Despite some steps in the right direction, the
new policy has several limitations. This article makes a case for
looking at them anew.
Biswajit Dhar (
bisjit@gmail.com) teaches at the Centre for Economic Studies and Planning, Jawaharlal Nehru University, New Delhi.
The long-awaited foreign trade policy (FTP) of the National
Democratic Alliance (NDA) government evoked much interest both because
it was the first comprehensive statement on the government’s priorities
in the external sector, and also, perhaps more importantly, it would
show if the present government has set its sights differently from the
United Progressive Alliance (UPA) government.
It was the UPA government that tabled the first FTP in 2004,
replacing the export–import policy. This seemed to suggest a change in
the thinking of the policymakers—they had finally understood that it was
necessary to move beyond export–import procedures and incentives for
improving foreign trade performance, and that it was imperative for FTP
to consider policies for improving production efficiencies and reducing
transaction costs. In other words, FTP had to extend beyond the
decision-making confines of the Department of Commerce, and the
department had to develop a broader framework that provided the scope
for coordinating with a number of administrative ministries to make the
foreign trade sector more vibrant. But despite tabling two five-year
FTPs, the UPA government did little to change the orientation of
policymaking in trade.
The NDA government has attempted a new approach in its FTP by tabling
two documents. While the main document follows the UPA government’s
practice of detailing export–import procedures, the new government has
made a detailed foreign trade policy statement (FTPS) that articulates
its overall thinking on the external sector, covering two key
dimensions. First, the policy statement spells out the government’s
strategy for addressing some of the structural and institutional issues
that are relevant for improving the performance of the foreign trade
sector. Second, the government has given some idea about its thinking on
the ways in which it would make trade and economic integration
agreements with major trade partners work better for Indian enterprises.
The second dimension is important because India has concluded a number
of economic integration agreements with trade partners over the past
decade, but most of them have not delivered the expected results.
‘Whole-of-Government’ Approach
It must be said to the credit of the Department of Commerce that it
recognises that “foreign trade policy can neither be formulated nor
implemented by any one department in isolation” and that “a
‘whole-of-government’ approach will be required.” The FTPS speaks of a
“major path-breaking” initiatives that the department has taken “to
mainstream State and Union Territory (UT) Governments and various
departments and ministries of the Government of India in the process of
international trade.” Yet, another reflection of a possible change in
thinking in the commerce department is an important statement made in
the FTPs—“the biggest challenges that India’s foreign trade faces today
are from within the country.” To meet these challenges, the FTPS
underlines the need for “Setting Our House in Order.”
There is no doubt that bold print of the FTP shows a welcome
departure from past thinking. The proposed involvement of other
departments and ministries of the central government as well as state
and union territory governments, and the recognition of
“behind-the-border” constraints faced while engaging in foreign trade
should be regarded as steps in the right direction. However, the details
of this strategy spelt out in the FTPS have several limitations, and
there is a strong case for looking at them anew.
The “whole-of-government approach” lists the possible areas of
engagement with state and union territory governments, but is silent
about the manner in which departments and ministries of the central
government would be involved in supporting conduct of foreign trade. As
for states and union territory governments, the FTPS mentions that they
“can play a crucial role in promoting exports and rationalising
non-essential imports.” This statement is quite intriguing since
governments in member-countries of the World Trade Organization (WTO)
have little policy space to either promote exports or restrict
“non-essential imports.” One of the key objectives of the WTO is to
minimise government interference in the conduct of foreign trade and,
therefore, members are not allowed to provide subsidies and other
incentives for promoting exports. As for “rationalising non-essential
imports” (appears to be a euphemism for “restricting imports”), it
should be pointed out that state and union territory governments do not
have any instruments for doing so. Imports can only be restricted by
using customs duties, which can only be imposed by the central
government. Further, India had the right to restrict imports of
“non-essential” products using quantitative restrictions because of a
weak balance of payments (BoP) situation, which it did until 2000.
However, this right had to be given up in 2001 after a WTO Dispute
Settlement Panel ruled that India no longer faced BoP problems and
therefore had no basis to continue with these restrictions.
The other dimensions of involving state and union territory
governments that are listed in the FTPS are essentially statements of
intent. These include assistance that the Department of Commerce is
providing state and union territory governments to prepare export
strategies and set up an “Export Promotion Mission to provide an
institutional framework to work with State Governments to boost India’s
exports.” It is not entirely clear from the FTPS how these initiatives
will give the necessary impetus to state and union territory governments
to participate more vigorously in export promotion.
