Leveraging India’s trade competitiveness

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Pradeep S. Mehta

Job creation and farmers’ welfare are among the key contemporary challenges of our country. Thanks to the “Make in India” campaign, more than 120 new manufacturing units have created about 4,50,000 jobs in the mobile phone industry over the past four years. Similarly, a new agriculture export policy envisages the establishment of agro-specific zones to enable farmers to gain from international markets. Undoubtedly attention is being focused on these critical issues which will help us to move forward.
According to the International Trade Centre’s database, in 2017, India’s exports grew to $480 billion, an impressive 14 per cent growth over the previous year, the highest in the past six years. This was a result of sector specific interventions and focused export promotion initiatives.
Indeed, this performance has come in the midst of challenging times. Our current account deficit (CAD) is widening, rupee is depreciating, rising interest rates in the United States are causing large capital outflows, and trade protectionism around the world is on the increase. While the government is mindful of these difficulties, the tendency to overestimate them must be restrained. Moreover, some of these are external factors beyond our control. The situation today is quite different from 2012-13 wherein our CAD was over four per cent of the gross domestic product (GDP) and inflation was close to 10 per cent. Today, our CAD is around 2.5 per cent of GDP and retail inflation is around four per cent.
That said, we need to prepare a cogent strategy for structural changes to leverage India’s trade competitiveness, which should take into account the dynamic global realities, and should be cognisant of our strengths, limitations, and available resources. Such a strategy needs to be both outward and inward looking in the sense that our engagement with external trade partners is informed by reforms in domestic markets, and vice versa.
First, we need to focus our negotiating and implementing capital on executing and benefiting from preferential trade agreements with select countries and regional blocs. The objective is to focus on a few existing and unexplored markets, getting market access and penetration in value chains. Product-specific tariff and non-tariff measures should be negotiated to boost our exports. Emphasis should be on ensuring zero or the least possible effective rate of protection for Indian exports to these markets.
Second, challenges in the domestic regulatory environment affecting India’s trade with select countries and regional blocs in specific products are to be identified and addressed. Targeted export promotion initiatives for boosting supply should be put in place. There should be a greater emphasis on economic and commercial diplomacy by India’s foreign missions, particularly in select countries and regional blocs. Such an approach of dedicated trade promotion with consistent internal reforms will further help in exploring new markets.
This will require greater convergence between our trade and industrial policies. Already, some initiatives are under way. We should focus on 12 Champion Services Sectors, which are to be promoted both at the domestic and the global level. There should be effective utilisation of a dedicated fund of `5,000 crores, which has been set aside to help these sectors grow significantly. Initiatives to promote tourism, a big jobs generator, by facilitating an ecosystem which can attract tourists and has served well, should be undertaken.
Third, there is a need to capture the space created by trade protection measures adopted globally, particularly by the United States and China. We should focus on exporting to the US such products whose imports from China (and other countries) have been recently subjected to higher tariffs. Simultaneously, specific copanies should be attracted to make products in India through foreign direct investment, joint ventures, technology transfers and value chains for further export to the US (and other countries) to benefit from a favourable tariff regime.
In other words, we should identify countries and sectors in which we possess a competitive tariff advantage and attract investments for exports. However, we should be mindful that several other countries may also possess a similar advantage, and would compete with us in attracting investments. Consequently, such creative trade creation will require several internal reforms in tandem, of which rationalising transaction costs and addressing IGST refund woes will be the key.
Fourth, we need to review incentives provided to boost exports, particularly from Special Economic Zones (SEZs). Out of the 420 approved SEZs, only 223 were operational as of July 2018. According to our recently-concluded study on export-oriented FDI into India and SEZs, key issues faced by SEZ operators include inconsistent and unpredictable taxation, limited incentives to expand, and duplication of procedures. Considering the increasing share of SEZs in Indian exports, domestic as well as foreign investment needs to be facilitated by eliminating unnecessary barriers. To this end, we should come out with a revamped SEZ Policy.
Fifth, we need to reorient our subsidy schemes and make them globally acceptable. For instance, direct export subsidies to producers should be replaced with export incentives in collateral areas such as transportation and other logistics which can lead to reduced costs.
Simultaneously, internal reforms for increasing competition in domestic agriculture markets, particularly the procurement market, are required. As practised in other sectors, there is a need to reorient subsidies from producers to consumers in agriculture.
Last but not the least, India supports reforms at the World Trade Organisation (WTO). Trade multilateralism is still the best bet for us and reforms in the WTO’s dispute settlement and other functions are essential. We need to dispassionately work with the European Union and China on reforming the WTO to identify elements worthy of our support. India should take the lead in reforming the WTO and ensure that it continues to be an engine for global trade keeping in mind its development dimensions.
To conclude, the current global trade scenario presents before us many challenges but also several opportunities for innovation, collaboration and to grow our exports. Central and state governments will have to work together to make the most of these opportunities. The suggested multi-pronged approach can help us to leverage our export competitiveness to turn aspirations into reality.