India: new trade policy for a new government

East Asia Forum, May 02, 2014
By Pradeep S Mehta and Bipul Chatterjee

In India, 150 million new and better jobs need to be created, lest the country’s perceived demographic dividend fails to become a reality and, instead, becomes a burden. To achieve this, and provide much-needed lift for the economy, India can follow a combination of consumption-, investment- and trade-led growth. This is because of the size of its domestic market (1.25 billion people), investment requirements (US$1.75 trillion), and increasing outward-orientation. Trade is already no small part of the economy — over the last five years merchandise trade as a percentage of gross domestic product is more than 40 per cent and is growing steadily.

But for growth to happen in an inclusive manner, trade and other major macroeconomic policies (on fiscal, monetary, manufacturing, competition, investment, and the like) should be adopted and implemented by following a whole-of-government approach. This is sorely lacking in India and should be the principal focus of the new government’s economic agenda, once the elections conclude this month.

India’s new trade policy will be announced soon after the new government settles in. Continuing the practice of implementing a long-term policy, which replaced the earlier annual exercise in 2004, would be welcome. But more importantly the new policy should not follow the existing practice of having a set of export-enabling instruments in the name of a ‘policy’.

India’s trade policy should be ‘contextualised’. This was recently articulated by Rajeev Kher, the new Commerce Secretary of India. Kher argued that ‘India needs to mainstream its foreign trade policy within the governance system of the country so as to enhance its competitiveness in a holistic and dynamic manner. Foreign trade has to be looked as a composite economic activity … Various government departments and the state governments need to work in tandem. The foreign trade policy should have strategic objectives to address, should be contextualised and not just an amalgamation of a set of instruments towards export promotion’.

‘Exports should no longer be considered as a function of surplus generated over and above domestic consumption’, Kher said. Instead, exports ‘should be an intrinsic part of a vibrant economy. Imports also play a very important role because more than 60 per cent of our imports are intermediaries to manufacturing. Intra-industry trade is growing’, he added.

‘Contextualising’ India’s trade policy also means making it work better for national development. In the very least, trade should be directed at strengthening value chains through effective regional and global partnerships, generating employment for poverty alleviation, and engaging national and sub-national organisations and actors for policy coherence.

So instead of just focusing on export promotion, the new government’s trade policy should focus on numerous other goals. These include: promoting two-way trade and investment for generating more and better consumer welfare as almost 60 per cent of India’s imports are used for producing value-added products which are used domestically as well as for exports; the mainstreaming of trade into national development for large-scale job creation, particularly in labour-intensive manufacturing; and developing an inclusive trade policy for more effective economic governance so that stakeholders have a better buy-in and there is in-built monitoring and evaluation.

For the new trade policy to become an effective institution there should be convergence between trade policy and consumer welfare objectives, with emphasis on skill development and trade adjustment programmes, as well as economic, social and environmental sustainability impact assessments of trade policy.

In short, the focus of India’s economic agenda until 2030 should be on all three sources of economic growth — consumption, investment and trade (particularly trade in value-added goods). Together they should contribute to at least 3 per cent more average annual long-term growth of the Indian economy.

Taking into account the average growth of the Indian economy over the last decade, this means an average annual growth rate of 10 per cent over the next decade and a half (the proposed deadline of achieving the Post-2015 Development Agenda). This will only be possible through better economic, social and political governance.

Achieving these targets would not only place the world economy’s centre of gravity between India and China, it would, more importantly, lift the global economy in a more sustainable manner – moving away from the short-term application of fiscal stimuli.

Pradeep S. Mehta is the Secretary General of CUTS International, a global think-tank on Trade, Regulations and Governance for Consumer Welfare.

Bipul Chatterjee is Deputy Executive Director, CUTS International and Head of CUTS Centre for International Trade, Economics & Environment.

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