How India Can Supercharge Its Development |
India has endured a perplexing year in its diplomacy. After decades of growing closer to Washington, New Delhi saw its strategic calculus scrambled by the pressure tactics of the Trump administration, which slapped high tariffs on the country last summer. Indian leaders initially assumed the United States would prioritize their partnership as part of a larger plan to compete with China. That assumption clearly no longer holds. Even though it recently agreed to a new trade deal with the United States, India now wants to rely less on Washington and deepen its partnerships with others.
The trade agreement inked in January with the European Union signals an important shift in New Delhi’s geoeconomic strategy. What European Commission President Ursula von der Leyen described as the “mother of all deals”—with an estimated 30 billion euros in export gains for both sides—accompanied a new defense pact and a plethora of other agreements. Bilateral economic deals such as the one signed with Brussels and recent agreements with Australia, the United Arab Emirates, and others will help India boost its economy and diversify away from a reliance on any single power.
But India faces far deeper challenges. Its domestic market has struggled to deliver jobs for underemployed youth, for instance, and it does not attract sufficient numbers of world class manufacturers. If India ultimately wants to escape the middle-income trap—that prolonged and often stalled economic transition to greater wealth that has bedeviled so many developing countries—and compete with China, it needs to radically transform its economic orientation in its region and the world. One way to do that would be by joining Asia’s most important trade bloc, the Comprehensive and Progressive Agreement for Trans-Pacific Partnership, or CPTPP.Signed in 2018, the CPTPP emerged after U.S. President Donald Trump withdrew from an earlier agreement—the Trans-Pacific Partnership—designed to create a high-quality trade area spanning the entire Pacific Rim. The CPTPP eliminates or reduces tariffs across a wide variety of goods and services while also binding members to exacting common standards in many areas, including labor rights, intellectual property, and investment. These standards create the impetus to drive real structural reform in member economies. Even without the United States, the agreement now has 12 members that account for about 15 percent of the world economy, including Australia, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Singapore, the United Kingdom, and Vietnam. An array of new possible members now want to join, including Cambodia and South Korea. (China and Taiwan both formally applied in 2021, turning the agreement into a hotly contested geopolitical space between Beijing and a number of traditional U.S. allies—but the odds of either entering are slim given the objections from existing Western members.) To be sure, the barriers to India joining the bloc are substantial. Agreeing to the partnership’s strictures would require major changes to the Indian economy. India should be under no illusions: its sheer size will not entitle it to rewrite all the rules of the club. This means committing to nearly fully open markets, the reduction of politically thorny agricultural tariffs, and the acceptance of transitional periods of perhaps ten years at most, at which point India would have to impose the standards and rules of the partnership.
But the case for joining is also strong. CPTPP countries would gain preferential access to India’s potentially vast market, while the group as a whole would benefit from having a future global superpower inside the bloc. For New Delhi, membership would accelerate its integration into regional supply chains while providing a catalyst for economic reforms. India suffers from having relatively few preferential deals that give its exporters access to major markets; the CPTPP would be a major fillip for Indian exports. Joining the CPTPP would also position New Delhi at the center of a new economic architecture with the capacity to shape the rules of global commerce, just as the European Union today sometimes enjoys a “Brussels effect” when its rules and standards are adopted elsewhere. By entering the bloc, India could alter both its economic trajectory and the balance of power with China in the Indo-Pacific.
UNFAVORABLE CONDITIONS
India must reckon with a very different set of circumstances than China encountered during its rise over the past three decades. China’s growth accelerated during a period of unchallenged American hegemony and hyperglobalization. Washington supported Beijing’s integration into the world economy, sponsored its accession to the World Trade Organization (WTO), and maintained open markets even as Chinese exports surged—all with the assumption that such an approach would lead to China becoming a card-carrying member of the U.S.-led international order.Over the past 15 years or so, China has comprehensively disabused the United States of that notion. Washington’s supportive posture is now gone, replaced by an emphasis on strategic competition and blunt economic nationalism. As a result, India simply cannot rely on the favorable geoeconomic environment that drove China’s development. It must also navigate disruptive pressures, most obviously climate change and artificial intelligence.
Moreover, a strong China remains India’s primary geopolitical challenge, both along its Himalayan frontier and more generally in South Asia and the broader Indo-Pacific. That challenge requires significant military investment and modernization, which in turn needs strong growth to fund rising national power. India’s recent economic figures have been striking, with national output growing by more than eight percent in recent quarters. But in the long term, India faces daunting development obstacles in an economy that produces too few jobs and exports too little—never mind other huge hurdles such as the harmful effects of climate change or the social and ecological disturbances of rapid urbanization.
