India's policy flip-flops a bad example to emerging economies

ERRATIC MOVES: It takes shine away from it trying to assert larger role in world forums

IN recent months India has caused much disquiet among its international partners with a series of abrupt and arbitrary moves in policy.  Late last year, India backpedalled on a planned liberalisation of its retail sector.

This past March, India announced plans to introduce a retrospective tax that could prove punitive on existing foreign investments. Also in March, India imposed an immediate ban on cotton exports only to reverse it a week later -- and just a day after rowed back from the reversal saying that the ban stays although consignments that have already been registered for export can proceed upon revalidation.

These erratic moves have dimmed the confidence of India's partners in the country's policy direction. The United Kingdom and the United States have vociferously protested over the proposed retrospective tax's impact on their businesses and investors.

India's actions will have implications on other emerging economies and developing countries, too. It has already drawn China's ire on its export ban on cotton. Malaysia also should be wary, what with our fast-deepening trade and investment linkages with India.

But what can we draw from India's haphazard policy developments?

For one, they call for a change in the conversation at global trade policymaking forums such as the World Trade Organisation (WTO) from the oft played-up developed versus developing countries. Such fault lines are simply not relevant Many developing countries are hurt just the same by trade distortive measures taken by other emerging and developing economies as those imposed by more advanced nations. A shift to a less adversarial narrative about shared commitment in creating a trading system that can truly work would better reflect current realities.

Shared commitment demands that the more developed countries, such as the European Union and the United States, finally address, among others, outstanding thorny issues such as subsidies. Equally, because of their systemic importance, it urges emerging economies whose distortive measures reverberate widely across their shores to not plead for less accountability to the system.

India's policy flip-flopping also highlights how the missed opportunity of the Doha Round goes beyond the failure to advance global trade. A more pernicious side-effect is the uncertainty Doha's failure perpetuates in the direction that countries can choose to take their trade policy.

With countries' international trade commitments still largely dating back to when the Uruguay Round ended in 1994, they can still backtrack on their current level of openness to the 1994 status with little repercussion. The continued absence of Doha thus severely undermines the predictability and security that the WTO system is meant to afford.

Further, crucial gaps remain in the global trading system -- in that potentially distortive measures, such as the export ban imposed by India, remain mostly unregulated and fall outside of the WTO's ambit. It is unsurprising, therefore, that the WTO reported during the May to mid-October 2011 period G20 countries' "implementation of new trade restrictions ... has not decelerated", and "export restrictions continue on an upward trend".

Such findings make the G20's reaffirmation of "standstill commitments until the end of 2013", and commitment "to roll back any new protectionist measure that may have risen, including new export restrictions and WTO-inconsistent measures" sound hollow.

What is disappointing, too, in India's inconsistent policy actions is that it rather takes the shine away from it trying to assert a larger role in international forums like the International Monetary Fund (IMF).

With emerging and developing economies accounting for "about half of global output and two-thirds of global growth ... much of which is accounted for by China and India", as reported by the IMF last year, it is only right that they should have a greater say-so in global economic policymaking.

But this new-found status demands that emerging markets assume a greater responsibility for driving progress in the multilateral system. Instead, these countries have largely remained content to react to developments and play a defensive game with little thought to the future shape of international economic institutions.

Finally, the grave implications of India's unpredictable policy moves might be on its own prospects. Its integrity has been diluted, and unless India restores confidence and policy consistency it risks frittering away the dividend garnered from tremendous growth to achieve its full economic potential.

Other emerging and developing economies should take heed, recognise the critical signposts when they reach them, and avoid taking the same path.

Indian Finance Minister Pranab Mukherjee at the recent G20 Finance Ministers and Central Bank Governors Meeting at the IMF/World Bank in Washington. India’s arbitrary moves have implications for other emerging economies and developing countries like Malaysia. AFP pic

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