The current climate is fraught with uncertainty, slowing demand and
exporting conflicts. The new Foreign Trade Policy should focus on measures
critical for India’s growth
India’s trade policy faces multidimensional challenges in today’s world of
uncertainty, protectionism, falling global aggregate demand, elimination of
export programmes and, perhaps the more important reason, domestic
preoccupations.
Recognising the potential implications of these challenges, the Department
of Commerce is working on the new Foreign Trade Policy and the task for
framing the new trade policy is likely to be much more challenging, given the
current developments in the international trading system. Broadly, India’s
trade policy challenges can be categorised as domestic and external
challenges
Domestic challenges
At the domestic level, the greatest challenge to the development of a robust
trade policy in India is the poorly developed manufacturing sector. It is a
well-recognised fact that India has not been able to develop a strong
manufacturing sector despite two decades of economic and trade
liberalisation. A large number of structural issues relating to labour reforms,
limited availability of power, factory and goods market reforms, low
productivity, and lack of technology are responsible for a weak
manufacturing sector.
One of major challenges for India’s trade-policy makers is to deal with its
export promotion programme, which acts as a catalyst for India’s exports.
There are clear signals that India is likely to lose its trade dispute on the
export promotion programme against the US. This means that India has to
overhaul schemes such as the Merchandise Export Programme (MEIS),
Export Promotion for Capital Goods (EPCG) and Interest Subvention
Scheme so as to make them compatible with the WTO rules.
The elimination of these schemes will have detrimental effects on the export
competitiveness of a large number of MSMEs, who extensively use these
incentives to offset high trade transaction and logistics costs.
For instance, imported capital-intensive goods under the EPCG scheme help
the industry improve productivity and competitiveness, but its termination
will adversely impact such imports, which are critical to enhance high-value
added manufactured exports.
The Department of Commerce is working a new scheme called the Rebate of
Duties, Taxes and Levies (RoDTL). This scheme is already being
implemented in the textile and clothing sector but it has received a sharp
criticism due to its bias towards specific components of textile and clothing
value chains. The benefits of scheme are not evenly distributed across the
value chain. This scheme will cause serious problems for sectors such as
engineering, where value chains are highly dispersed and involve a wide
variety of players with complex power dynamics.
External pressures
Challenges for India’s trade policy are increasing manifold at the multilateral
level due to increased trade protectionism, dispute settlement body and the
Regional Comprehensive Economic Partnership (RCEP) negotiations.
The immediate crisis at the WTO is to address the issue of appointment of
judges at the Appellate Body, held up by the US. Further, developed
countries have started negotiations in new areas such as e-commerce,
investment facilitation, MSME, gender and trade. They are seeking greater
disciplines in new emerging areas at the WTO.
The US has terminated its Generalised System of Preference which provides
duty-free market access to a large number of MSME products. It is adversely
affecting India’s exports worth $5.6 billion to the US market.
The next biggest challenge is the RCEP. The proposed tariff reduction
commitments in the RCEP negotiations are well beyond the demand of the
industry. As per media reports, India is likely to liberalise its 80 per cent
tariff lines for China, Australia and New Zealand. This will far reaching
implications to Indian domestic industry.
Need for coherence
Given these challenges, it is extremely important for Indian policymakers to
focus on making trade policy much more coherent at both domestic and
external fronts. A very good starting point would be to undertake bold
reforms in three important areas.
First, it is important to promote “inner consistency and harmony” between
objectives of policy and its implementation strategies. This requires a wellthought
engagement in international trading arrangements.
India’s stance at the WTO and with FTAs must be shaped by domestic
priorities that are critical for growth, employment and poverty reduction.
This requires an active participation in areas of international and regional
trade negotiations where India has strong economic interest, as well as in
those areas where rules will have an effect on the domestic regulatory space.
Second, our trade policy is largely conducted at an aggregate level and fails
to capture critical factors that shape dynamic comparative cost advantage of
firms. Therefore, it is important that trade policy analysis should focus on
firms rather than sectors. This requires dedicated efforts on collecting firmlevel
data to understand policy and operational issues of exporting firms so
that our trade policy helps firms connect with value-chain networks.
But what is more important is that our trade-policy makers understand the
dynamic linkages between upstream and downstream sectors. This is vital to
understand how a policy decision that supports the upstream sector could
actually hurt the downstream. A dynamic thinking is a prerequisite to
analyse the implication of backward and forward linkages to our global
export competitiveness.
Finally, there is also urgent need to reform our trade and related institutions
to enhance their participation in policymaking and negotiations. For this,
trade regulatory bodies, promotion councils and standards-related
institutions should work together to create a dynamic database of imports
and exports, so that information can be gathered at the product and market
level to allow for a well-informed decision for trade negotiations. This will
certainly help trade-policy makers leverage the benefits of global trade for
firm-level productivity, competitiveness and job creation.
Source: The Hindu Business Line, India Thursday, 24 October 2019