In the age of Trump, it would clearly be unwise to expect to rely on new flows of U.S. investment, technology transfers, and greater market access—boons that New Delhi enjoyed over the last decade. The friction of the past year is still keenly felt in India. It is for this reason that Indian officials have over recent months pivoted toward much greater multialignment, embodied by the deal with Europe. Ties with Japan, South Korea, and countries in Southeast Asia are also improving. Many of these states are CPTPP members.Competing with China in the long term demands domestic reforms to improve business conditions, streamline regulations, and attract investment. Greater openness to trade can help here. Indian firms need exposure to global competition to become more productive. Indeed, India can position itself as an alternative to China in important sectors such as electronics only if its firms can compete globally.
Signed in March 2018 in Chile, the CPTPP covers a set of countries responsible for about $500 billion in annual trade flows overall. The deal allows advanced economies such as Canada and Japan to win access to fast-growing economies—such as Malaysia, Mexico, and Vietnam—while also guaranteeing stronger enforcement of standards in areas such as labor rights, which helps level the playing field among high- and low-cost competitors. For their part, emerging economies win guaranteed preferential access to wealthy consumer markets, as well as a credible external rationale to justify painful domestic reforms. To take one example, Vietnam’s decision to join the CPTPP brought the country a flood of foreign direct investment as global manufacturers sought a CPTPP-compliant base, helping the country’s exports grow sharply.
For New Delhi, participating in the CPTPP would accelerate India’s integration into regional production networks, particularly in areas such as electronics, automobiles, and precision manufacturing that are currently dominated by China. The CPTPP membership process could also help galvanize much-needed domestic reforms. International obligations can make difficult changes possible, similar to the way EU accession in the aftermath of the Cold War drove transformations in central and eastern Europe. In a similar vein, China used the prospect of WTO membership to restructure some state-owned enterprises and introduce limited forms of intellectual property protection.
The Japanese scholar Kenichi Kawasaki has estimated that CPTPP membership would provide a major annual boost of around $56 billion to India’s GDP of roughly $4.5 trillion. In particular, this would help major exporting sectors such as textiles, pharmaceuticals, information technology services, and engineering goods; preferential access to CPTPP markets in these sectors could unlock demand that current tariff and nontariff barriers suppress.
For India, competing with China demands domestic reforms to improve business conditions.
Of course, many members of the group may not be immediately thrilled at the prospect of India applying to join. Many will recall India’s lengthy negotiations over the Regional Comprehensive Economic Partnership, another regional trade agreement led by the Association of Southeast Asian Nations (ASEAN) that includes economies in Southeast Asia as well as Australia, China, Japan, New Zealand, and South Korea. RCEP set less stringent standards than the CPTPP, but India still negotiated for years before withdrawing from talks in 2019, fearful of the deal’s impact on Indian farmers. The episode hit India’s credibility, underlining its reputation for being a tough and difficult negotiator. Many CPTPP members would likely doubt that India would follow through on any commitments it makes to ensure entry into the partnership.That said, the recent EU-Indian trade agreement shows that a combination of geopolitical and economic circumstances are now turning India into a more attractive and willing partner. That pact was reached in less than a year, when such deals previously took decades to hash out. New Delhi can move more quickly these days, given the changed situation in the Trump era. More important, its recent spate of deals demonstrate a new willingness to consider making difficult concessions in areas such as market access and regulatory harmonization. In its deal with the EU, India even reduced tariffs on those goods associated with powerful domestic interests, including steel and automobiles.
The CPTPP does impose far more stringent requirements than India’s existing trade agreements. These include the liberalization of legal and professional services, the adoption of intellectual property protections in controversial areas such as medicines and other pharmaceutical products, and the limiting of government support for state-owned enterprises, which remain a major part of India’s economy. The partnership’s requirements regarding agricultural trade present perhaps the most glaring obstacle. To join the CPTPP, India would eventually need to accept significant tariff reductions on sensitive agricultural goods such as corn and wheat, measures that would invariably threaten politically powerful farming constituencies. These are serious impediments. Opening the services sectors would be challenged by established players and India’s well-connected legal lobby. The Indian government still protects and subsidizes Indian farmers, and farming communities wield considerable political influence. The politics of economic reform is always difficult, especially in a country as vast and complicated as India.
