India Can’t Afford to Lose the World’s Trust on Trade

(Bloomberg Opinion) -- Indian Prime Minister Narendra Modi often speaks of “trusted” supply chains. At the G-20 last year, he said that global supply chains depend upon “trust, transparency, and timeframes”; he's made a similar pitch for Japan, the United States and Australia to “trust” India as a trade partner.

And he's right: The only chance that countries such as India have to entice value chains away from China is by focusing on resilience and reliability.

Yet the actions of Modi's government are severely undermining his argument. India has responded to rising global commodity prices by unexpectedly blocking exports of sugar and wheat; some expect rice to be next. These are products in which India plays a major role in global markets; the country is the world's second-largest exporter of sugar and the second-largest producer of wheat. World prices for wheat rose 6% on news of India's export ban.

True, for India, food prices are of particular importance. It's one of the few countries in the world in which food products comprise more than half the consumer price index. If you don't control food prices, you risk inflation expectations spiraling out of control and years of macroeconomic instability.

But export bans aren't the only way to manage food inflation. Besides, what's the excuse for all of New Delhi's other anti-trade moves? India's steel industry is still reeling from the unexpected and arbitrary increase in export taxes for finished steel products imposed last month. Share prices for Tata Steel Ltd. fell by 15% and those of Steel Authority of India Ltd. by even more.

The arbitrariness of India's trade policy is even more evident in the way the government has treated the country's paper industry. After two years of global price increases, officials recently declared that all imports of paper products would henceforth require “pre-registration” — dangerously close to a 1970s-style license. This, the government claimed, would “go a long way in promoting ‘Make In India' and ‘Atmanirbhar' [self-reliance].”

Thus, rather than arguments detailing how consistent trade policy helps productivity and investment, we're left with empty slogans. Every bad, anti-trade decision is presented as either supporting Modi's “Make in India” and “self-reliance” drives, or as necessary to control inflation. And the slogans can cheerfully point in opposite directions: Two years ago, India levied tariffs on steel imports to protect domestic producers; now it has an export tax to protect domestic consumers.

India's trade policy is not just incoherent across time but contradictory at any particular moment in time. For example, steel producers justifiably complain that the new export taxes mean that they will fail to meet government-set targets for exports under an incentive subsidy regime begun as recently as last year. To sum up: First, the government raised steel tariffs, then it subsidized exports and set stiff targets for the steel industry, and then it slapped an export tax on steel products to control domestic prices — all in just a few years.

These aren't, to say the least, the sort of decisions that build trust. Who will sign a long-term contract for Indian steel under such circumstances? India can't hope to steal investment away from China as long as its trade policy is so unpredictable.

Moreover, Indian protectionism doesn't just hurt Indian producers; it hurts the world. As my Bloomberg Opinion colleague David Fickling has pointed out, the global safety net against hunger depends on the world's large food producers — including India — avoiding disruptions such as export bans. If India, which will assume the G-20 presidency later this year, expects to be treated as a global leader, we need to start taking the global effect of our policies into account.

Modi himself is intensely attuned to international perceptions of India. Yet he keeps on being forced into embarrassing climbdowns by his own government. Last year, he promised India would vaccinate the world — only to end vaccine exports after the Delta variant hit. In April, he promised to “feed the world” and to “send relief from tomorrow itself”; within weeks, his government shut down the wheat trade.

Judging by his words, Modi certainly understands how critical trust is. Now he just needs to build some.

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This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Mihir Sharma is a Bloomberg Opinion columnist. A senior fellow at the Observer Research Foundation in New Delhi, he is author of “Restart: The Last Chance for the Indian Economy.”

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