New trade policy runs into familiar issues | Economic Times

In March 2018, the US had challenged certain export promotion schemes of India, alleging that these largely created an uneven playing field for competing nations. The Merchandise Exports from India Scheme (MEIS), Exports Oriented Units Scheme and sector-specific schemes were some of the subsidy programmes under the lens. Consequently, a World Trade Organization (WTO) dispute panel ruled in October 2019 that India’s subsidy schemes were not in congruence with WTO norms.While India appealed against the panel’s views in November 2019, the proceedings are currently on hold as the appellate body is not functional right now. That is because the US blocked the appointment of judges, citing varied issues pertaining to the trade agency’s dispute settlement mechanism.In light of this, while the MEIS scheme was replaced with the Remission of Duties and Taxes on Exported Products (RoDTEP) on January 1 this year, the rates and guidelines have not been announced so far. This has left exporters in a state of flux. And that is why they are betting big on the new foreign trade policy (FTP), expected to come up in October.Industry experts are rooting for developing WTO-compliant schemes that would offer the right push to promote India’s export potential. “The new scheme should focus less on sheltering the exporters and should help them through the medium of lower-cost competitive advantage, and enable them to be self-sufficient and gain competitive advantage for the quality of the product they export,” says Pushkar Mukewar, CEO and co-founder of trade factoring company Drip Capital.Export PushThe current FTP — announced in 2015 and extended till September 2021 — is a legacy of the times when trade policy was heavily focused on export promotion through incentives, says Manasvi Srivastava, Partner-Trade and Customs, KPMG. Therefore, any new schemes under the five-year FTP must be crafted with caution. “With the applicability of restrictions under the Subsidies and Countervailing Measures Agreement (WTO rules that deal with government subsidies), there are limited means of traditional export promotion that India can now deploy. In a sense, it may be good that the policy can now focus on more efficient trade governance and on building trade-related infrastructure. We can expect a leaner trade policy in terms of export schemes, but at the same time, a more effective policy in terms of overall trade promotion and governance,” Srivastava adds. 84397594In fact, India’s export figures, which have hovered around $300-$350 billion for over a decade, shows that a lot needs to be done to promote India as an export powerhouse. The 2015 FTP set an ambitious export target of $900 billion by 2020. But reaching this seems more difficult than ever, especially after the virus outbreak last year plunged exports to record lows in the first quarter. Though the situation has improved since, with exports rising to $95 billion in the April-June quarter of 2021-22, according to Commerce and Industry Minister Piyush Goyal, a lot more remains to be accomplished.Greater integration with the global supply chain will be vital in making India emerge as a key player in global trade. “The new FTP should encourage manufacturing and export of value-added final goods or even intermediate goods with strong global demand,” says Mukewar of Drip Capital. “This would be a move in the direction of growth. Dedicating more trade corridors by signing product-specific MoUs with different economies to diversify and establish new markets could be another way of boosting India’s export-led growth.”Making a Successful DealAnother aspect that is considered crucial to increase exports is free trade agreements (FTAs). In a recent address to the media, the Federation of Indian Export Organisations (FIEO) stated that FTAs with major trading partners such as the US, the UK and the EU as well as Australia, New Zealand, Canada and Israel would be helpful in attracting foreign direct investments, particularly those looking at the Indian markets and exports. “One reason for Vietnam’s success in attracting investment and relocating units is its effective FTAs with the rest of the world,” says A Sakthivel, President of the exporters’ association.In fact, there have been many areas where India can take a leaf out of Vietnam’s aggressive trade policies. Its market openness has greatly contributed to the country’s manufacturing growth with a good number of FTAs that came about. For instance, joining the Regional Comprehensive Economic Partnership (RCEP) in November 2020 would help Vietnam further in reducing trade barriers and boost local firms’ export growth. The country was also seen as a viable option for firms looking to move out of China in the aftermath of the US-China trade war, with factors such as low labour costs, effective policies and better infrastructure working well in its favour. Its corporate tax rates for large manufacturing plants are 10-20%, while it is over 40% for foreign companies in India.The timing is right for India to emerge as an export powerhouse, but that would first need a massive overhaul of the framework as it exists now. With FTAs, for instance, even though such agreements have always been a contentious subject — they are seen as more helpful to the partnering country than India’s domestic firms — exporters insist that finding a way to make them work will eventually be in the country’s favour.