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, according to Moody’s Investors Service.
Yet, the country is the least vulnerable to a balance of payments crisis because of its larger and more diversified export sector as well as better macroeconomic policy management, which has allowed it to accumulate and maintain adequate foreign exchange reserves, it said in a note published on Thursday.
Among South Asian economies, India’s exports are also the most diversified. However, South Asian economies, including India, have very low exports as a share of GDP, attract little foreign direct investment and are not well-integrated in global value chains, the note said.
South Asia is operating at only one-third of its export potential, according to the World Bank, reflecting a largely inward-looking development strategy, it said.
In the longer run, low trade openness will also weigh on growth potential and the ability to create jobs adding to social risks, the note said.
However, as compared with the 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, said the note.
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, the note explained.
Moreover, India’s recent policy choices have continued to constrain its ability to become more export-oriented, it said. India has continued to adopt protectionist measures in recent years.
The IMF found that between 2008 and 2019, India significantly raised its import tariffs on agricultural goods and manufactured goods, while also actively using non-tariff measures, the note said. India has also declined to join two regional free trade agreements, the Regional Comprehensive Economic Partnership and Comprehensive and Progressive Agreement for Trans-Pacific Partnership, it added.