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Adjusting to the Indian political tsunami: Tim Groser discusses the possible implications of Narendra Modi's accession to power for trade negotiations, including the prospective India-New Zealand free trade agreement.

The implications of the political tsunami in India that brought Narendra Modi to power in the second largest country in the world by population are profound. In the field of trade the question to be answered is: what implications will this have on historical Indian negotiating positions? Traditionally, India has adopted a highly conservative approach to trade negotiations. But that approach will not allow India to increase its connectivity to the global economy. The change of government in New Delhi will hopefully open the way for greater Indian participation in multilateral trade deals and for the prospective India-New Zealand free trade agreement.

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Around the world, friends of India, strategists, business groups and others are all starting to ask a rather important question. With the landslide victory of the BJP over Congress, we have seen a shift in the political tectonic plates. What implications will this have, if any, for India's approach to international economic negotiations? No doubt, even that is too confining; as minister of climate change issues I am also wondering about that matter in terms of the international climate change negotiations. But here I wear my trade hat.

No-one inside India should doubt this. In the last few months since the Indian election, I have had very private and informal discussions on exactly this topic with ministers and senior officials of some of the most important countries in the world. We are all in full listening mode. Depending on what answers we receive from New Delhi--and no-one is expecting clarity soon--New Zealand and countries far more important than us in international affairs will maintain or re-calibrate their own agendas and negotiating positions.

It is hardly surprising that this strategic question is central to many people's thinking. India is the second largest country in the world by population. What happens in India affects everyone - not just the around 1.2 billion people who live there. And across the vast Indian diaspora, including here in New Zealand where there is a vibrant community of New Zealanders of Indian ethnic heritage, this will be more important still.

On a personal note, I have enjoyed extremely close professional links with many Indian senior officials over many years - people like K.M. Chandrasekhar, former Cabinet secretary, past Indian World Trade Organisation ambassadors, a variety of other senior Indian negotiators--not to mention a warm relationship with former Commerce Minister Kamal Nath and his successor, Anand Sharma. I am obviously hoping to develop an equally good relationship with the new BJP ministers.

The central question, of course, is how is Prime Minister Modi's government going to interpret India's real long-term interests? Second, what implications might this have for historical Indian negotiating positions? I will come back to this.

Political tsunami

The election was a political tsunami. The tech-savvy young Indian professionals of the BJP who used the full power of the social media--including the famous hologram--to power Narendra Modi into office perhaps sensed what was possible in terms of the magnitude of the victoiy and the corresponding loss of the Congress Party. But no-one else did. For the first time in 30 years, the prime minister's party has a majority in Parliament's lower house.

It is not my purpose to explain why--this has been done by numerous political commentators far better informed than me about Indian politics. Nor will I comment on the obvious problems the new prime minister faces. Most of them are finally rooted in the vast diversity of the country and the massive gaps between millions in rural villages without electricity and the brilliant young Indian professionals who used the digital universe to power Modi to office.

But one thing is clear: Prime Minister Modi has a clear-cut mandate for change. That is rare. The prime minister and his inner circle will be asking themselves the most important question: where and how can we use that political capital?

He and his strategists will be pondering some obvious and large matters that would frame any answer to that question. It is not just economic questions they need to address. There are vital foreign policy questions such as bringing greater stability to the sub-continent, which will turn primarily on their relations with Pakistan.

But we are assuming that the primary message both from Modi's campaign and his great earlier success as the chief minister of Gujarat for thirteen years lies in the economic sphere. We know that the surge of growth in the late 1990s and early years of the 21st century--the period that gave rise to the controversial slogan 'India Shining'--has dissipated in recent years. There are massive infrastructural needs. Some 30-40 per cent of domestically produced food is wasted. Inward foreign direct investment is weak compared with the potential of the country. I could go on but there is no point: Indian analysts know all this.

Developmental problems

These are developmental problems affecting numerous emerging economies. They are not specific to India. It is just that they matter more globally because of India's size and India's potential. But common to all this, at least in my view, is the need to introduce more competition into the Indian economy. Without that, I cannot see an acceleration of sustained growth and the creation of an even stronger climate of innovation.

Just recall this famous 'factoid': entrepreneurs of Indian ethnic origin create about one-third of Silicon Valley start-ups. Of course, there are already numerous signs of an explosion of similar intellectual and entrepreneurial talent inside India proper --I have seen it myself in Bangalore, in Mumbai, Pune and elsewhere. There is also a very interesting debate going on about how to marry India's new-found success in IT with the right manufacturing model.

But I sense there is much more waiting to be unleashed and I do not think India is going to achieve its full potential outside of a more competitive environment with an appropriate rules-based system around it. That, I suggest, frames correctly the controversial matter of the most appropriate trade policy for India.

There are two ways to look at trade negotiations. 'Pain or pleasure?', 'problem or opportunity?' would be two crude ways of putting it. I am describing in more colourful terms what trade theorists more formally called 'mercantilism versus comparative advantage'.

