The Hindu Business Line : New Foreign Trade Policy

In an era of globalisation, when competitiveness is the key to success in building resilience in the export industries, the trade strategy has to mesh fiscal policy with investment planning, especially focussed on export sectors. Besides increased trade, this will also subserve the domestic goal of economic development with adequate employment generation.

THE Five-Year Trade Policy, announced by the Commerce Minister, Mr Kamal Nath, has certain new features. Notable is a liberal import regime for exporters with a minimum floor-level performance, particularly in the service sector.

The goal that Mr Kamal Nath has set before the country is to double India's share of global exports from the present 0.8 per cent to 1.6 per cent in the next five years.

Assuming that world trade in the next five years grows at an average 10 per cent a year, India has to aim for a merchandise export of $190 billion in the next five years against $61.84 billion last year.

Besides increased exports, trade policy has also to subserve the domestic goal of economic development with adequate employment generation.

In an era of globalisation, when competitiveness is the key to success in building resilience in the export industries, the trade strategy has to mesh with fiscal policy and investment planning especially focussed on export sectors.

For example, the elimination of duty incidence on the export segment will become easier if a full-fledged VAT regime is put in place. This will make it easy to identify the ultimate duty incidence on exports and provide for its removal at one step.

The year 2005 is important for the traditional export of textiles, since the multi-fibre agreement will be phased out.

That, however, means that the textiles industry has to face intense competition from countries such as China, Thailand, Korea, Malaysia, Indonesia, Sri Lanka and other low-cost producers. The investment planning in this sector must pay special attention to the industry's modernisation programmes, including keeping pace with fast-changing design and fashion preferences in major importing countries.

If one looks at the composition of exports, about 25 per cent may be services, dominated by ITES, thanks to the outsourcing bonanza. Of course, tourism and financial services may constitute a significant and growing segment of service exports. Bio-tech exports can replicate the IT sector success if there is proper policy underpinning.

But the real point is that it is the manufacturing sector, comprising a variety of engineering and other products, which will continue to play an important role in exports as well as employment generation. The automobile and auto ancillary sectors can be cited as a good example.

With cost advantage on its side, what India needs in these sectors is quality production with adequate testing facilities and an aggressive marketing effort. The steel industry has just come out of a global recession.

Domestic demand is growing. Global economic recovery may presage a strong export growth for this industry. No doubt, India must brace up to intense competition from traditional steel-producing countries such as Germany, the US, and Korea.

Pharmaceutical industry is another example of good potential for growth in exports. The Board of Trade and industry bodies must take note of emerging global scenario in these sectors and work out a medium-to-long term strategy for placing India on the global export map. Mr Kamal Nath has done well to broadbase the incentive regime of duty free import entitlement based on export performance, going beyond the IT sector, to cover a whole range of service sectors such as engineering consultancy, architecture, medicare, and so on.

The biotechnology sector occupies a special place, since with the large technical pool and biodiversity, India has special advantages that can make it a bio-tech leader. Tourism industry, in particular independent restaurants, has also come in for favourable treatment in terms of duty-free import entitlement. If the Commerce Minister has done away with service tax for the export sector, it is passé, since as a well-accepted principle, exports are normally exempt from the burden of domestic levies.

Fresh from the Geneva meet on WTO issues, Mr Kamal Nath has recognised the importance of India making it big in horticulture, forest products and vegetable/fruit exports. He has given them a due place in his trade policy.

This has the potential to generate employment in the rural sector. But what will make for success here is a well organised marketing effort including refrigerated container and storage facilities and quickest means of delivery to important export destinations in Europe and elsewhere. It is in these areas that India needs to do better.

Private entrepreneurs should seize the opportunity and establish on owned or leased basis scientific warehousing facilities in key export markets and actively promote Indian products. The policy has recognised the agriculture resource-based products as having a huge potential for exports. The Government must call a meeting of export promotion councils, banks and leading chambers of commerce to operationalise the scheme for making India a major agriculture export producer.

The policy has identified several towns of export excellence with annual export turnover of Rs 250 crore such as Nashik, Shimla or Ranchi with good potential for farm and forest product exports, promising them special infrastructure facilities.

Among other steps announced in the policy are the setting up of free trade and warehousing zones to make India an important sourcing centre for export products and biotechnology parks that will give a boost to export of this fast emerging knowledge centred export sector. The DEPB will be replaced as it comes to an end by an alternative from April 1, 2005. Aside from the trade policy, as per media reports, the Government is actively considering a proposal to revamp the Board of Trade, making it independent of Government and appointing an "eminent person" to head the body which will make suitable recommendation to the Government on trade policy related issues. It is a welcome suggestion and whoever heads the Board of Trade should be a senior industrialist with hands-on experience on trade matters and sufficient exposure to international practices.

The Free Trade Area concept, recently introduced between India and Thailand, promises to be a new turn in the foreign trade policy and based on the experience gained, this new tool must be used to expandbilateral or regional trade as with the ASEAN region.

In a fast globalising era, trade policy should lay down the policy parameters for achieving excellence in export effort and maximum autonomy to entrepreneurs to play their role. To achieve this, the policy must be well-integrated with other policy instruments such as fiscal and credit policies, investment planning, agriculture policy, and so on. The first trade policy announced by Mr Kamal Nath marks a good beginning in that direction.

(The author is a New-Delhi-based management and financial consultant.)

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