How to make trade policy more inclusive

The Hindu Business Line, July 29, 2014

By Bipul Chatterjee and Chenai Mukumba

Home to a third of the world’s poor, India cannot afford to promote trade as an end in itself

India’s success with international trade over the past two decades has been a testament to the benefits that an economy can garner from an outward-looking foreign trade policy. Following some significant economic reforms in the early 1990s, the Indian economy underwent resurgence and began to experience unprecedented growth.

By 2008, India’s trade was 20 times what it had been in 1980. Today, the economy is the third largest in the world in purchasing power parity and the largest in terms of nominal gross domestic product.

Over the last two decades, India’s share of world trade increased from less than 1 per cent to more than 3 per cent. Not only that, its total trade (export plus import) increased from $132 billion in 2001 to nearly $1.1 trillion in 2013 and its trade openness (ratio of export plus import to GDP) rose from 27 per cent in 2001 to 58 per cent in 2013.

However, in spite of this formidable growth internationally, India has not managed to achieve similar success domestically.

India’s trade achievements have been tempered by its inability to filter the benefits gained externally down to its population. Although India is one of the largest economies, this feat is marred by its GDP per capita ranking of 123 in the world.

Developmental needs

Hence, the need to enhance the developmental components of India’s National Foreign Trade Policy. While it is true that addressing India’s developmental needs is not the responsibility of its trade policy alone, a country like India, which is home to almost one-third of the world’s extreme poor, should balance its economic objectives with its development needs.

Trade policy can and should play a vital role in that respect. Given that the ‘new trade policy’ is set to be announced next month, it is important to note how India can use trade as a tool for inclusive growth.

CUTS International undertook a study that could aid in advancing the development agenda of India’s ‘new trade policy’. Based on the feedback that was obtained from stakeholders, several broad lessons were identified.

Unlike the previous trade policy where export promotion and employment generation were at times regarded as inter-changeable, the ‘new trade policy’ would benefit from distinguishing these two concepts.

The growing importance of technology and the subsequent increase in demand for skilled workers implies that an increase in exports does not necessarily lead to employment generation.

Everyone has a say

During our field survey, many respondents noted that the implementation of India’s trade policy would benefit from direct inputs from stakeholders.

An explicitly stated consultation mechanism that requires feedback from local stakeholders could improve the inclusiveness of trade policy.

Also, the ‘new trade policy’ should note the advantages of a ‘whole of government approach’, where all the Government authorities concerned are associated with the formulation and implementation of this policy.

Such coordination among various government departments and stakeholders, including those at the sub-national level, would really help.

Furthermore, given the growing importance of global value chains (GVC) in today’s economy, the ‘new trade policy’ would need to encompass measures to foster India’s inclusion into international production processes. According to the UN Conference on Trade and Development, of the top 25 exporting economies, India has the lowest global value chain participation rate.

Although this does not reflect well on our current standing, it presents an immense untapped opportunity.

Enhance partnerships

The ‘new trade policy’ should, therefore, include measures to strengthen regional and global partnerships to foster India’s engagement in value chains.

Given that service sectors are increasingly constituting a large proportion of GVCs, India is in a prime position to take advantage of this opportunity.

According to the GVC report that was released last week by the World Trade Organisation, the Organisation for Economic Cooperation and Development and the World Bank, “services are the links that forge value chains”.

While benefit-sharing mechanisms are increasingly providing more returns to farmers, artisans and workers, the linkage between trade and its direct benefits to economic actors at the local level was not explicit in the previous policy.

The ‘new trade policy’ would benefit from an additional section that explicitly articulates the modalities of benefit-sharing mechanisms in order to make them more sustainable.

Finally, India’s trade policy is largely isolated from its negotiations of bilateral, regional and multilateral trade agreements.

This lack of congruence between India’s participation in various trade agreements and its trade policy has resulted in less than potential gains from trade openness. Under the Focused Product and Focused Market Schemes, the ‘new trade policy’ should give priority to sectors that are granted market access under preferential trading arrangements.

Investment is another area with which India’s trade policy needs to align itself. The relationship between trade and investment policies is crucial for the growth and development of any country, and enhancing the synergy between these two policies would boost India’s FDI-led exports.

The responsibility of improving the standards of living of one-third of the world’s extreme poor is indeed a daunting task. However, India ‘new trade policy’ should be used as a tool for domestic reforms.

(Chatterjee is Deputy Executive Director and Mukumba an Assistant Policy Analyst at CUTS International.)

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