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Opportunities for Bringing Russian and Indian Businesses Closer Together

23 Apr 2015 BRICS

Russias BRICS presidency in 2015 encourages reflection not only on the political significance of this association, but on its economic substance and potential as well. In this respect, we need to consider the possibilities and prospects of economic integration among the associations member countries that would be able to create a more attractive business environment.

One such condition is the bilateral work being done to bring the economic systems of the individual member-states closer to one another. The convergence of economies could provide an opportunity for this, inter alia, within the framework of other efforts to establish a free trade area (FTA) with India, which was proposed by the Indian Ministry of External Affairs in March 2013. What makes the Indian market attractive for domestic Russian businesses, and what benefits can the Russian private sector gain from the convergence of the two economies?

Microbarometers of cooperation

We can single out a number of economic incentives that encourage countries to participate in the integration process. First, these processes make it possible to lift tariff and non-tariff barriers to international trade which hamper the efficient use of resources. The second incentive is related to redistribution capabilities that the parties acquire due to the division of labor and industrial cooperation. Macroeconomic barometers, such as GDP and volumes of trade and investment allow us to estimate how far the Indian and Russian economies have advanced in terms of bilateral integration.

The summarized index for evaluating interstate differences is GDI (gross national income) per capita. Since 1991, India has been in the top ten countries of the world in terms of economic growth. Despite the decline in this figure to 4.4% in 2014, the Indian economy has shown accelerated development in its service industry, as well as a recovery in its agriculture sector. Moreover, economic growth in 2015 is expected to reach 6.2% due to an increase in industrial production and new investment projects. As a result, the OECD forecasts that in 2031-2050, India will demonstrate the world's highest average annual level of productivity growth, namely 3.8%.

Of course, this summarized index should be adjusted using indicators such as innovation and social development that characterize the GDP in terms of its quality. The innovation factor may be assessed through R&D funding, while social development by final consumption expenditure.

Final consumption expenditure in India has increased significantly following the global economic and financial crisis in 2008-2009, and in 2013, it surpassed the corresponding figure for Russia (819.31 billion dollars).

Despite the similarity of indicators demonstrating the share of R&D funding in GDP (in 2014, this figure was 1.5% in Russia and 0.9% in India), the trends of funding research and development in the two countries are on different paths. Before 2008, R&D spending in the BRICS countries was higher than in other countries with similar incomes. Since 2008, India has dramatically increased its investment in the development of science, while Russia has significantly reduced relevant expenditures down to the level of 1981. Due to these changes, the innovative systems of both countries are now more than 60% dependent on public funding.

As far as investment cooperation is concerned, before the liberalization of Indias investment policy in 1991, many sectors of the Indian economy (in particular, telecommunications, banking, insurance) were closed to foreign investors. Currently, the state is reducing its participation in a number of industries, while sectors such as agriculture, mining, oil refining, management consulting, pharmaceuticals, and steel production have become completely open to foreigners.

The modernization of investment regulation has had a beneficial impact on the Russian-Indian investment cooperation. In 2012, the volume of Russia-India investment projects in energy, metallurgy, aerospace, pharmaceuticals, petrochemicals and telecommunications amounted to about $537 million dollars. The package of contracts signed by the parties in December 2014 opens up new opportunities for domestic corporations in the field of nuclear energy, in the aircraft industry, as well as in the extraction of commercial minerals (hydrocarbons and precious stones).

Despite the size of Indias economy, the countrys share in trade with Russia is insignificant. Accordingly, the share of our country in Indias exports and imports does not exceed 1%. The structure of Russia's trade with India as a whole has not changed over the last ten years. Russia continues to export precious stones, engines, and nickel and to import products from the pharmaceutical industry, transmission equipment, and flat-rolled products.

Indias current account and budget deficits account for the weakness of the countrys position in trade. Nevertheless, we note the steady growth of bilateral trade. In 2013, Russian exports to India amounted to 6.9 billion dollars, while Indian imports to Russia were a little over 3 billion dollars.

These macroeconomic indicators do not underlie the importance of trade and economic cooperation and the closeness of the economic systems of Russia and India. The opportunities for integration and for the facilitated access of Russian business to Indias markets appear to be within the realm of institutional convergence, which can contribute, inter alia, to the emergence of new forms of production.

Institutional convergence

Institutional convergence reflects the quality and speed of drawing economic systems together, and is determined by such factors as the regulation of competition, public procurement procedures, and protection of intellectual property rights, as well as the following of customs procedures and of technical requirements. These are the factors that open up opportunities for Russia to enter the Indian markets.

Yury Zaytsev

PhD in Economics, Senior Research Fellow at the Institute of Applied Economic Studies, Presidential Russian Academy of National Economy and Public Administration

Source: RIAC

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