Trade Imbalance

The new government will have to overhaul the trade framework if India is to play any meaningful role on the world stage.

Illustration by Ajay Thakuri Illustration by Ajay Thakuri

As the government starts its second term, it will have to focus on one area where it did not deliver in the last term - boosting exports. In 2018/19, India's merchandise exports hit a record $331 billion, but did not cross the government's target of $350 billion. More importantly, they were just 5.3 per cent over the $314.4 billion achieved in 2013/14. Also, the export to GDP ratio in 2018/19 was 12.2 per cent, almost half the 23 per cent achieved in 2013/14. What should the government do this time round?

It needs to overhaul the trade policy. The focus has to be on goods and services where India is competitive. There is a need to widen the portfolio of products in the export basket and enter newer markets. These products can be part of the global value chain-led trade. Doing that requires not just backward integration of export policies and agreements but also a fresh look at how new opportunities are approached.

Arvind Panagariya, former Vice Chairman of NITI Aayog, has suggested creation of a new entity that will negotiate trade agreements. This department should be placed with the Prime Minister's Office, quite like the Office of the United States Trade Representative. The commerce ministry is contemplating setting up an autonomous body on the lines of Australia's National Productivity Commission, accountable to Parliament. The Australian authority not only vets bilateral and multilateral agreements but also monitors their implementation. These ideas have merit as they are outward looking and coordinate with stakeholder ministries. But implementing them requires a radical change in outlook.

New Territories, Newer Products

The first Narendra Modi government did some work in tapping new markets. This included getting trade infrastructure ready to reach out to Central Asia via Iran and Asean nations via road through the North East.

There was an exercise to identify new products as well. For example, the UAE and Saudi Arabia negotiated to set up export-oriented food processing units in India. The talks couldn't fructify because of challenges of acquiring land, and the tedious Agriculture Produce Market Committee Act. Various companies are pushing for changes in laws governing agricultural produce. "The way the GST Council ironed out glitches in implementation, there is a case for having an APMC council or an agriculture council," says Ajay Shriram, Chairman and Senior Managing Director, DCM Shriram Group.

Ajay Shriram, Chairman and Senior Managing Director, DCM Shriram Group

To test waters, the Exim Bank conducted a study for the commerce ministry to understand requirements in some African and Latin American countries. These were the first steps in shifting the ministry's approach towards the demand side, a senior official in the commerce ministry says. The report, however, was not accepted.

Another challenge for India has been the lack of trade agreements. The commerce ministry is negotiating with the African block on the Comprehensive Economic Cooperation Agreement. In the last fiscal, India's trade with Africa alone was $63 billion. In 2018, the countries that comprise the Africa block had free trade agreements among themselves, which makes the region a lucrative market. Moreover, their concerns about falling in a debt trap with China works to India's advantage. "The newer free trade agreements are back-loaded and a win-win for both India and Africa," Suresh Prabhu, Minister of Commerce & Industry in the first Modi government, told Business Today. "The plan is to make the manufacturing sector worth $1 trillion by 2025, and exports play a pivotal role in this strategy."

Suresh Prabhu, Minister of Commerce and Industry in the first Modi government

To achieve this, changes are needed in the way diplomats are trained. There is also a need to develop skillsets needed to identify opportunities. It is easier said than done. A senior official said this requires not only policy changes but alteration in the structures as well. The to-do list includes better trade negotiations, preparing domestic players to take advantage of opportunities and removing bottlenecks in policies.

Amid global trade wars, the biggest opportunity for India is the global value chain (GVC) led trade. This requires India to put in place its global integration strategy.

In the last decade, manufacturing centres in the European Union and North America were the traditional hubs of GVC-oriented production. But the EU is yet to recover from the shocks of the global crisis, and production has moved to China. However, with China's manufacturing slowing down, there are emerging opportunities for East Asian and South Asian countries.

Tightrope Walk

Can the new government prepare India to take advantage of this? Globally, the emphasis is now on domestic integration. But there will be a price to it. China is pushing India to join the Regional Comprehensive Economic Partnership (RCEP). India is reluctant, because there are 74 products on which it will have to reduce import tariff to zero; of these, 40 products are being dumped in India by Chinese companies.

India is seeking differential and lower levels of preferential market access for its non-FTA partners. Those who back RCEP say India must not view this group with the prism of bilateral trade deficit with China. Pradeep S. Mehta, Director General of think tank CUTS International, argues that the RCEP has to be seen as a mega-regional trade agreement which is a means to both trade liberalisation and integration with regional value chains. Those opposing it say this can be achieved via existing FTAs itself.

Many Chinese textile and apparel players are moving to Vietnam, the Philippines and Bangladesh. India will have to compete as well as integrate with them.

Economist Rathin Roy, a member of the PM's Economic Advisory Council, says, "India's demographic distribution can offer solutions. Relocation of labour intensive units to eastern India can cut labour costs. For this, the government will have to come forward."

India's contribution in global textile and apparel exports is a dismal 4-5 per cent, whereas Bangladesh's has risen from 4.5 per cent in 2001/02 to 8.1 per cent now. China leads the pack at 37 per cent. "The biggest threat is that China is working on robotics and artificial intelligence in this segment. If we don't move quickly, forget gains, it will be difficult to even compete for export markets," cautions another trade expert.

On his recent tour to New Delhi, US Commerce Secretary Wilbur Ross said, "India has overly restrictive market access barriers and the average applied tariff rate is the highest of any major world economy."

India is closing its markets with moves like the e-commerce policy, data localisation, and by raising tariffs on several manufactured products such as auto parts and mobile phones. In return, the US has withdrawn duty-free access to over 3,000 Indian products under the Generalized System of Preferences trade programme. India can't brush off America's concerns as it has to negotiate with it on H1B visas and sanctions on Iran, which is affecting crude oil imports.

The commerce ministry has come out with a strategic paper on methods to bring balance to India's trade with China. The plan includes increasing tariff to permissible rates and introduction of standards for products.

"Theres nothing against MNCs, but the law of the land should not be changed to accommodate them. They must change their ways to do business in India," says Ashwani Mahajan, National Co-convenor of the Swadeshi Jagran Manch, an RSS think tank.

India's new export policy is due in March 2020. The wish list is long, and the market expects the new government to bring changes quickly.