Large numbers of people in our communities used to think barriers to imports were good because they saved jobs, trade 'concessions' were bad because they lost jobs and the 'best' negotiators were those who were 'tough' negotiators (meaning they never agreed to anything). This was exactly the consensus amongst New Zealand trade negotiators and their political masters in the 1960s and 1970s as they defended a hopeless system of import licensing, subsidies and the highest average tariffs in the developed world. The first political economy book I read as a young adult in New Zealand was The Search for Security by the former secretary of the Department of Commerce and Industry Dr Bill Sutch. It was a classic expression of that view. It had huge influence but it led us into an economic cul-de-sac with low growth rates, high unemployment and uncompetitive industry.

Needed reform

New Zealand in the 1980s needed reform. We needed to do something to improve our productivity, competitiveness and export performance in our highly protected sectors. Finally, we came to the conclusion that this would never be done unilaterally. We needed the impetus of external competition. We then began a long, slow process of opening up the protected sectors of our economy first with our then largest trading partner, Australia, later the world.

Today, the evidence that competition through trade liberalisation helps your country is literally overwhelming. II you seek to protect your country or sector with heavy insulation from import competition, you have to accept the corollary--the country or sector in question is not going to cut it internationally.

If you are looking for practice to confirm the linkage between trade policy and competitiveness, just think that today, in spite of the largest global financial crisis in 70 years, governments around the world are engaged in an explosive number of trade negotiations designed to link their economies into the global value chain to promote desperately needed growth. The Trans-Pacific Partnership (TPP), the Trans-Atlantic Trade and Investment Partnership and the Regional Comprehensive Economic Partnership (RCEP) are just three of many such initiatives.

Traditionally, however, India has adopted a highly conservative approach to trade negotiations. I recall that in 1985 India and New Zealand both had approximately the same share of world trade--0.3 per cent. That historical figure is better left unadorned without any commentary.

Isolationist mind-set

I understand the origins of the Indian position. New Zealand had a similar isolationist mind-set in the 1970s. I am not, therefore, criticising the generations of brilliant Indian intellectuals and negotiators such as Ambassador Shukla, who campaigned tirelessly in Geneva in the mid-1980s to try to stop the launch of international negotiations in trade in services as we were putting the negotiating mandate for the GATT Uruguay Round together. Fortunately for India, however, he failed--under the GATS framework, India has moved from around 22nd in the world in trade in services ten years ago to number seven today. History has proved that India's fears of opening up to services competition were misguided.

Trade negotiators finally reflect the choices made by their political masters. It is for this reason that we will look so closely at Prime Minister Modi and his key advisers' choice concerning India's economic development: will India open up, incrementally and intelligently, to trade and with that become economically competitive or will it remain closed?

Outsiders like me, of course, have no standing in answering that question. Despite this, I maintain an illogical desire to give advice to leading Indians. I tried to do so at the end of last summer, when I had the pleasure of a chance encounter with M.S. Dhoni and his fantastic cricket team at Auckland International airport. I have a photograph proving that I inappropriately took advantage of a moment with the great cricketer to give some pointers on his cover drive. Even though he politely declined my offer of coaching, I want to try again, in the trade policy sphere, to provide some advice to the leading Indian experts on trade policy.

On trade policy at least, New Zealand can offer a friendly but unambiguous view from the outside: increasing India's connectivity to the global economy cannot be done by maintaining existing trade policy settings and its historical negotiating approach.

Three fora

We are involved with India in three trade negotiating fora--the WTO, the mega-regional trade deal known as RCEP, and the bilateral free trade agreement negotiations between New Zealand and India. I should add that as early as 2009 I have quite deliberately gone out on a limb diplomatically by advocating informally and rather controversially in APEC circles that the next expansion of APEC would have to include India, while recognising that India has not formally requested membership. Anyone that knows anything about the cultural, economic, religious and demographic history of Asia knows that it is impossible finally to exclude India --a central actor in any Asian story.

I will not here dwell on the WTO and the role of India. Suffice it to say that I am deeply familiar with all the Indian negotiating positions in the key aspects of WTO affairs. I am also proud of the fact that I chaired the first ever legal case India took to the WTO--an anti-dumping case involving certain steel products against the United States. I was told that there were many cynics in New Delhi who believed the WTO was the creature of the developed countries and would never find in their favour. India won the case on the merits of its legal arguments.

The RCEP is a bit like the TPP--but without the United States involved and with the involvement of India and China. It involves sixteen countries--the ten ASEAN countries and the six others which have negotiated free trade agreements with ASEAN. That includes India. ASEAN negotiators have told me frequently that the free trade agreement with India was extraordinarily difficult. However, India is in that mix, and sixteen heads of government have given it their blessing. It is far less mature as a negotiation than the TPP and there are complex political linkages between the RCEP and TPP, despite the fact that the United States is not directly involved.

