India’s trade policy should address both domestic, foreign challenges

Suranjan Gupta/ Surendar Singh | Updated on October 23, 2019

Trade policy needs to be much more coherent at both domestic and external fronts   -  iStockphoto

The current climate is fraught with uncertainty, slowing demand and exporting conflicts. Measures critical for growth should be focussed on, especially in lieu of the ongoing RCEP negotiations

India’s trade policy faces multidimensional challenges in today’s world of uncertainty, protectionism, falling global aggregate demand, elimination of export programmes and, perhaps the more important reason, domestic preoccupations. Recognising the potential implications of these challenges, the Department of Commerce is working on the new Foreign Trade Policy and the task for framing the new trade policy is likely to be much more challenging, given the current developments in the international trading system. Broadly, India’s trade policy challenges can be categorised as domestic and external challenges

Domestic challenges

At the domestic level, the greatest challenge to the development of a robust trade policy in India is the poorly developed manufacturing sector. It is a well-recognised fact that India has not been able to develop a strong manufacturing sector despite two decades of economic and trade liberalisation. A large number of structural issues relating to labour reforms, limited availability of power, factory and goods market reforms, low productivity, and lack of technology are responsible for a weak manufacturing sector.

One of major challenges for India’s trade-policy makers is to deal with its export promotion programme, which acts as a catalyst for India’s exports. There are clear signals that India is likely to lose its trade dispute on the export promotion programme against the US. This means that India has to overhaul schemes such as the Merchandise Export Programme (MEIS), Export Promotion for Capital Goods (EPCG) and Interest Subvention Scheme so as to make them compatible with the WTO rules. The elimination of these schemes will have detrimental effects on the export competitiveness of a large number of MSMEs, who extensively use these incentives to offset high trade transaction and logistics costs.

For instance, imported capital-intensive goods under the EPCG scheme help the industry improve productivity and competitiveness, but its termination will adversely impact such imports, which are critical to enhance high-value added manufactured exports.

The Department of Commerce is working a new scheme called the Rebate of Duties, Taxes and Levies (RoDTL). This scheme is already being implemented in the textile and clothing sector but it has received a sharp criticism due to its bias towards specific components of textile and clothing value chains. The benefits of scheme are not evenly distributed across the value chain. This scheme will cause serious problems for sectors such as engineering, where value chains are highly dispersed and involve a wide variety of players with complex power dynamics.

External pressures

Challenges for India’s trade policy are increasing manifold at the multilateral level due to increased trade protectionism, dispute settlement body and the Regional Comprehensive Economic Partnership (RCEP) negotiations. The immediate crisis at the WTO is to address the issue of appointment of judges at the Appellate Body, held up by the US. Further, developed countries have started negotiations in new areas such as e-commerce, investment facilitation, MSME, gender and trade. They are seeking greater disciplines in new emerging areas at the WTO.

The US has terminated its Generalised System of Preference which provides duty-free market access to a large number of MSME products. It is adversely affecting India’s exports worth $5.6 billion to the US market. The next biggest challenge is the RCEP. The proposed tariff reduction commitments in the RCEP negotiations are well beyond the demand of the industry. As per media reports, India is likely to liberalise its 80 per cent tariff lines for China, Australia and New Zealand. This will far reaching implications to Indian domestic industry.

Need for coherence

Given these challenges, it is extremely important for Indian policymakers to focus on making trade policy much more coherent at both domestic and external fronts. A very good starting point would be to undertake bold reforms in three important areas. First, it is important to promote “inner consistency and harmony” between objectives of policy and its implementation strategies. This requires a well-thought engagement in international trading arrangements. India’s stance at the WTO and with FTAs must be shaped by domestic priorities that are critical for growth, employment and poverty reduction. This requires an active participation in areas of international and regional trade negotiations where India has strong economic interest, as well as in those areas where rules will have an effect on the domestic regulatory space.

Second, our trade policy is largely conducted at an aggregate level and fails to capture critical factors that shape dynamic comparative cost advantage of firms. Therefore, it is important that trade policy analysis should focus on firms rather than sectors. This requires dedicated efforts on collecting firm-level data to understand policy and operational issues of exporting firms so that our trade policy helps firms connect with value-chain networks. But what is more important is that our trade-policy makers understand the dynamic linkages between upstream and downstream sectors. This is vital to understand how a policy decision that supports the upstream sector could actually hurt the downstream. A dynamic thinking is a prerequisite to analyse the implication of backward and forward linkages to our global export competitiveness.

Finally, there is also urgent need to reform our trade and related institutions to enhance their participation in policymaking and negotiations. For this, trade regulatory bodies, promotion councils and standards-related institutions should work together to create a dynamic database of imports and exports, so that information can be gathered at the product and market level to allow for a well-informed decision for trade negotiations. This will certainly help trade-policy makers leverage the benefits of global trade for firm-level productivity, competitiveness and job creation.

The writers are Executive Director and Senior Deputy Director, respectively, at Engineering Export Promotion Council of India, Views are personal

Published on October 22, 2019

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