“If you look at it from an FTP perspective, ease of transactions, internationally, is largely driven by trade agreements. We have to find a mechanism by which they will work for India,” says Pankaj Khandelwal, Chairman and Managing Director of INI Farms, an exporter of bananas and pomegranates. “Ultimately, such FTAs help both the countries or regions involved. And I think that overall, from a policy perspective, we need to figure out the problems with our trade agreements and how they can be resolved. The world has changed since 2015 when the previous FTP came in. There is so much of a shift that has happened.” 84397605What Exporters WantThe exporters ET Digital reached out to were unanimous on getting more clarity in the FTP as far as WTO compliance is concerned. This, they say, would enable them to plan the direction of their exports and target countries in a more strategic manner over the five-year period. “Right now, we don’t have any clarity on the short-term or long-term policies,” says Mahavir Pratap Sharma, Immediate Past Chairman, Carpet Export Promotion Council (CEPC). “In the case of apparel, everything goes to Bangladesh, Indonesia or the Philippines. There is so much ambiguity here on RoDTEP and GST. Inflation has gone through the roof. Businesses working on razor-thin margins such as carpets, semi-precious stones, depend on incentives. And if the situation worsens for them, everything goes for a toss.”In the context of the “China-plus-one” strategy — where countries are looking at an additional hub to invest beyond China — India has the potential to get manifold gains, he says. “Aspects like long-term policies, controlled inflation and ease of doing business are what foreign entities will find attractive. No grants and incentives are needed in such a case. We would rather want a level playing field with other countries on logistics, return on duties, taxes and ease of banking to take us forward,” asserts Sharma.Besides this, exporters talk about promoting a cluster-based approach to drive efficiencies of scale. This can help to make the products cheaper and gain an edge in international markets. “Trade negotiations and subsidies are important and provide booster doses. But how can one be more competitive from a long-term perspective? The next five years are important in that context. Cluster-based, district-centred excellence for exports is the way forward,” says Khandelwal of INI Farms.Incidentally, as part of the Agriculture Export Policy, certain product clusters at the district level have already been identified for export promotion. “They are looking at it as a district-level approach in the case of agriculture. Cluster initiation has already happened in this sector. But what are the minute details and how exactly will it function? A clear direction in FTP will help in giving further impetus to the sector,” he explains.Logistics and InfrastructureWhat will also play an integral role in paving the way forward for enhanced trade facilitation will be how well a road map is laid out to clear logistic bottlenecks and improve infrastructure. 84397665According to a report by the Confederation of Indian Industries and Arthur D. Little, India’s supply chain and logistics costs are currently 14% of the country’s GDP, against 8% in the US and 10% in EU countries. It further stated that a “competitiveness gap” of $180 billion existed in the sector, which can easily become $500 billion by 2030 if the supply chain inefficiencies were not addressed. The pandemic has made the situation worse as many companies faced supply chain disruptions; they were ill prepared to navigate a crisis of this magnitude.The Trade Infrastructure for Export Sector (TIES) scheme, which supports export infrastructure, has an allocation of Rs 75 crore, which is grossly inadequate to make any difference. “How can we support infrastructure development for exports in 28 states and 8 UTs with a meagre sum of Rs 75 crore? Such a paltry sum for infrastructure isn’t sufficient and should be increased to Rs 1,000 crore,” FIEO said in its press note recently.Besides this, the new policy should also address the shortage of containers and high container freight, which compounded the woes of exporters during the pandemic. Experts in the industry have also pointed out that India should create a shipping line of global standards. This will resolve a lot of the logistic constraints and play a crucial role in ensuring export growth.If the government’s aim is to achieve $1 trillion exports in the next five years, the FTP will also have to factor in policy changes that can help exporters increase their profitability. Incentivising labour-intensive sectors — which contribute majorly to exports and are an employment generator — will also need to be considered. And with tech upgradation and upskilling taking on a new urgency in the backdrop of the pandemic, efforts to push such initiatives will help exporters adapt to global trends and carve a niche for themselves in foreign markets.(Editing by Ram Mohan. Illustration by Sadhana Saxena)