The Hindu Business Line : Foreign Trade Policy needs FDI flavour

It is time for the Foreign Trade Policy to adopt a new strategy in the wake of a dramatic change in the global trade pattern. The decade-old area- and product-specific trade matrix needs a re-look.

The Foreign Trade Policy Supplement for 2006-07 is the second within the five-year framework. The CommerceMinister, Mr Kamal Nath, is entitled to be smug about the excellent performance of India's exports. India's exports touched $101 billion in 2005-06, rising from $64 billion in 2003-04, with an annual average growth of 25 per cent. Given that exports account for 12 per cent of GDP and are growing three times more than the average GDP growth, the incremental contribution of the former to the latter is almost one-third.

The focus of the FTP is export promotion. The export strategy is based on an area- and product-specific trade matrix, which was adopted in 1995. But time has come for looking at a new strategy in the wake of a dramatic change in the global trading pattern. There has been since the end of the 1990s a shift in world exports, from traditional products such as textiles, clothing, food and chemicals to high-end products such as IT, automobile and intermediatesIn this context, area- and product-specific export strategies and putting the onus on small and medium scale enterprises do not augur well for exports in the long run.

Thus, China, which was never a focus area in the 1995 trade matrix, emerged the third major destination for India's exports in 2004-05, and petroleum products the second key item. The euphoria over the $101-billion export in 2005-06 is ephemeral. It is just one-fifth of China's export, while India's GDP growth is one percentage point lower than China.

China's role in world trade

The driving force for the growth in world trade was the US-China trade. The incremental contribution of the US-China trade accounted for 21 per cent of the increase in global imports.

In China's export basket, technology-oriented goods such as electrical machinery, electronic and power generating equipment outpaced traditional items such as apparels, toys and light engineering. They accounted for 41 per cent of China's global exports in 2004. China achieved the world's highest growth rate in exports of integrated circuits and electronic components during 2000-2004.

The US was the main destination for China's exports. Over one-third of China's exports went to the US in 2004.The major items of its exports were power generating equipment and electrical machinery and electronic goods. How has China achieved this global dominance in the export of technology-oriented goods from traditional items such as garments, toys, leather and light engineering goods within just five years?

FDI-induced China's trade

It was not China's domestic enterprises that catalysed the boom in exports of tech-oriented goods. Foreign Direct Investment-led enterprises are the major contributors to China's exports of tech-oriented goods. FDI-led corporates accounted for 52 per cent of China's exports. Popular Japanese branded cameras, TV sets, music systems are all produced in China for the world. China has become Korea's hub for electronic components.

How has China attracted foreign investors to accelerate its exports, while India has failed? The fundamental reason for this situation is that China offers a reliable workshop for the foreign enterprises; India is failing to do so.Backed by strong infrastructure, China offers various fiscal incentives, besides cheap labour. Export is listed in the "Encouraged Foreign Investment Industries".

Foreign investors in export-oriented industries are encouraged to import equipment duty free and without payment of VAT as actual users. Foreign investors are also permitted to import equipment and parts duty-free and without payment of VAT as actual users if they are not available within the country. All this led foreign entrepreneurs to shift their production base to ChinaSuch practices were deployed by a large number of Japanese and Korean firms. FDI has, thus, become the catalysing factor for China' global dominance in export.

In India, FDI was never thought of as giving exports an edge. The FTP was never made FDI-friendly. It did not offer any special incentive to foreign investments in export-oriented industries. It merely provided some duty exemption schemes, subject to export obligations.

FDI-funded units have several advantages over domestic enterprises in promoting exports, particularly in developing nations like India and China. acts as a conduit for technology and R&D. With Free Trade Agreements on the rise and the world becoming borderless, multi-lateralism has become a catalyst for expansion of trade.

FDI is the route for multi-lateralism. Hence, an FDI-inducing Foreign Trade Policy is needed. It is paradoxical that while the Commerce Minister, in a recent speech endorsed the imperativeness of an FDI-inducing FTP, the latest Supplement to the Policy is without any FDI flavour.

(The author is Adviser, JETRO, New Delhi. The views are personal.)

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