The RCEP may evolve in ways we cannot really envisage at this stage. Nor have 1 excluded in my mind the possibility of a 'two-speed' negotiation--that is a sub-set of countries ready and willing to deepen their trade and investment integration with the ASEAN economies and others who might lack the political base at home to do this in the near term. That is all for the future.

Useful partner

Focusing on the India-New Zealand free trade agreement, New Zealand would be a more than useful partner if India decides to pursue a trade liberalising agenda as a means to economic competitiveness. Our size means we are an ideal test-case for a progressive approach to liberalisation and explains our strategic role when China was looking for its first outward-looking free trade agreement partner.

Prime Minister John Key and then Prime Minister Singh launched the India-New Zealand free trade agreement in 2009. We have made progress but are not yet where I would like us to be.

The free trade agreement, if we could conclude it, would play a critical part in New Zealand's relationship with India. The first of all the New Zealand Inc country strategies that were launched by the prime minister was that on India. I think many New Zealanders, irrespective of their ethnic heritage, all have a sense that this small country, which we like to call 'New Zealand Inc', has done an astonishing job developing ties with the other developing country super-power, China. Unquestionably, the free trade agreement with China has played a crucial role in that. The potential with respect to India is of the same order of magnitude. I know some New Zealand thinkers who assert that it is greater.

New Zealand is committed to rapidly progressing the free trade agreement negotiation to its conclusion if the Indian government desires. However, if we receive the green light from New Delhi, we will come hard up again on the central problem New Zealand has not only with India but also with every country we negotiate with: agriculture liberalisation, without which New Zealand cannot enter into any free trade agreement.

Somehow, we have yet to convince some of our negotiating partners that there are not secret convoys of New Zealand milk tankers hidden behind the Bombay Hills near Auckland, and just waiting to flood their country with milk given half a chance through trade liberalisation.

Small proportion

Many abroad do not realise that New Zealand only accounts for 3 per cent of total milk production. We simply do not have the land to produce the projected global increase in dairy demand over the coming decades. Increased demand for dairy is a global phenomenon, but applies equally to the rapidly growing Indian middle class. Indian dairy farmers have a central role to play in satisfying that demand. Many do not realise that India is a larger producer than New Zealand, accounts for 14 per cent of world dairy production and with efficiency gains could increase that production considerably.

New Zealand companies could play a role in the process of modernisation of Indian agriculture. We have already seen New Zealand companies play this role in China. The stark reality is that New Zealand's local production cannot keep up with Chinese demand for safe, high quality milk. That is why a commercial decision has been made by Fonterra to invest in Chinese farms on the back of the strong commercial interest they have in the Chinese market through the free trade agreement.

Undoubtedly, rural modernisation and building rural incomes are critical for India. The agriculture sector is India's largest employer, a critical support structure for the poor and a key component to food security. Negotiating a balanced and liberalising free trade agreement with New Zealand offers opportunities for both countries in this regard. In fact, with the right policy settings, there is no reason why India cannot become a competitive agricultural producer of global significance in some crops. Applied seed science, investment, infrastructure, and local advantages have already come together in India to deliver globally significant production in basmati rice, spices, flowers and chickpeas. There will undoubtedly be others if farmers are given the right incentives.

I am, therefore, convinced that we can chart a pathway through the agricultural political minefield to conclude a free trade agreement with India that includes agriculture. In those areas where New Zealand is absolutely cutting edge, I am sure New Zealand agricultural technology and, longer term, New Zealand investment can be part of India's agriculture answer, not part of the problem.

Early signals

We have already had some preliminary and friendly conversations with the new Indian government on these matters. I would not be expressing these quite blunt views about competition and the need for new thinking on trade policy if 1 thought such views were completely out of tune with emerging thinking in New Delhi. I am not that reckless.

Having said that, we fully understand that the new policy of the government is not yet settled. Important industry still needs to better understand the benefits of free trade agreements and their link to economic growth. There is also an internal review of trade policy taking place in New Delhi that needs to be completed.

What is clear is that the prospects for the New Zealand free trade agreement will not be determined in a policy vacuum. Any reconfigured Indian position will reflect a broader strategic appraisal of free trade agreements and the role they might play in achieving the broader policy goals of the new government. And that takes us all the way back to the core question of competitiveness.

For that reason, we are optimistic that India's political leadership will ultimately give the green light for its negotiators to conclude the free trade agreement with New Zealand. Our chief negotiator went to New Delhi in July and I am already looking forward with enthusiasm to my own first opportunity to have informal discussions with the new commerce minister on this important negotiation for New Zealand and the Indian economy.

Hon Tim Groser is the minister of trade. This article is the edited text of an address he gave to the India New Zealand Business Council on 8 July 2014.
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Author:Groser, Tim
Publication:New Zealand International Review
Article Type:Report
Geographic Code:9INDI
Date:Nov 1, 2014
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