Trade Reform: Regulatory and Policy Scenario since 2004

NewsYaps, April 23, 2014

By Pradeep S Mehta

India has continued to reap benefits from trade liberalisation and the economic reforms it undertook in the early 1990s. Consistent with the process of economic reforms, the Foreign Trade Policy of India (FTP), 2004-09 was adopted by the United Progressive Alliance (UPA) government in 2004. It replaced the Export Import (EXIM) Policy, which was an annual feature. The FTP (2004-09) is a turning point in the history of trade policymaking in that it emphasised that trade is not an end in itself, but a means to economic growth of India, and that the Policy should be for a longer term than once every year. The vision of bringing the FTP 2004-09 was clear in expressing India’s ambition to become a major player in world trade as well as achieve overall development of the country. An all-inclusive and comprehensive FTP was needed. The preamble clearly stated that merely earning foreign exchange would not be enough but the focus would also have to be on stimulating greater economic activity. In other words, this policy was designed to use foreign trade as an instrument for promoting economic growth and laid the foundation that saw India double its percentage share in world merchandise trade from 0.83 percent in 2003 to 1.45 percent in 2008. However, with the outbreak of the North Atlantic financial crisis in 2008 the global scenario changed pushing a large number of developed economies into recession and thus an unstable global economy. The subsequent FTP 2009–14 was launched in the midst of the global slowdown and intends to reverse the declining trend of exports. The global economic climate still remains dim as economic growth has weakened further. The latest trade statistics from the WTO suggest even slower world trade growth in 2013–14 than previously estimated from an around 2.5 percent in 2013 (down from 3.3 percent forecast in April 2013) to 4.5 percent in 2014 (down from 5.0 percent). The global slowdown escalated by the euro zone sovereign debt crisis has, inter-alia, adversely affected the Indian economy in a number of ways including deceleration in exports, the fall in the value of Indian Rupee and lower economic growth. Today, the merchandise trade deficit of India has mounted and continues to rise. One of the predominant reasons for rising imports is the inelastic demand for oil and rise in gold imports. This coupled with the weakening of the Indian Rupee, while making the exports cheaper, has created pressure on the oil and gold imports. It therefore adversely affected the Current Account Deficit (CAD). In view of this, it is crucial for India to take essential and holistic steps to not only maintain the trade growth trajectory but to also achieve new heights for further growth. This article asserts the manner in which trade policy can act as an effective tool to boost trade growth by looking into the Foreign Trade Policy of India (FTP) 2009–14. It speaks about the key achievements and major challenges posed by the FTP and suggests some measures to further improve India’s trade growth.

Current Foreign Trade Policy 2009 – 2014

The current FTP, is adopted for five years and augmented with annual supplements each year. It was streamlined in April 2013 with the objective of addressing supply-side constraints and thereby developing export capacity. The FTP 2009-14 and its annual supplements contain several such specifically targeted schemes, tailor-made to use trade expansion as an instrument for employment generation. Focus Market Scheme, Focus Product Scheme, Technology Up-gradation Fund Scheme, Assistance to States, etc., along with assistance for Special Economic Zones and Export Promotion Councils are some of the main policy instruments in India’s FTP. While the long term objective of the current FTP is to accelerate export growth to 25 percent per annum and double India’s share in global trade by 2020, the short-term objective is to achieve annual export growth of 15 percent. In order to achieve this, a mix of policies has been undertaken such as tax incentives, export promotion, and credit facilitation schemes to ‘neutralise’ the cost of imported inputs used in exports. Accordingly, the Department of Commerce (DOC), Ministry of Commerce & Industry, Government of India, in 2011, had prepared a strategy for doubling merchandise exports in three years from US$246bn in 2010-11 to US$500bn in 2013-14. The strategy paper has further targeted policy instruments including, fiscal incentives, institutional changes, enhanced market access across the world, diversification of export markets, improvement in infrastructure and reduction in transaction costs. However, the export target for the year 2013-14, for merchandise trade, has now been revised by DOC to US$325bn, as against the initial proposed target of US$500bn.

Key Achievements

The FTP 2009-14 has been able to provide a stable policy environment. The market diversification strategy adopted by focusing on following four pillars has so far yielded benefits. a) Developing products with a considerable growth potential b) Market diversification strategy c) Nurturing high technology exports d) Build a Brand India In the last four years, India has expanded its scope and coverage of the Focus Market Scheme covering about 112 markets across the world which includes markets in Asia, Africa and Latin America. Another important outcome of the FTP is that India’s export performance in value added exports has increased and touched US$60bn while for gems and jewellery it has crossed over US$46bn, promoting the Brand India among other efforts. The FTP further encourages South-South trade cooperation which is expected to get a required boost by the addition of 53 countries in the list of eligible markets to which the Incremental Exports Incentivisation Scheme is applicable. Overall, the FTP has allowed India to maintain its export momentum and recorded a 20.9% growth last year upto the value of US$303bn. This depicts a positive partnership between government, its agencies and the export community.

