The Need for a New Foreign Trade Policy – Explained, pointwise

Introduction

Various aspects of globalization are being rethought all over the world, and this includes rethinking trade policy. India is also going through this process. The Ministry of Commerce is working on a new trade policy to be unveiled in September 2022. The Government may roll out a new foreign trade policy (FTP) of a shorter term of two-three years in a bid to keep pace with the fast-evolving scenarios in international trade. These have been triggered by recent disruptions, such as the pandemic and the Russia-Ukraine war.

What is a Foreign Trade Policy (FTP)?

An FTP is an elaborate policy guideline and strategy to promote the export of goods and services, usually with a duration of 5 years. It sets out the regulations for cross-border trade and reveals the Government’s position on a host of crucial policy variables such as technology flow, intangibles, and so on.

Revisited and notified every five years since the 1991 economic reforms, the FTP has been the guiding beacon for all stakeholders. The last FTP was notified in 2015, and the new policy was due in April 2020. However, it has been periodically extended since then, and the new policy is expected by September 2022.

What is the current status of India’s Foreign Trade?

India achieved highest good exports in 2021-22 at US$ 419.7 billion. However, there was a significant jump in the imports, which also recorded their highest level ever at US$ 611.9 billion. The trade deficit stood at US$ 192.2 billion.

India has run a consistent Trade deficit in Merchandise Trade since 1991. The deficit reached highest level in 2021-22 at US$ 192 billion (18.6% of total trade (Exports + Imports). However, in % terms, trade deficit was worse in 2008-09 (US$ 118.4 billion, 24.2% of trade) and 2012-12 (US$ 190.3 billion, 24.1% of trade).

The trend is similar in 2022-23 so far. For Q1  FY2022-23 (first quarter, April – June 2022), the exports were US$ 119 billion, imports US$ 189.8 billion and trade deficit at US$ 70.8 billion.

India’s share in world exports of goods had been declining before the reforms and had fallen to 0.5% in 1990. It has improved in the post-reforms period to touch 0.7% in 2000 and 1.8% in 2021.

What is the need to formulate a new Foreign Trade Policy?

First, a new policy is desired in consonance with the altered nature of international trade especially after the introduction of Global Value Chains (GVCs). India hasn’t been able to truly leverage the potential of GVCs in comparison to China and other East Asian neighbors.

Under this, the multiple components of a typical export product are produced by different companies, often based in developed countries but offshoring production to locations in deloping countries based on the competitiveness of that location. The iPhone, for example, has 178 components that are sourced from 200 different suppliers across 26 countries.

Further, the onset of the pandemic followed by the Russia-Ukraine Crisis has created opportunities for India to boost its exports in fellow countries. For instance, Pandemic made countries adopt a China plus one policy that provides an opportunity to boost Indian exports.

Second, a revamped policy is desired to clarify the country’s position and alignment with flagship programmes like ‘Local for Global’ and PLI (Production linked incentive) schemes.

Third, India is in the process of concluding critical Free Trade Agreements (FTAs) with the U.K, Australia and Canada that warrants a revamped policy for leveraging the benefits of FTAs.

Fourth, the surge in input and fuel costs are hitting the bottom lines of MSMEs. There’s a rise in prices of raw materials such as steel, and plastics along with a shortage of shipping containers and labour, making matters worse. MSMEs are finding it difficult to take full advantage of the increase in demand and hope the new FTP will ease their woes.

Fifth, various export incentive schemes had to be phased out after India faced challenges at the World Trade Organization (WTO) over the same. These need to be reintroduced in compliance with the WTO norms e.g., India discontinued the MEIS scheme, which was the incentivisation scheme and introduced duty neutralisation rates under the Remission of Duties and Taxes on Exportable Products (RoDTEP). It will refund embedded duties and taxes not refunded earlier, such as fuel, stamp and electricity duty.

Sixth, some export-oriented businesses have been adversely impacted by certain ad hoc, mistimed, and contradictory changes to the Foreign Trade Policy, 2015. 

