India faces tough choice in opening up its market

The Modi government, which has refused to join any regional trade agreement, seems to have finally realized that it has come to a point where its foreign trade policy must change course, or the country faces the risk of being shut out of global markets.

India and the United Arab Emirates (UAE) on Friday signed a Comprehensive Economic Partnership Agreement (CEPA) that is expected to increase bilateral trade to $100 billion over a span of five years.

The first free trade deal signed by the Modi government, which marks part of the South Asian nation's recent efforts to pursue free trade deals with its trading partners including the UK, the EU, Canada and Australia, is undoubtedly an important shift of the country's attitude toward opening-up to the outside world.

Whether it is because of the pressure coming from the Regional Comprehensive Economic Partnership (RCEP) that took effect at the beginning of this year, or from the pandemic-hit economy, India's pursuit of separate free trade agreements with other economies is generally beneficial to its opening-up agenda.

Yet, it should be pointed out that those free trade talks aimed at lowering tariffs look more like a stopgap measure India has taken to counter the pressure in terms of its trade environment, rather than a real change in protectionism at home.

In fact, anyone who has the basic knowledge about India's obsession with protecting domestic industries like agriculture will know that its free trade negotiations with any developed country will not be as easy as the one with the UAE, which underscores the difficulty it faced in opening up its market to others.

For years, India's economic and trade policy has been facing the tough choice between opening-up and protecting domestic industries. On the one hand, some believe that the government should protect local industries from shocks caused by foreign rivals before they can grow to participate in international competition. On the other hand, there is rising sense of urgency over opening up India's domestic market, in order to improve the competitiveness of Indian manufacturing sector.

So far, the Modi government has yet to work out a solution to resolve New Delhi's frequent policies conflict, which has already become a critical question restricting India's economic development. This may be because the contradiction is also inextricably linked to India's political system. Policies that may harm domestic industries and affect Indian workers often face strong opposition and political pressure in India, even if they may be conducive to the country's long-term development.

In fact, there is no perfect solution for any economy. It is not realistic for developing countries to integrate themselves into the global value chain without suffering any negative impact. Take China's textile industry for an example. Without opening up to the world, China's textile industry would not have developed its edge today.

Unfortunately, India's political system makes it impossible for the nation to follow China's path. While India is now trying to strengthen trade through free trade talks with individual economies, the further it goes, the more difficulties and pressure it will face. India has a long-held ambition to become a regional power, but when it comes to market openness, it even lags behind neighbors like Pakistan and Bangladesh.

Against the backdrop of the construction of the China-Pakistan Economic Corridor, Pakistan has adopted favorable opening-up measures to attract foreign investment, allowing 100 percent foreign ownership in a wide range of industries.

India is very likely to face severe challenges if it cannot shake off of its fear of outside competition.