India’s exports are not matched with world import demand. Shifting our exports to those items on which there is global demand requires a more dynamic trade policy.
As the mid-term review of India’s foreign trade policy is on and a revised policy is expected to be announced on July 1, the country confronts multidimensional challenges – falling global aggregate demand, weakening linkage between global income and trade growth, the rise of protectionism and halted progress in mega regional trade agreements to name a few. As against a few changes here and there, addressing these challenges requires a radical shift in its trade policy.
This is because most of these challenges demand structural changes in our trade policy to achieve the export target of $900 billion by 2020. For India to achieve this stated policy objective, concerted efforts are required to realign its foreign trade policy with the new global trading system.
Currently, India’s trade policy faces several policy-related challenges – inadequate export diversification, rationalisation of the tariff regime and export promotion schemes, insignificant involvement of a majority of states in exports and factor market reforms which are critically linked with export performance. These challenges not only affect the productivity and competitiveness of domestic firms but also restrict them from participating in global production networks.
The fact is India still relies on traditional markets such as the US and the European countries for its exports. India’s export share in top 100 world import items at four-digit HS code level is slightly higher than 5% in five items. They are: petroleum oil (not crude), diamonds, not mounted or set, articles of jewellery and parts thereof, t-shirts and knitted crochets and insecticide and herbicide items.
In 2015, in terms of number of products, India exported 96.5% of items in world total imports at the four digit level and 83.2% at the six digit level. However, in terms of value, they constitute merely 1.6% of world total imports. Thus, India’s exports are not matched with world import demand as they are more supply-based than demand-driven. It needs to shift its exports to those items on which there is global demand. This requires a more dynamic trade policy that takes into account the ever-changing global import demand, shaped by value chain led trade.
Rationalise export promotion schemes
India’s average most-favoured nation (MFN) tariff rates are relatively higher than APEC (Asia-Pacific Economic Cooperation) countries. At present, the average applied MFN tariff on industrial products is at 10.1%, which is relatively lower than its average applied total tariff at 13.4% in 2015. However, it is interesting to note that the weighted average tariff on industrial products is significantly lower than the average MFN applied tariff, making India a low tariff economy. This provides a significant leeway to reduce MFN applied tariffs and rationalise export promotion schemes.
This will not have much revenue implications. In fact, a slightly higher applied tariff rates than weighted tariff rates would ease the import of intermediate inputs, thereby creating opportunities for exporting firms to enter in global production networks. Most importantly, it would reduce the significance of post export incentives and would make our trade policy much more transparent and compatible with global trading system.
In this context, it is important to note that the introduction of Goods and Service Tax (GST) will provide a considerable new dimension to our trade policy and export promotion schemes. A plethora of taxes (additional and countervailing duties, service taxes and cesses, etc.) that are levied on imports will be subsumed under the GST. This is likely to lower the overall duties and will create the need for reviewing the existing duty drawback system.
A streamlined tax regime will provide greater flexibility to policymakers to reduce import duty, thereby reducing the significance of different kinds of export incentives. For example, the gradual reduction in tariffs on imports of capital goods has reduced the importance of export promotion schemes for such goods. Post-GST, a careful review of such schemes is needed.
Encourage states to participate in exports
The participation of states in exports has been neglected for a long time. States such as Maharashtra, Gujarat, Karnataka and Tamil Nadu hold a major share in total exports of the country. A study by the Associated Chambers of Commerce of India shows that Gujarat and Maharashtra account for 45% of merchandise exports of India.
One of the key reasons behind the insignificant participation of other states in exports is associated with ‘cost and efficiency’ of the transport system in India. Other than this, there is the dearth of state-wise export data, which makes it difficult for policymakers to arrive at well-informed policy decisions.
Need for factor market reforms
Trade policy and factor market policies (land, labour, capital, etc.) have a symbiotic relationship. Ineffective factor market policies hit at the very root of firms and inhibit their ability to leverage the benefits extended by trade policy. While India has made some progress in factor market reforms, it is yet to develop a holistic coherence between factor market policies and trade policy.
Efforts are being made through ‘incremental solutions’ to ‘discrete problems’ rather than through fundamental transformation. The depth, breadth and effectiveness of factor market reforms are still far from ‘factors of production’ where they actually exist.
Make it grounded
It is sufficient to say that, as trade policy is conducted at an aggregate level, it is difficult to connect trade rules at the firm level due to their divergent needs and economic priorities. Therefore, it is vital that trade policy analysis moves close to where action is and benefits more from firm level data and related developments. Accordingly, it should formulate policy measures that create opportunities for domestic firms to connect with global production networks.
Understanding the dynamics that shape competitiveness and productivity of firms will help trade policymakers to take informed policy decisions. In short, India’s trade policy should be strongly grounded and in alignment with export interests of the states. This will help India to achieve its ‘trade policy priorities’ with a better understanding of the benefits from global trade for firm-level competitiveness, job creation and consumer welfare.
Bipul Chatterjee and Surendar Singh are Executive Director and Policy Analyst at CUTS International, respectively. The views expressed here are personal.