The 2015 FTP incentivised exports by issuing duty-credit scrips directly in proportion to exports. However, the government limited the maximum export incentives to INR 20 million for goods and services in 2020 and 2021 respectively without reason. The changes for service incentives were retrospectively notified in September 2021 to be applied from April 2019. Similarly, earlier there was a 3% export incentive on agriculture implements like tractors, which has been reduced to 0.7%.

What factors impair the realization of benefits of the FTP?

First, due to inadequate upgraded export infrastructure such as ports, warehouses and supply chains, the average turnaround time for ships in India is about 3 days while the world average is 24 hours.

Second, the tariffs imposed on multiple products are much higher than China and other East Asian neighbors. India hasn’t been able to extract a big chunk of GVCs in comparison to its peers.

Third, India’s bound tariffs are much higher than tariffs that are actually applied. The bound tariff is the maximum tariff level for a given commodity. (e.g., the bound tariff on import of steel may be 10% but the actual rate applied by India may be 5%). India’s trade negotiators tend to view this as an advantage because it gives ‘policy space’ to raise duties if required. But, it also enhances uncertainty because investors can no longer be sure whether duties on their inputs will suddenly be raised.

Fourth, many experts believe that India’s decision to opt out of the Regional Comprehensive Economic Partnership (RCEP), after several years of negotiation, was a missed opportunity. This would have given better integration with the East and SouthEast Asia region. Further, China has applied to join the Comprehensive and Progressive Agreement for Transpacific Partnership, which is the new incarnation of the old Trans-Pacific Partnership.

What should the new Foreign Trade Policy contain?

It must revert to the earlier trend of gradually reducing customs duties to levels prevailing in East Asia.

It must keep access to imports open especially in important areas where technology is changing rapidly (like green energy).

It must give clarity on the incentives and benefits available for e-commerce exports. This is desired as the e-commerce sector is growing enormously.

India is dependent on imports for a range of products, so the new trade policy should boost domestic manufacturing and should also suggest ways to make it competitive.

One of the key highlights of the new FTP would be the ‘Districts as Export Hubs’ scheme. Under the scheme, the focus will be on 50 districts that have products with huge export potential. It will be a centrally sponsored scheme, with the majority contribution by the Centre and the remaining by the states. Additionally, every scheme should be compliant to WTO norms.

What steps should be taken to promote exports?

First, the Government must invest in upgrading export infrastructure such as ports, warehouses, quality testing and certification centers to stay ahead of technology-advanced countries. For instance, China has planned to spend US$ 1.4 trillion on infrastructure between 2019 and 2023.

Second, India also needs to adopt modern trade practices that can be implemented through the digitisation of export processes. This will save both time and cost.

Third, the Government must help MSMEs planning to tap the export potential in existing tariff lines and provide policy support to raise the number of exporting MSMEs and increase MSME exports by 50% in 2022-23.

Fourth, the Indo-Pacific Economic Framework (IPEF) agreement offers a new opportunity. The trade pillar in the IPEF does not, as of now, deal with market access. India should work to push the IPEF towards a trade agreement.

Fifth, Digital trade, e-commerce and digital payments will play a major role in global integration in the years ahead. India has substantial strengths in this area, but there seems to be ambivalence about entering negotiations on it. India should shed this hesitancy and be actively involved in the development of global rules acceptable to all.

Sixth, a short-term FTP shall be a good move because the general elections are just two years away. The new government (new or the existing one) should be given the mandate to announce a new policy, as it may have a different focus area or agenda.

Conclusion

The new FTP should work in a phased manner to address export constraints. It should review the regulatory and operational framework to reduce the transit costs and create a low-cost operating environment through developed logistics and utility infrastructure.

Syllabus: GS III, Indian Economy and Issues related to Growth and Development.

Source: The Hindu BusinessLine, Mint, ORF, Business Today, Business Standard