Minister Sharma is well connected politically in the new government; he was part of his party’s “War Room” which spearheaded the party’s election campaign. The 56 year old lawyer has a long record of political involvement beginning with student and youth movements in the Congress party. In the previous government he served as Minister of External Affairs and as the party’s spokesman on key issues. He is an articulate speaker, but does not have extensive experience on economic issues. He is also in charge of attracting foreign direct investment at a time when India’s exports in April declined by 33 percent from April of last year, the seventh straight month of declines. Merchandise trade exports account for 15 percent of India’s GDP.
While the party is in a better position to push economic reforms, the situation in India is not more conducive to reforms than before the elections. The Congress Party partly won the election because it maintained its pro-farm policies that helped block the Doha talks. Sharma may have more operating room to provide market access in other industries. India’s national government budget deficit for last year was 10 percent of GDP compared to 6 percent the year before, which was double the government’s target of 3 percent. An estimated 63 million Indians will join the work force over the next five years.
The Congress Party can now rule without the support of the Communist Party which stymied past efforts to privatize government-run enterprises. The government may sell state-run companies to raise money for other programs, but even without the Communists, parts of the ruling coalition will oppose such efforts. India’s biggest problem is restrictive labor laws that limit employment opportunities in manufacturing that could adsorb workers who leave rural areas as farm policy reforms encouraged farmers to look for other jobs. Agriculture continues to account for 17 percent of GDP, but 60 percent of the labor force, while industry is 29 percent of GDP and 12 of the labor force. Industrial production growth was estimated at 4.8 percent in 2008. This relates back to Minister Sharma’s responsibilities to attract foreign investment. Political parties and unions resist reforms that would lessen their power over private economic activity and investors remain cautious as a result. Unemployment was estimated at 6.8 percent in 2008, a number which is almost certainly higher today.
The Trade Minister has already ventured into agricultural trade policy by attending the Cairns Group of 19 major agricultural trade countries, including Argentina, South Africa, Brazil, Australia, Canada, New Zealand and Chile, meeting in Bali, Indonesia chaired by Australian Trade Minister Simon Crean. India is not a member of the group, but Sharma was invited to attend as was USTR Ron Kirk and WTO Director-General Pascal Lamy. Kirk and Sharma had a telephone conversion on June 1 just after Sharma’s appointment to exchange views on the economic situation. Media reports indicate that Kirk and Sharma agreed on a rapid conclusion of the trade talks which will celebrate their eighth birthday in November. The Cairns Group, which accounts for 25 percent of world agricultural trade, committed itself to helping get the talks started again. Lamy was his usual optimistic self noting that 80 percent of the work had already been done on an agreement. He believes that Kirk and Sharma are engaged in a process that will lead to a deal sometime next year.
India and the U.S. will have other talks in the weeks ahead. Under Secretary of State for Political Affairs William Burns will begin a three-day visit to India on June 10 to review the long standing India-US partnership. Trade Minister Sharma will come to the U.S. on June 16 and 17 for talks about bilateral and multilateral trade.
Upon USTR Kirk’s return from Bali he issued a statement that said, in part, “While we should not discard the progress made to date in the Doha round, we must consider new ideas to get these talks moving again. It will take some creativity, and quiet and informal work by ministers and by senior officials. Some countries have already begun offering suggestions to adjust the process. The United States will continue to work with Cairns Group members and with all of our partners in the World Trade Organization to explore solutions, and ultimately to reach consensus on how to put the Doha negotiations on a path to success.”
A skeptic could rightly dismiss all of this talk as too much of a good time at a nice resort in Bali. Trade policy progress is not made in recessions, particularly one that is the worst in most policymaker’s direct memories. But the economic integration of the last 20 years has made trade more important. With India’s export of goods down by a third, that translates into 5 percent of GDP. Regaining that 5 percent may be easier through trade reforms than with more government spending. Foreign direct investment will be easier to attract if investors see India as part of the trade policy solution rather part of the problem. The new government has a mandate to govern until 2014. If they are ever going to make change, now is the time to do it. If they fail to do anything in the next two years, they will have to wait for another election cycle that pushes real change until sometime in 2015.
Kirk and Sharma also have the advantage of being able to chart a course together without the baggage of the past three years of talks that always took a step backward after taking one forward. The EU is about to undergo a Commission change, but Trade Minister Catherine Ashton may have more opportunity in the economic downturn when politicians are looking for a way out of no economic growth and high unemployment. If India and the U.S. can make progress, perhaps they can pull China into positive contributions to the WTO talks.