Ajit Ranade: India should reinforce its strengths on the external economic front
Trade openness is measured as the ratio of trade to GDP. India’s is close to 50%, as per World Bank data. It used to be 7% in 1970, about 15% in 1980 and 1990, and jumped to 26% in 2000 and 49% in 2010.
This decadal upward shift shows India’s embrace of globalization, especially after 1991. It shows a decisive turn-away from the earlier export pessimism and trade scepticism, and India’s acceptance of trade as an enabler of economic growth. For a few years around 2010, the ratio inched up to 55%, before dropping, but has shown a steady rise in recent years.
On this measure, India is ahead of China and the US, although one must not jump to any conclusion. The question of what an optimal ratio is and whether higher trade openness is always better is complex. For small economies extremely dependent on foreign trade flows, the ratio can exceed 100%.
While India’s trade-to-GDP ratio is higher than Indonesia’s, Bangladesh’s and Sri Lanka’s, it is below Thailand’s 133% and Singapore’s 184%. The latter two’s high dependence on foreign trade also implies high vulnerability to global business cycles and recessionary winds. An optimal ratio for any country depends on its stage of development, the structural features of its economy, its resilience and stability, geopolitical considerations and increasingly its desire for strategic autonomy.
With India’s large size, its optimal ratio cannot be too far from 40-50%, which represents a good combination of domestic orientation and harnessing of global markets. Free trade is not just flows of goods and services, but is accompanied by flows of investment, know-how, management and skills. It undoubtedly enhances efficiency, but it can also be negative for certain non-competitive sectors and
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