Major Policy lacunae and implementation challenges

Given the weakening external economic environment, the excessive focus of the FTP, through the recent Annual Supplement, on supply side issues is likely to be insufficient unless market access expansion to non-traditional export destinations is pursued with due diligence. For instance, textile sector, one of the consistent beneficiaries of export promotion schemes under the NFTP has been struggling to expand overseas presence in the recent past. The textile industry associations such as the Confederation of Indian Textile Industry (CITI) and the Southern India Mills Association (SIMA) although have lauded provisions including bringing of several textile sub-sectors under the Market Linked Focus Product Scheme. However, the industry is mindful of the fact that securing market access in neighbouring South Asian countries and countries belonging to other Asian sub-regions is of equal importance. The FTP recognises the effects of a global slow-down and has accorded incentives to drive market diversification by including Norway under the Focus Market Scheme and Venezuela under the Special Focus Market Scheme. However, there is a marked absence of South Asian countries under the Focus Market Scheme. Furthermore, the scheme should not only consider South Asia as focus market but the Second Task Force constituted for looking into transaction costs should give special attention to transaction costs of intra-regional trade in South Asia, which will enable India to reap benefits from exports to neighbouring countries. The FTP does not provide a systematic mechanism for dissemination of information about its trade-related schemes and policies. The CUTS Study: ‘Grassroots Reach out and Networking in India on Trade & Economics’ (GRANITE), 2007-11, demonstrates that there exists no institutional mechanisms that educate either the producer groups or exporters about the demands and requirements in the exporting markets, due to which export potential cannot be fully realised. Even when producers know about the earning potential of certain crops, they are not able to market them. Instead, the FTP focuses on big export houses, large farmers and producers. Consequently, only a few progressive farmers/exporters have access to specific government training programmes and incentives. The FTP also does not provide for special schemes to integrate small farmers and entrepreneurs even though they are increasingly being affected by exporting chains and can also hope to gain from exporting their products. Keeping in mind the domestic and global economic scenario, stronger incentives for exporting to less explored markets are required. Though there are measures to incentivise exports in labour-intensive sectors in the current FTP, there is not much of focused initiatives and technical assistance to SMEs. Though the FTP seeks to generate employment, it is found that it is not necessarily linked to international trade but attributed to other schemes such as NREGA. Overall, the level of improvement in employment is low. The scenario is compounded by the traders, middlemen and agents who are so ingrained in the system that they act as major obstacles for producer groups to create wealth. Individual farmers who export their produce are not able to sustain it due to lack of government support and problems with agents in the destination country. While the GRANITE study points out at the abysmal awareness level about FTP at grass root, it is clear that there exists knowledge gap about the FTP so also about the export potential and the quality requirements in international markets. Lastly, it is appears that the process of trade policy formulation does not have a participatory approach between various sections of the society for whom it is made but is entrenched in the mind set of centralised state–led and top down growth model.

Major Recommendations

In the interest of economic growth of the country, it is crucial to make the process of trade policy formulation more inclusive and give due recognition to the concerns of all stakeholder groups. A key area for reforms in this regard is expansion of the Board of Trade constituted under the Foreign Trade Policy of India, allowing more representation from trade/business organisations, especially those of SMEs, and also the civil society. Some of the long expected reforms from the point of view of export-oriented small scale sectors are inclusion of special needs of SMEs, who form 40 percent of the growth, for market diversification under special focus schemes, demarcation of a special pool for SMEs under the Technology Up-gradation Fund (TUFS) and Assistance to States (ASIDE) schemes, and special assistance to SMEs for exploring new export destinations under Market Access Initiative and Market Development Assistance. In the long run, besides trade policy measures, complimentary measures such as providing world class infrastructure at the ports and airports, reduced transaction cost for exporters, decreasing non-tariff barriers etc, will be required. In conclusion, there is a need to adopt a more inclusive trade policy by taking into account investment concerns and other major objectives of the National Manufacturing Policy of India, producer and consumer welfare, and other socio-economic objectives of India’s development. That would help the Foreign Trade Policy of India to better achieve its major objectives of export promotion as well as employment generation.

This article has been co-authored with Archana Jatkar, Deputy Head, CUTS Centre for International Trade, Economics & Environment. Jatkar can be reached at aj@cuts.org

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