New terms of trade

Source: The post is based on an article “New Terms of Trade” published in the Business Standard on 8^th August 2022.

Syllabus: GS 3 Effects of Liberalization on the Economy, Changes in Industrial Policy and their Effects on Industrial Growth.

Relevance: External Sector; Foreign Trade Policy, Free Trade Agreements

News: In the last fiscal year, India’s merchandise export rose by over 40% in the last fiscal year. However, India’s merchandise export growth has seen a moderation in recent.

Causes of the recent moderation

(1) The surge in India’s merchandise export was driven by global commodity prices. Therefore, it was not going to sustain for a longer period of time.

(2) Moderation is partly because of the imposition of export restrictions to contain domestic inflation.

(3) In recent years, India’s participation in the global value chain has declined. Consequentially, it has affected exports.

(4) The World Bank data shows that India’s exports of goods and services as a percentage of gross domestic product steadily declined from a high of 25.4% in 2013 to 18.7% in 2020.

Importance of attaining and maintaining higher levels of India’s merchandise exports

High Merchandise export is an important driver for attaining higher sustainable economic growth.

Some measures were taken by the government – the government restructured the department of commerce.

(1) Now, the Directorate General of Foreign Trade (DGFT) will look at regulations and the promotion of foreign trade. It will not be involved in the making of the foreign trade policy.

(2) Further, the trade policy division has been bifurcated to handle bilateral trade negotiations and multilateral trade negotiations. This will help in providing focused attention to negotiations on free-trade agreements that India is currently engaged in with a number of countries.

However, the reorganization of the commerce department cannot solve the problem. Instead, it should be seen as a starting point.

Other Potential areas for interventions

In addition, the government must bring domain experts into the system of the department of commerce.

India needs to build institutional capacity in the trade policy establishment. This will help India to take a practical position in trade negotiations. For example, India’s decision to not join the Regional Comprehensive Economic Partnership (RCEP) has been severely criticized in various quarters. India lost an opportunity to become part of the most dynamic trading bloc in the world.

India needs to integrate with global value chains (GVC) to boost its merchandise trade sustainably. For example, If India remains out of an RCEP-like trade agreement and increases tariffs to protect domestic businesses, then it would be difficult for India to become an integral part of any value chain.

The Way Forward

India should build on the momentum that it has gained after the pandemic and sustains a reasonable rate of export growth over the medium term.

The government should use the restructuring of the commerce department to build institutional strength.