Why India should sign a free-trade deal with itself

India is currently in the midst of two large but different endeavours.

The first is to complete the unfinished agenda of the previous decade, providing the country with the modern infrastructure, rural amenities, social services and connectivity that any developed economy needs. And the second, the most ambitious of the two, is to create jobs, wealth and value to accommodate a young and aspiring population, eradicate poverty and boost GDP growth.

But these two projects are being undertaken at a time when global headwinds are deeply unfavourable. Today there are five hurdles that stand between India and its ambition to join the club of developed economies.

India’s challenges

The first is the advent of this new age where the open, free, and democratic global trading system has become a pale shadow of its previous self. The multilateral trading system—and the preference for this kind of model—has waned considerably. It is being replaced by free trade arrangements between smaller groups of countries and regions, where a handful of stakeholders are able to decide the terms of trade.

This is coupled with a stagnation in global financial flows, because of weak growth, and the growing disquiet over globalization, curiously enough, in the developed world. From the European Union to the United Kingdom to the United States, politicians are using globalization as a convenient culprit for all that ails domestic economies and societies.

It’s against this backdrop that India has to discover new markets, new sources of funding and new trading arrangements.

Second, the advance of technology and the expansion of the digital economy, along with the advance of robotics, is in many ways closing the window for export-led manufacturing growth. They have significantly eroded the advantages that cheap labour typically provides for developing countries. Industrialization, when seen through the narrow prism of manufacturing, therefore already looks improbable, if not impossible.

End of manufacturing as we know it

Emerging economies will be stuck with the traditional disadvantages of weak governance, cumbersome bureaucracies, quality and competence issues, fragile supply chains and a lack of skilled labour, even as they compete with machines and machine learning. Large labour pools are unlikely to provide any competitive advantage unless the labour force is reoriented, retrained and reimagined.

That’s going to make things difficult for India. Even though the country might benefit in the next 5-10 years from weak energy prices, industries exiting China, and inflows of foreign direct investment, it’s going to get harder to compete in manufacturing.

A case in point is the relocation of textile and garment production to the developed world. This was previously a sector most sensitive to cheap labour and therefore the first to be off-shored to the developing world. Today, it’s now returning to robotized factories in the US and the EU.

Indeed, it can be argued that with 3D printing and artificial intelligence, manufacturing as we know it may be coming to an end. Whatever form that manufacturing takes in the future, we can safely assume that it will based on high competencies in design, material science, resource management, super-computing, and precision engineering, all delivered by machines or sets of machines and requiring minimal labour.

Third, energy derived from fossil fuels may no longer be a given in any new industrialization effort. In a “climate-aware” world, it is apparent that there is a willingness to compromise with low incomes and poverty but little appetite to allow the developing world too much carbon space.

Fourth, global finance is increasingly agnostic, if not outright unfriendly, to the idea of traditional industrial growth. An IMF working paper suggests that “investors such as pension funds, insurance companies and mutual funds, and other investors such as sovereign wealth funds, hold around $100 trillion in assets under management.” This study estimates the infrastructure-funding gap between $1 trillion and $1.5 trillion each year, with the deficit significantly higher in developing countries. This paper and other studies have argued that this stems from a lack of financial instruments and a lack of appetite to invest in the industrial ventures of the past. Global capital and even local commercial capital in developing countries are being crowded away from investing in infrastructure.

Fifth, innovation itself has a spatial flaw. Discovery and invention are still the preserve of the Atlantic system while consumption and absorption are witnessing greater uptake in the Asian economies and in Africa. This new innovation divide, when combined with restrictive intellectual property regimes set up for the benefit of Western corporations, is bad news for developing countries. It’s likely that they will merely transform from being labour sources, marginal consumers, and resource-rich spaces to markets for innovation, sources for the data that drives the process, and part of a value chain where the largest wealth will still be created in the old economies.

This will ensure that their purchasing power remains low. Without large-scale, export-driven manufacturing, and without the revenues that would accrue to the owners of technology, there is a high possibility that developing countries that are not yet middle-income will remain trapped in a low-productivity, low-wage spiral.

The better way forward

So what should India do, given these five trends in global economic development?

First, India must get its own house in order. One-fifth of humanity is a market and a productive base in and of itself. But for the country to take advantage of its size, it must sign a free trade deal with itself.

Currently the 30-odd states and union territories that comprise the Republic of India are nominally a single economy. But in reality they’re less integrated than the economies of Europe. India’s states and union territories often have sharply different regulations and incompatible tax systems. As a result, trading across state boundaries is a nightmare and India really needs to focus on creating a trade association among these regions.

As a single tax, the GST is the first step in the right direction as it will allow new manufacturing units set up under the “Make in India” programme to have access to multiple markets.

And there are other government policies that also fit well with this endeavour: Digital India knits markets together, allowing for vast e-commerce and business-to-business opportunities, and Start-up India gives new entrepreneurs access to the finance and incubation required for them to take advantage of these opportunities.

Secondly, the attitude towards informal employment needs to change. It’s time to stop thinking of the informal economy as a bad thing, particularly since an overwhelmingly large number of Indian workers (over 90% by some estimates) are currently employed in the sector. The government should instead focus on creating support systems that will allow for India’s vast informal workforce to become more secure, productive, and, where feasible, more entrepreneurial.

Finally, India must think big. It must consider the possibility that it will have to leapfrog over the industrialisation process itself. It must imagine itself becoming the epicentre of the robotics and AI world, much like Japan become the hub for electronics, Germany for automobiles, and China for manufacturing everything at a tenth of the cost.

To prosper in a world that is suffering from the absence of growth and the disruption of old models, India must strive to become the principal stakeholder of the digital revolution—and ensure that its teeming millions partake in it gainfully, even if informally.

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The India Economic Summit is taking place in New Delhi, India, from 6-7 October.