India’s New Foreign Trade Policy (FTP) and its significance – Explained, pointwise

Introduction

The new Foreign Trade Policy (FTP) document for India was just released. It focuses on improving certain processes and procedures to increase exports and lower transaction costs. The new FTP also emphasises a move towards processes that make trade easier and a focus on infrastructure for both manufacturing and services. However, there are some issues that must be addressed before deploying the new FTP.  

What are the salient features of India’s new FTP?

What is the significance of the new FTP? 

Shift from incentives to remissions: The new FTP marks a shift from industry-specific subsidies to trade facilitation processes, focusing on infrastructure for manufacturing and services.  

Compliance with WTO rules: The new FTP focuses on WTO-compliant export support schemes like RoDTEP, while incentives linked to level of exports are being phased out.  

E-commerce exports: The new FTP raises the consignment cap on e-commerce exports, but questions remain unanswered regarding the tariff treatment of such exports globally and data sharing principles.  

MSMEs and towns of excellence: The new FTP reduces transaction fees for MSMEs and creates towns of excellence to boost their manufacturing and agricultural activities.  

Overlooks structural changes post-Covid: The new FTP does not take into account the structural changes in the global export order post-Covid, and overlooks the structure of imports and the role of FTAs.  

What are the expected benefits of the new FTP?  

Boost in exports: The new FTP aims to promote exports by reducing transaction costs, enhancing trade facilitation processes, and offering remissions on duties and taxes on export products.

For example, RoDTEP scheme will help reduce the cost of exports and make Indian products more competitive in the global market.  

Encourage MSMEs: The reduction in transaction fees for MSMEs and the creation of towns of excellence will help MSMEs to expand their business and increase their exports. For example, with reduced transaction fees, MSMEs can invest more in product development and marketing.  

Facilitate decentralization of manufacturing and agriculture: The new FTP promotes a decentralized approach to manufacturing and agriculture with the principle of ‘one district, one product.’ This will help promote local products, create jobs, and reduce regional imbalances.

For example, the promotion of local handicrafts from a particular district can help to create employment opportunities and encourage the growth of the handicrafts sector in that region.  

Improving e-commerce exports: Raising the consignment cap on e-commerce exports will benefit small businesses and startups. For example, small businesses can take advantage of the new policy to reach a global audience through online marketplaces, leading to increased exports and growth of the e-commerce sector.  

Enhancing competitiveness: The new FTP aims to provide a level playing field for domestic businesses by phasing out industry-specific subsidies and focusing on infrastructure development. This will help improve the competitiveness of Indian businesses in the global market.

For example, the development of efficient ports and logistics infrastructure will help businesses reduce the cost of exporting and become more competitive.  

International compliance: The emphasis on WTO-compliant schemes like RoDTEP and elimination of industry-specific subsidies is expected to improve India’s standing in international trade.  

Universal focus on infrastructure: The shift towards a universal focus on infrastructure for manufacturing and services is expected to have long-term benefits.  

What are the challenges in implementing the new FTP?  

WTO compliance: India needs to ensure that all its export promotion schemes comply with WTO rules, as it has faced criticism and even lost disputes in the past.

For instance, the WTO struck down India’s export subsidy schemes last year, leading to a shift from ‘incentives’ to ‘remissions’ in the new FTP.  

Implementation and coordination: Implementation of the new FTP will require coordination between multiple stakeholders, including government agencies, industry bodies, and exporters.

For example, the effective implementation of RoDTEP scheme, the flagship export support scheme, will require coordination between the customs department and the commerce ministry.  

Infrastructure and logistics: India’s poor infrastructure and logistics have been a long-standing challenge for exporters, leading to higher transaction costs and delays.

For instance, the high cost of transportation and poor connectivity has led to perishable goods like vegetables and fruits getting spoiled in transit, hurting exports.  

Global trade dynamics: The global trade environment is constantly evolving, with geopolitical tensions and protectionist measures posing challenges for exporters.

For example, the ongoing trade war between the US and China has disrupted global supply chains, affecting Indian exporters who source raw materials or sell them to these countries.  

Digital infrastructure: With the rise of e-commerce and digital exports, India needs to improve its digital infrastructure to enable seamless online transactions and data sharing.

For instance, the new FTP raises the consignment cap on e-commerce exports, but questions remain about the tariff treatment of such exports globally and the principles of data sharing that underlie it.  

Structural Changes in Global Export Order: The FTP has not taken into account the structural changes in the global export order post-Covid, which could impact the effectiveness of the policy.

Lack of Focus on Imports: The new FTP has overlooked the structure of imports altogether, which could create imbalances in India’s trade balance.  

Limited Focus on Services Exports: The new FTP does not delve much into services exports, which are becoming increasingly important for India’s economy.  

What should be done? 

Incorporate macroeconomic analysis: The new FTP should include a SWOT analysis and macroeconomic analysis to provide a comprehensive view of the impact of the policy on the economy.  

Note: SWOT stands for Strengths, Weaknesses, Opportunities, and Threats. A SWOT analysis is a framework to help assess and understand the internal and external forces that may create opportunities or risks for an organization.  

Mainstreaming gender into the new FTP: Research by the World Trade Organisation (WTO) and World Bank has recently proven that trade and trade policy affect men and women differently — in terms of wages, consumption, welfare and in the quality of jobs created. Therefore, it is vital to include the intent and specific provisions for enabling women in the policies that have an impact on the speed and direction of the country’s trade growth.  

Focus on infrastructure: The new FTP should focus on creating a robust infrastructure for manufacturing and services, which will help in boosting exports. For instance, the government can invest in developing industrial parks, improving connectivity and logistics, and upgrading technology.  

Promotion of innovation: The new FTP should promote innovation in exports by providing incentives and support to exporters who are developing new products and technologies. For instance, the government can provide grants and tax incentives to start-ups and MSMEs involved in research and development.  

Need regular review: The new FTP should be reviewed regularly to assess its effectiveness and make necessary changes to ensure its objectives are met. For example, the government can conduct a periodic review of the impact of the RoDTEP scheme and make necessary modifications to improve its effectiveness.  

Address structural changes in the global export order: The new FTP should consider the structural changes that have occurred in the global export order post-Covid to ensure that it remains relevant.  

Need holistic approach: The government should adopt a more holistic approach while formulating the new FTP by taking into account the structural changes post-Covid in the global export order, the role of FTAs, and services exports. For example, the government can explore the possibility of negotiating more FTAs with countries that have a demand for Indian goods and services. 

Sources: The Hindu, Livemint (Article 1 and Article 2), Indian Express, The Hindu Business Line and Economic Times.

Syllabus: GS 3: Economic development – Changes in industrial policy and their effects on industrial growth.