). In products such as automobiles, jet planes or telecommunication products and services, the largest markets in the world are already China and India.
To reinforce the economic ties between Asian countries, trade liberalization is just one tool. Capital flows between these countries can also potentially grow much faster than now. This is even as intra-South flows of FDI have accounted for about 37% of FDI inflows received by developing countries in 2006, compared to some 15% a decade ago. Maybe, some policy actions would help.
The Asian countries could also consider the setting up of a mechanism for mobilising their foreign exchange reserves to build infrastructure and boost consumption.