Emerging From Conflict, India Faces Trade And Investment Headwinds

India is emerging after a brief conflict with Pakistan, with a ceasefire thankfully appearing to hold for now. This is welcome news for the business community and the public at large, many of whom too young to remember the adverse economic impact from previous conflicts.

As the dust literally settles on the border, Indian policymakers are returning to address economic policy priorities interrupted by the conflict. This includes accelerating economic growth—higher than the current 6% pace—concluding a free trade agreement with America (to avoid penalising tariffs of 26%, which are currently suspended until July), and attracting sizeable foreign investment inflows away from China, with Apple being a top priority. On each of these fronts, India is likely to face considerable headwinds.

It is “never a bad time” for big reforms, explained Richard Rossow, senior advisor and Chair on India and Emerging Asia Economics at the Center for Strategic and International Studies (CSIS) in Washington D.C. As he wrote in a note, the recent India-Pakistan conflict serves as a reminder that while India enjoys relatively high growth rates, investors have “several options” when looking at changes to global supply chains. “The Modi government’s third term has largely been devoid of significant reforms compared to its first two terms,” Rossow wrote in the note. “Finance Minister Nirmala Sitharaman laid out some very good ideas in her February 1 budget speech. It is time to follow up ideas with action.”

That action in recent weeks appears to be focused on momentum in two broad areas. First, With a U.K.-India Free Trade Agreement (FTA) in the bag, India’s Commerce Ministry hopes to complete negotiations with America on an FTA in July. Further afield is the prospect of an India-EU FTA, although that process has dragged on for a decade. Second, the government has been hugely encouraged by Apple CEO Tim Cook’s recent comments that India was well-positioned to become a major manufacturing hub for the company’s iPhones. While India’s promiscuous moves to conclude FTAs with major trading partners in record time will likely boost short-term growth, policymakers are perhaps under-estimating the domestic social impact of opening up too rapidly.

India’s entrenched business elite is notoriously protectionist and it is not clear how these FTAs will impact vast sectors of the economy, including agriculture. The Modi government had to withdraw controversial legislation to reform farming and lower tariffs agreed on specific sectors (lamb imports from the U.K., for example) will have social reverberations. Similarly, the Modi government’s fledgeling “Make in India” manufacturing plan is contingent upon Apple significantly scaling production of iPhones in the country.

CEO Tim Cook recently told analysts that a majority of iPhones sold in America will have India as their country of origin. This comment drew an immediate rebuke from President Trump, who according to media reports, told Cook that “we’re not interested in you building in India.” The U.S. President followed that threat by posting on social media that he would introduce a 25% tariff on any smartphone imported into America.

While it is unclear if this will be implemented, it signifies the political minefield which American companies currently have to navigate in outsourcing production overseas. India needs plenty of Apple-like production facilities to lift manufacturing share of GDP (currently at 16% compared with China’s hefty 26%) as well as to provide quality jobs for millions of young people entering the job market each year. A scaling back of production would be a major setback.

Fortunately for India, its vast population and internal market can remain the growth driver if trade and foreign investment initiatives falter. However, for this to succeed and to accomplish the country’s growth aspirations, the government will have to introduce significant reforms designed at making the economy more productive, competitive, and inclusive.

The overwhelming message for Indian policymakers therefore should be to focus less on the noise (Trump tariffs) and more on the signal (faltering growth in the absence of reforms). Getting this balance right will lead to the pathway for accelerating economic growth in the years ahead.