India stuck with an archaic trade policy

The world is quietly undergoing a seismic change that would re-define the very concepts of productivity and employment. This change is both technological and socio-economic. Diffusion of technology means new innovation spreads very quickly and renders older products redundant.

In the last century, developing country firms had a longer time to adapt to change. They do not have that luxury any more. An illustrative example is the time taken to complete the transition between VHS and DVD in India in 1990s (several years) and DVD and new media more recently (very rapid).

In addition to technological change, a new cohort of young middle-class consumers is defining consumer patterns globally and is highly adaptive to new products and technologies. They are also willing to pay a premium for innovations and quality. Combine these dynamics with increasing automation and artificial intelligence in the production of goods and services, and you have a perfect storm approaching.

The question is whether India’s trade policy is up to the challenge. Being successful at globalisation requires the ability to undertake structural change, that is, to move human resources and capital from under-performing or dying sectors and re-employ them in more competitive activities. Research has underlined that developing countries in Asia could sustain higher growth in the 1990s and 2000s relative to their counterparts in Latin America and Africa largely due to their better ability to make structural changes.

A trade policy designed to foster successful structural change would have to have the following features:

It should reward value-addition, and promote employment in activities with higher returns to labour, that is, more productive sectors.

It should promote investment in innovation and new product development and help such products find a global market.

It should ensure fair market access for Indian products subject to stringent technological and quality standards in global markets.

It should leverage domestic economies of scale to attract FDI in sectors with higher returns to labour.

India’s current trade policy and promotion tools are inadequate in addressing any of these goals.

Trade promotion schemes in India essentially amount to rewarding businesses with some financial sops in the form of incentives post the export activity. This design has two essential flaws.

First, it means that the trade promotion incentives are not designed to help a firm attain export competitiveness in the first place, but reward already successful exporters to improve their margins from trade.

Second, it is not designed for strategic interventions based on value-addition and employment achieved by the exporting firm. This reduces the current regime to being an immediate-term palliative rather than a longer-term programme designed to aid India’s competitiveness through structural change.

Trade promotion activities conducted by export promotion councils and business associations in India remain confined to the traditional ‘trade fair’ mindset. While they are still important for business development, such trade fairs are increasingly a 20th-century relic in the 21st century’s network-centric models of business.

India’s trade promotion environment has not invested in institutions that provide hand-holding support for new product development and their placement in the global market. Such institutions can be in the form of low-cost manufacturing facilities for the development of prototypes, and marketing support for such new products and innovations targeting a global customer base.

Another key area of deficit in India’s trade policy armoury is the archaic design of India’s existing trade agreements. The Indian narrative around trade negotiations remain fixated on tariffs that are increasingly less important for market access gains. Trade in the 21st century is governed by a plethora of behind-the-border and at-border barriers related to technical and quality standards.

Some of these standards are defined by government regulators; others emerge from private norms developed by lead players in the market. Helping Indian firms surmount the barriers imposed by such standards would require proactively using trade agreements and other institutional solutions to reduce the cost of adhering and complying with these standards. The compliance costs have to be so reduced that even an SME can afford it. This in turn would need revisiting our negotiating priorities for trade agreements, besides investing in technical institutions that are capable of engaging with the standard setting and vetting agencies globally.

India’s biggest competitive strength stems from the sheer size of its domestic market and the economies of scale that it provides. However, India has been relatively less successful in leveraging this strength to attract foreign direct investment and associated technology transfers to emerge as a global production hub. MNCs attracted by the size of the Indian consumer base often do not expand operations in India to serve as one of their major manufacturing locations.

Investors are discouraged by a combination of high transaction and input costs, supply-side constraints, and infrastructure deficits. These factors ensure that India remains limited to being a ‘market-seeking’ FDI location, and not an ‘efficiency-seeking’ FDI location that serves as a key node in global production networks. The current administration’s focus on ‘doing business’ reforms and infrastructure deficit might reverse this trend.

But the perfect storm of technology and global consumer preferences mentioned earlier is changing the pattern of FDI-led outsourcing from what was seen in the last four decades, reducing the future window of opportunity from FDI-led export growth.

India needs to seriously review its overall trade strategy, both in terms of trade promotion schemes and activities, as well as the design of trade agreements and negotiating priorities going forward. India would also do well to expedite the execution of major ‘doing business’ reforms. The ability to do all this well and fairly quickly would determine India’s ability to undertake structural change and push for longer-term competitiveness in the first half of this century.

The writer is Senior Director, Corporate Public Policy (South Asia), Deutsche Post DHL. The views are personal

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