The Indian trade regime presents complexities for its neighbours.
India has recently unveiled a new Foreign Trade policy with the avowed aim of boosting exports and making India a significant partner in global trade by 2020. According to reports, initiatives like ‘Make in India’, ‘Digital India’ and ‘Skills India’ will be integrated into the new trade policy to achieve results. Some other salient points of India’s New Trade Policy include: (1) Replacement of all multiple schemes earlier in place with two new schemes i.e. merchandize exports from India (MEIS) and ‘Services exports from India (SEIS); (2) Industrial products to be supported in major markets at rates ranging between 2-3%; (3) Support to agriculture and industry products; (4) Branding campaigns in sectors where India enjoys comparative advantage; (5) Change of export performance criterion from Rupee to US dollar earnings.
According to the Foreign Trade Policy Statement “The FTP for 20152020 seeks to provide a stable and sustainable policy environment for foreign trade in merchandise and services; link rules, procedures and incentives for exports and imports with other initiatives such as ‘ Make in India’, ‘Digital India’ and ‘ skills India’ to create an ‘Export Promotion Mission’; promote the diversification of India’s export basket by helping various sectors of the Indian economy to gain global competitiveness; create an architecture for India’s global trade engagement with a view to expanding its markets and better integrating with major regions, thereby increasing the demand for India’s products and contributing to the ‘Make in India’ initiative; and to provide a mechanism for regular appraisal in order to rationalize imports and reduce the trade imbalance.”
With the new policy, the Indian
government aims at almost doubling exports from $465.9 billion in 201314 to $900 billion by 2019-20. If this increase happens, the share of India in the global exports will rise from 2% to 3.5%. India’s previous FTP has worked especially with regard to increase in agricultural exports. India is now the world’s sixth largest net exporter of agricultural exports. Will the new foreign trade policy help achieve targets? This depends on several caveats. India started opening up its economy in the 1990s. Till 1990, India was considered a closed economy due to her highly protectionist measures. Despite its opening up, tariff still continued to be high compared to other countries of the region. But the real problem was in the non-tariff barriers which made trading across borders difficult and unless such barriers were removed, even export promotion would face hurdles.
According to the WTO Trade Policy Review of India 2011, India generally follows non-tariff barriers on imports from other countries. Sanitary and phytosanitary measures are applied through various laws. Import restrictions are also imposed on the grounds of health, safety, and security reasons. Licensing, permit and tariff regimes are complex and vary according to product and user. Moreover, India actively uses antidumping measures and quantitative restrictions. Some goods can only be exported through specified ports. So the first caveat is that India needs to introduce measures to reduce tariff and non-tariff measures.
In order to enhance exports, a country needs to simplify both its import and export regimes. Mercantilism, ‘beggar thy neighbor’, or ‘import substitution’ policies are time-tested and have not worked. Exports are difficult to promote without making both import and export processes simpler and easier.
India’s economy is primarily services-driven as the share of manufacturing has remained stagnant at about 16% of the GDP for several years. Compared to India, other countries like China and South Korea have enormously benefitted from strong manufacturing sectors. One of the challenges confronting India in achieving its export targets depends how fast it boosts its manufacturing sector. Nobody can deny the fact that a strong manufacturing sector is considered a guarantee for greater employment generation, higher and stable foreign direct investment and infrastructural development. Though India’s new Foreign Trade Policy hinges on the promotion of both manufacturing and services sectors, but boosting the manufacturing sector will not lead to flow of foreign investment and the question remains whether such foreign investment will be forthcoming in view of the global economic downturn.
The third factor on which the achievement of export targets hinges is India’s capacity to capitalize on geographical proximities. Traditionally, India’s relations with the neighboring countries have not been very cordial. Its policies can be said to be more mercantilist when it comes to these countries, especially Pakistan. It has been reported very frequently that excessive checks are carried out on consignments from Pakistan. As a result, goods are held up for long periods at Customs before they are cleared, especially from the Mumbai Port.
There are about 24 standardsetting agencies both at the centre and in the states in India compared to Pakistan’s single standards authority i.e. the PSQCA. Due to such multiplicity of standards, trading across borders becomes an acute problem. Similarly, there are a number of Pakistan-specific non-tariff barriers like pre-shipment certificate from an accredited laboratory in case of textiles, drawing of samples and time consumed in their testing in case of leather products, SPS requirements for agricultural items and, above all, hurdles in issuance of visas for Pakistani businessmen. The point is that it would be difficult for India to achieve the ambitious targets of exports unless it does not take a holistic view of foreign trade and improves business procedures.
The Indian ‘Task Force on Transaction Cost in Exports’ in its report rightly points out that: “An important dimension of transaction costs in a large country like India is that there is significant variation in trade facilitation efficiency in different parts of the country. Part of the difference is explained by differences in access to trade related infrastructure and distance from port facilities. But differences also arise due to variation in quality of regulatory implementation and procedures. Such regional differences can lead to sustained economical disadvantage over a period of time and as such present a developmental challenge.”
The international report like ‘Doing Business of the World Bank and WEF’ and the report on competitiveness also points towards the complexity of the Indian trade regime. For example, the Doing Business Report 2015 ranks India 142 out of 189 countries regarding ease of doing business. Against the indicator of trading across borders, India sits at 126th position out of the countries ranked. Overall 7 documents are required to export and it takes an average 17.1 days to export a consignment from India. The transaction cost to export a container is estimated at US $ 1332. India therefore needs to address in-house challenges to substantially increase its exports. Constraints like infrastructural bottlenecks, high transaction costs, inadequate diversification of services exports and complex procedures need to be addressed on priority basis. The remarks of Indian Minister of Commerce and Industries on the eve of FTP, 2015-20 that India does not exercise much control over the external factors but there is a lot India can do to set its house in order, are quite apt. In-house reforms, in a nutshell, will determine whether India will be able to achieve the ambitious target set for exports under FTP 2015-20.
The writer has a degree in Economic Policy Management from Columbia University and is a Chevening Fellow on Economic Governance.
According to the WTO Trade Policy Review of India 2011, India generally follows non-tariff barriers on imports from other countries.