The Hindu Business Line : New Foreign Trade Policy

In a clear signal that economic reforms are back on track, the thrust of the New Foreign Trade Policy is on export promotion, moving away from quantitative restrictions and improving competitiveness of industry to meet global market requirements. But will there be real change on the ground in terms of quick and seamless implementation, ask Pravakar Sahoo and Geethanjali Nataraj.

THE first New Foreign Trade Policy (NFTP) 2004-2009 is undoubtedly a novel attempt to boost India's external sector and double its share in world exports from the current 0.82 per cent to nearly 2 per cent by 2010. It not only provides the much-needed boost to Indian exporters but also re-affirms the fact that trade policy reforms constitutes the core of the country's economic reforms.

Economic policy in India is increasingly driven by trade policy reforms which, over the last decade, have provided an export-friendly environment with simplified procedures conducive to enhancing export performance. The focus of these reforms has been on liberalisation, transparency and globalisation.

The thrust of the trade policy, as has been that of the Exim Policy, is on export promotion activity, moving away from quantitative restrictions and improving competitiveness of industry to meet global market requirements. Over the years, significant changes in trade policy have helped strengthen the export production base, remove procedural irritants and facilitate input availability.

Steps have also been taken to promote exports through multilateral and bilateral initiatives, identification of thrust areas and focus regions. In this backdrop, the New Foreign Trade Policy's aim of further enhancing exports is indeed commendable. In the short run, it aims to achieve the target of $80 billion worth of merchandise exports by 2007. Another welcome feature is the sectoral thrust to various sectors with potential for growth.

The NFTP, in the place of the five-year Exim Policy, is expected to give a major boost and strategic direction to the manufacturing sector and exports. The NTFP aims to increase employment opportunities, especially in semi-urban and rural areas, with a special focus and initiatives for agriculture, handlooms and handicrafts, gems and jewellery and leather.

This is undoubtedly a welcome measure considering that the leather, handicrafts and handloom sectors needed a major push to help them survive in the globalised environment. Exports of these products are under major threat due to the high technical standards set by the EU. Thus, the new measures announced in the NFTP, wherein specific funds have been allocated to the handloom sector, under the Market Access Initiative Scheme and the Market Development Assistance Scheme will go a long way in promoting handloom exports.

Another notable feature of the new policy is the proposal to set up Special Economic Zones (SEZs), especially for handicrafts. The SEZs for handicrafts will procure products from the cottage sector and do the finishing for exports.

An important objective of trade policy reforms, in view of India's commitment to the WTO has been the removal of quantitative restrictions and reducing tariffs. Continuing with this objective, the NTFP has further removed quantitative restrictions from 29 items.

Further, the Commerce Minister has relaxed the norms for import of capital goods by removing the restrictions on import of machinery that is over 10 years old. In fact for the first time, equal thrust has been given to both export promotion and import liberalisation in the Foreign Trade Policy.

Another important feature of the NFTP is its re-emphasises of the objectives laid down in the Medium Term Export Strategy (MTES 2002-2007) of the NDA government, announced in 2002. The MTES had identified 14 thrust areas of exports from the country. These comprise tea, cereals, processed foods, marine products, iron-ore, leather manufactures, handicrafts and jewellery, capital goods and consumer durables, electronic goods and computer software, basic chemicals, fabrics, readymade garments, woollen fabrics and knitwear.

The Foreign Trade Policy has announced several measures for the promotion of these sectors. Finally, there seems to be some synergy between the various policies announced by the government, including those in the Budget.

For instance, as mentioned in the thrust export product list, agro-processing is considered a sector with immense potential for exports, given our surplus production of a variety of fruits and vegetables. But this sector needs huge investment and encouragement.

Given this requirement, the new NTFP will allow duty-free import of capital goods for agriculture exporters and will permit 100 per cent foreign direct investment for free trade zones. The policy has a special package for agriculture to boost exports, and exempts all goods and services exported from service tax.

The policy includes two new schemes — `New Target Plus' and `Served for India' — to boost exports. It liberalises import of seeds and plantation material. The policy also provides for 100 per cent FDI to establish free trade zones and warehousing zones.

A new scheme, `Vishesh Krishi Upaj Yojana', has been announced as part of the five-year foreign trade policy to promote the export of fruits, vegetables, flowers, minor forest produce and their value-added products.

In a developing country like India, services constitute one of the fastest growing sectors, growing at a rate of more than 8 per cent and contributing to nearly 50 per cent of India's GDP.

According to a forecast by Nasscom, India's service sector exports are likely to touch $35 billion by 2007. If China is considered to be the world's manufacturing powerhouse, the same status is given to India in the service sector. Given this backdrop, the FTP has given a further leg up to the service sector.

The major initiatives in this regard are that all goods and services exported will be exempt from service tax and that an export promotion council for services has announced.

A major area of debate in recent times has been FDI policy. It is a well-known fact that, compared to its counterparts in East Asia and South-East Asia, India has not been able to attract substantial FDI.

Empirical studies show that there is a close link between FDI and exports. In China, FDI accounts for nearly 50 per cent of China's manufactured exports, whereas in India, it is only 8 per cent.

In this context, the NFTP has been quite disappointing, though it has announced one or two useful measures, such as 100 per cent FDI to be allowed in free trade and warehousing zones. But a more aggressive push to FDI policy would have helped the industry achieve higher growth rates.

However, the new policy has certainly made an earnest effort to integrate the existing Exim policy for five years into a whole document, giving a new thrust to India's foreign trade.

It has laid a roadmap for doubling India's share in world trade but the important question is whether all the measures announced by the policy will be implemented in the right earnest.

India's export-import policies have always been plagued by procedural hassles, delays and red-tapism. More often than not, due to the long gestation period between the announcement of the policy measure and its implementation, the incentive and motive for which the measure is announced is lost and exporters are left in the lurch.

One can only hope that this policy will be implemented quickly and efficiently as it is time India started to make a mark on world markets.

India is always compared to China on the trade front. But one always wonders whether the comparison is fair. Can China ever be a benchmark for India?

The Foreign Trade Policy has certainly given hope to the industry, exporters, policy-makers and the common man that India can certainly make a dent in world trade and increase its share in world exports to 2 per cent.

In the era of globalisation and marketisation, there is no substitute to export-led growth. The Foreign Trade Policy, realising this, has certainly given the right push and direction to India's foreign trade. It is a welcome relief to many that economic reforms are back on track and in full swing.

(The authors are on the faculty of the Indian Institute of Foreign Trade, New Delhi.)

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