India to face challenges in becoming more export-oriented

Moody's Investors Service on Thursday said India is likely continue to face challenges in raising longer-term growth potential and creating enough jobs for its young population in the absence of higher trade openness.

In its report on South Asia sovereigns, Moody's said compared with other South Asian economies, India appears to be in a better position to deepen its integration in global value chains, attract FDI and increase exports.

The country has better macroeconomic fundamentals, more stable politics and a more developed export sector.

"Even so, India will likely face significant challenges in becoming more export-oriented. It will require the government to implement reforms to increase the country's export competitiveness, which may also be politically difficult.

"For example, that would involve reducing protection of businesses that have benefited from decades of restrictive domestic trade policies, which have kept out foreign competition," Moody's said.

India's recent policy choices have continued to constrain its ability to become more export-oriented, said the report titled 'Low trade openness fuels vulnerability to shocks and curbs growth in the longer run'.

India has continued to adopt protectionist measures in recent years. The IMF found that between 2008 and 2019, India significantly raised its imports tariffs on agricultural goods and manufactured goods, while also actively using non-tariff measures.

India has also declined to join two regional free trade agreements, the RCEP and CPTPP, it said.

"India will be more resilient to external shocks, but in the absence of higher trade openness, it would likely continue to face challenges in raising longer-term growth potential and creating enough jobs for its young and growing population," Moody's said.

South Asia's rated sovereigns – Bangladesh, India, Pakistan and Sri Lanka – have very low exports as a share of GDP, attract little foreign direct investment (FDI) and are not well integrated in global value chains.

"South Asia is operating at only one-third of its export potential, according to the World Bank, reflecting a largely inward-looking development strategy.

"Low levels of trade openness and FDI increase South Asia's vulnerability to shocks and constrain longer-term growth prospects, which may also add to social risks," Moody's said.