World Bank: India Needs Lower Tariffs and FDI Reforms to Tap Global Trade Boom

India is positioned to take advantage of the ongoing global supply chain reshuffling due to its advanced industrial base and skilled workforce. However, the country needs to reduce tariffs and ease foreign direct investment (FDI) restrictions to fully tap into its potential, said Franziska Ohnsorge, World Bank’s chief economist for South Asia.

Ohnsorge emphasized that South Asia, including India, lags behind other emerging economies in areas such as portfolio flows and loans from global banks. She pointed out that India's average import tariffs exceed 15%, placing the country among the highest globally. Reducing these tariffs and fully digitizing customs clearance could help improve India’s Logistics Performance Index (LPI).

India ranked 38th out of 139 countries in the World Bank's 2023 LPI, reflecting a notable improvement from previous years. This rise presents an opportunity for India, particularly as global companies seek alternatives to China in their supply chains.

Global Supply Chain Restructuring India is a key beneficiary of the growing trend among Western companies to diversify supply chains, which are often overly reliant on China. The "China Plus One" strategy aims to shift parts of manufacturing to other countries, including India. Factors like rising labor costs in China, trade tensions, and pandemic-driven supply chain disruptions have accelerated this movement, creating an opening for India to position itself as a competitive alternative manufacturing hub.

Opportunities in the Post-Pandemic Era A recent World Bank report underscored that South Asian countries, including India, are among the least open to global trade and investment when compared to other emerging markets. Ohnsorge cautioned that without increasing openness, India might miss a rare opportunity for growth and development in the shifting global economic landscape.

"This is a small window of opportunity where global supply chains are being reshaped," she said, adding that restrictive policies could hinder India from fully capitalizing on this moment.

While global trade remains weak post-pandemic, Ohnsorge highlighted that India’s small market share means it still has room to grow and compete. She noted that while replicating the success of nations like South Korea, which grew substantially through trade, may be difficult, India can still benefit from increasing its share in global markets.

Economic Outlook for South Asia In its October 2024 "South Asia Development Update: Women, Jobs, and Growth," the World Bank projected that the region will remain the fastest-growing among emerging markets. However, risks such as extreme weather, social unrest, and policy delays could derail this positive outlook.

The report called for measures to boost job creation, remove barriers to women’s participation in the workforce, and promote gender equality. Additionally, reducing the cost of doing business could help South Asian countries leverage remittance inflows to fuel economic growth.

India's Growth Forecast Despite global challenges, India’s growth outlook remains strong. The World Bank recently raised its growth forecast for India to 7% for FY25, up from 6.6%. This increase reflects continued government investment in infrastructure, higher household investments in real estate, better agricultural output due to favorable monsoons, and a rise in private consumption.

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