Three Issues Highlighted
What are the steps that the FTPS suggests for “setting our domestic
house in order?” It suggests this can be done by addressing three sets
of issues. The first is to make better use of telecommunications and
information technology (IT) infrastructure, especially the internet, in
trade transactions. The second is to remove the anomalies caused by the
“absence of a uniform system of indirect taxation in India.” The
existing system, according to the FTPS, prevents exporters from getting
“a rebate or drawback on all indirect taxes paid on the exported product
and the inputs that went into its production, significantly inflating
the final price of the exported product and making it less price
competitive”. And the third is the “liberalisation, rationalisation and
simplification of labour laws.” The FTPS insists,
Recent initiatives by the Central Government and some State Governments
...must be taken to their logical conclusion in order to make Indian
labour more productive and efficient, which will, in turn, contribute to
enhancing the global competitiveness of India’s products.
Given the huge burden of inefficiencies that plague the domestic
manufacturing sector, which often begin at the shop-floor, the three
areas identified by the FTPS seem to convey yet again that the
policymakers are not fully cognisant with what it takes to make India a
globally competitive production hub. What is really needed is
actualising the “whole-of-government” approach, which can provide a
comprehensive view about the needs of the manufacturing sector for
enhancing its competitiveness. This approach, which was a feature of
policies adopted by most of the successful countries in East Asia, is
essential for repositioning Indian industry on the world stage.
SEZ Failure
Special economic zones (SEZS) are another area where successive
governments have ignored the steps necessary to make them function
effectively. Although the FTPS says that exports from SEZs increased
significantly from Rs 22,000 crore in 2005–06 to Rs 4,94,077 crore in
2013–14, there is a facet of these zones that the government needs to
consider. Since the notification of rules under the SEZ Act in 2006, 435
SEZ had been formally approved by the Board of Approvals until March
2015. Of these approved SEZS, 189 have been functional. Importantly, all
but 20 of these SEZS were established before 2010 and only three after
2013. The past few years have also witnessed a spate of cancellations of
the approvals granted for setting up SEZS. Since July 2014, approvals
for 82 SEZS have been withdrawn by the Board of Approvals. India’s
experience with SEZS thus seems to be at considerable variance with that
of China, where SEZs have contributed immensely to the country’s export
growth over the past several decades. One possible way forward for the
Government of India would be to understand the process countries such as
China follow for establishing of successful SEZS and consider applying
good practices wherever they are possible under Indian conditions.
Regional Trade Agreements
As mentioned, the FTPS provides an account of the Government of
India’s position on its economic integration agreements with partner
countries. The commerce and industries minister has commented on more
than one occasion that these agreements have not been particularly
beneficial to India’s interests and that they must be comprehensively
reviewed. Perhaps in the continuation of this position, the FTPS
indicates that two sets of initiatives should be taken—one, to make
these agreements work better for Indian enterprises through focused
programmes; and two, to explore opportunities in countries where India
has a relatively small footprint, including through economic integration
agreements.
The South Asian Free Trade Agreement (SAFTA), one of the older free
trade agreements that India is a party to, has remained largely dormant.
The government has proposed reinvigorating SAFTA by building regional
value chains in several sectors that are of considerable interest to the
countries in the region, which include textiles, engineering goods,
chemicals, pharmaceuticals, auto components, and plastic and leather
products. Successful implementation of this proposal would go a long way
towards furthering the cause of South Asian regional integration.
India’s free trade agreement with the Association of Southeast Asian
Nations (ASEAN), which has been operational since 2009, has not brought
the desired benefits. The present government has therefore proposed
reworking the contours of its engagement with its eastern neighbours by
focusing on trade integration with the CLMV (Cambodia, Lao PDR, Myanmar
and Vietnam) countries. As a part of this strategy, it has decided to
support the development of manufacturing hubs by the Indian private
sector in these countries.
The government has indicated that it will actively consider enhancing
India’s economic engagements with the African region by assisting
countries there to develop their productive capacities in both
agriculture and manufacturing. Such a programme would not only
complement the development cooperation initiatives that were taken by
the UPA government, but also enable these initiatives to yield better
results.
Although the FTPS is an important statement of the government’s
intent to improve the performance of the foreign trade sector, the
results are not likely to be delivered if the operational framework is
not made functionally more robust. There are a number of weaknesses in
the proposed framework that were alluded to in an earlier discussion,
and the government would need to address them. There is a greater
urgency for so doing because the FTPS sets an ambitious target of
increasing India’s exports of merchandise and services to $900 billion
by 2019–20, which would raise the country’s share in world exports to
3.5% from the 2% it is now.