HOW TO ESCAPE THE MIDDLE-INCOME TRAP
Yet in this new geopolitical era defined by China’s abiding threat and the United States’ new unreliability, these obstacles should not be insurmountable. India’s process of applying to join the CPTPP would need to happen in stages, beginning with confidence-building measures. New Delhi could conduct what trade experts call a “gap analysis,” a study to understand the steps that India would have to take to meet the standards for joining the deal. Once India sends a clear political signal that it wants to explore membership, it would need to enter into a period of exploratory engagement with the CPTPP, which has a rotating chair currently held by Vietnam. Here, there are already models to follow; both ASEAN and the EU are currently building closer relationships with the CPTPP bloc.
India could first assume observer status and make commitments in less contentious areas, building support and demonstrating the benefits of its involvement before moving to full membership. Consider, for instance, the areas of digital standards and artificial intelligence. Framework agreements could be developed between India and CPTPP members in areas such as investment in AI frontier models and the regulation of digital data. Carbon market integration and climate finance mechanisms offer another avenue for early cooperation, given India’s substantial renewable energy capacity and the varied net-zero commitments of CPTPP members. In the longer term, India could seek to negotiate favorable terms for its accession. These might include extended transitional periods to allow it more time to adjust to potentially complex changes and partial carve-outs for sensitive sectors, following precedents set by other CPTPP members that secured temporary exemptions. Vietnam, for instance, negotiated significant transitional periods for adopting reforms to reduce support for state-owned enterprises. India could over time embrace those agricultural reforms necessary to join the CPTPP and pair them with substantial support programs for affected farmers, including investments in boosting agricultural productivity, crop diversification, and rural infrastructure.For current members, any costs of Indian membership would be outweighed by the benefits. India’s entry would enhance the long-term size and weight of the CPTPP group as the Indian economy expands over the coming decades. Despite its complex business environment, India has long been far more open to international investment and more welcoming to international companies than China has. For India, the long-term benefits are clear, too. It could follow the path of Vietnam, which used its entry in 2019 into the original version of the partnership to drive domestic reforms that transformed it into a manufacturing and exporting powerhouse.
India joining the CPTPP could transform it from a regional commercial arrangement into a larger form of economic architecture that neither a protectionist United States nor a state-capitalist China would dominate. The EU, owing to different rule structures and Europe’s sheer size, cannot join the CPTPP directly, but it should seek to integrate and coordinate far more closely with CPTPP members, potentially as part of a grand bargain involving Indian accession.Convergence among India, the EU, ASEAN countries, and other members of the CPTPP could create a formidable bloc spanning western Europe and the Indo-Pacific. It would represent the world’s largest aggregation of open-market economies. And it could serve as an alternative for countries seeking to reduce dependence on China without becoming entirely reliant on the United States.
In an era of great-power competition, this kind of economic architecture could also offer small and middle powers genuine choices. At the annual meeting of the World Economic Forum in Davos in January, Canadian Prime Minister Mark Carney highlighted a “rupture” in the global order and called for a new era of middle-power cooperation. But bilateral cooperation among middle powers lacks weight; an enlarged CPTPP, including India, could constitute the basis of a new constellation, creating a counterweight to China and the United States when it comes, for instance, to setting rules around artificial intelligence or grappling with climate change.
India, meanwhile, faces a choice. Without greater reforms, it will struggle to build the economic strength necessary to compete with China. It risks permanent second-tier status. Establishing that domestic strength is also essential for maintaining India’s leverage when dealing with the United States. Indian history shows that the country can indeed embrace meaningful economic change when the circumstances create urgency, as was true in 1991, when India embarked on an extensive program of liberalization after the collapse of the Soviet Union.The current moment offers such a window. Washington’s tariffs and Beijing’s assertive foreign policy mean that India must make new, bold moves. Indian Prime Minister Narendra Modi remains at peak political power, giving him the potential to drive through difficult reforms. Global financial institutions, notably the largely paralyzed WTO, are also in flux, creating opportunities to reshape economic architecture.
For India, CPTPP membership serves twin long-term objectives: it would help India escape the middle-income trap by creating more durable economic growth, and it would help India better compete with China, for instance by funding the modernization of the Indian military. The geopolitical conditions are ripe for such a gambit. But if India cannot seize this opportunity now, its economy will continue to struggle to develop, and New Delhi will find itself in an increasing position of weakness when facing Beijing. India should recognize that joining the CPTPP would be the true fulfillment of its policy of multialignment in an age of fissuring geopolitics.
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