India must reduce tariffs and ease FDI restrictions, says World Bank economist Franziska Ohnsorge

With the rapid reshaping of global supply chains, India, with its sophisticated industrial base and skilled labour force, is poised to capitalise on these shifts, but must reduce tariffs and ease foreign direct investment (FDI) restrictions to unlock its full potential, said Franziska Ohnsorge, World Bank’s chief economist for South Asia.

Speaking to Mint, Ohnsorge said South Asia, including India, is behind most emerging economies in portfolio flows, loans from global banks, with average import tariffs higher than the global average, and several restrictions on FDI.

"India's average tariff is well above 15%, placing it in the top quartile globally," she said, adding that the country can boost its Logistics Performance Index (LPI) by expediting customs clearance through full digitisation.

According to the World Bank's 2023 LPI, India ranked 38 out of 139 countries, a six-place improvement from 2018 and a 16-place improvement from 2014.

Global supply chain restructuring

Interestingly, India stands as a key beneficiary of the West’s push to diversify supply chains beyond China, as global companies seek alternatives to reduce over-reliance on the world's second-largest economy.

The "China Plus One" strategy, increasingly adopted by Western businesses and governments, aims to shift portions of manufacturing and sourcing to other countries.

Rising labour costs in China, escalating trade tensions, and the supply chain disruptions triggered by the COVID-19 pandemic have accelerated this trend, offering India an opportunity to position itself as a competitive alternative manufacturing hub.

Also read: India has to move fast to break into global supply chains: Jagdish Bhagwati

Opportunities for India in the post-pandemic era

The latest World Bank report highlighted that most South Asian countries, including India, are among the least open to global trade and investment compared to other emerging market and developing economies (EMDEs). 

Ohnsorge warned that without increased openness to global trade and foreign investment, India could miss a rare opportunity to accelerate its growth and development in the current global landscape.

"This is a very small window of opportunity where all these global supply chains are being reshaped. But if the region is so close it's very hard to take advantage of that opportunity," Ohnsorge said.

Global trade remains weak post-pandemic and rapid growth rates of the past are unlikely to be replicated, she added. 

She said India can still capitalise on opportunities due to its small market share.

"It may be difficult to replicate a South Korea that really grew on trade. That doesn't mean that India can't take advantage of it because it comes from such a small market share," she said.

"India is in a good position to compete with the others and increase its market share from what it is right now," she added.

In its October 2024, South Asia Development Update: Women, Jobs, and Growth, the World Bank expects the region to remain the fastest growing among emerging market and developing economies (EMDEs).

However, the Washington DC-headquartered international financial organisation has warned several risks could upend the generally promising outlook, including extreme weather events, social unrest, and policy missteps, such as reform delays.

The World Bank noted that while South Asian countries possess significant untapped potential that could enhance productivity growth and employment while addressing climate changes, measures to accelerate job creation, remove barriers to women’s participation, and promote gender equality should be addressed.

Also read: India faces ‘middle income trap’, may take over 75 years to reach one-quarter of US income per capita, says World Bank

The report further suggested that lowering the cost of doing business could enable these nations to better leverage their significant remittance inflows for economic growth.

"With such restrictive policies in such a large market with so much potential, even just a little opening might make a big difference," Ohnsorge added.

Speaking on the conflict in West Asia and its impact on India, Ohnsorge said while oil prices have risen, it has remained close to the World Bank's baseline assumption, of just under $80 per barrel.

"So far, there is no reason to revise that South Asia forecast, including India," she added.

During September, the World Bank revised its FY25 growth forecast for India to 7%, up from its previous estimate of 6.6%, stating that the upgrade reflects the Indian government's continued capital expenditure on infrastructure, rise in household investments in real estate, better-than-expected monsoon and agricultural output, and an increase in private consumption.