India’s new foreign trade policy: setting its own house in order Bipul Chatterjee is Deputy Executive Director, and Chenai Mukumba is an Assistant Policy Analyst, at CUTS International The government of India released its new national Foreign Trade Policy (FTP) 2015-20 on 1 April 2015. The aim of this FTP is to almost double India’s exports of merchandise and services from USD 465.9 billion to USD 900 billion by 2019-20; and raise its share in world exports from two per cent to 3.5 per cent. While some have criticized it arguing that given the growing complexity of the international trading system, it falls short on ambition and ideas, the new FTP instead reveals a more calculated, and perhaps long overdue, approach. When the FTP was announced by Commerce & Industry Minister Nirmala Sitharamam, she noted that the “state of the external environment and new features of the global trading landscape […] will profoundly affect India’s trade.” However, as she continued, she noted that “while the external factors are largely outside our control, there is a lot we can do to strengthen our own capabilities and set our house in order.” While the FTP acknowledges that the global trade architecture has evolved over the past two decades due to the expansion of global value chains and the flourishing of preferential trading agreements; it recognises that India does not have to undertake overambitious measures to reach its goal of becoming a significant participant in world trade by 2020. Rather, India’s biggest obstacle is in fact ‘addressing [its] in-house challenges.’ The government’s approach is novel in its almost counter-intuitive approach: instead of forging ahead and outlining a high-sounding policy, it has rather taken a step back and addressed several underlying issues that have remained unaddressed in previous policies, yet remain necessary to provide India with the platform it will need to achieve its goals. Without question, in spite being one of the largest economies in the world, a key factor obstructing India’s growth and development has been its own domestic constraints. For example, estimates have suggested that a lack of adequate infrastructure reduces India's GDP growth by 1-2 per cent every year, and India’s fast growth has placed increasing pressure on its physical infrastructure, which already suffers from a substantial deficit. For this reason, the government’s acknowledgement that India’s “biggest challenge is to address constraints within the country such as infrastructure bottlenecks, high transaction costs, complex procedures, and constraints in manufacturing” reflects an understanding that India’s external growth in the global trade system can be propelled by and perhaps requires, first and foremost, domestic capacity-building. In light of this, this article looks at several significant changes to the FTP that have been added to address these internal challenges. Coherence with India’s Domestic Policy Framework At a roundtable discussion jointly organised by CUTS International and the Federation of Indian Chambers of Commerce and Industry (FICCI) on India’s Foreign Trade Policy late last year, Pravir Kumar, Director General of Foreign Trade, Department of Commerce, Government of India, noted that one of India’s major tasks was to contextualise its trade policy within its domestic scenario. The importance of this, he argued, was because the underlying assumption of trade is that it leads to domestic wealth and employment generation. To this end, increasing convergence between India’s domestic and trade policies was addressed in the formulation of the new FTP in two specific ways. Firstly, the FTP Statement which explains the vision, goals and objectives underpinning the FTP, acknowledged that given the fact that foreign trade today plays an important part in India’s economy, it can neither be formulated nor implemented by any one department in isolation. For this reason one of the most innovative initiatives of this new FTP was the adoption of a ‘whole-of-government’ approach: vertically, with the mainstreaming of State and Union Territory Governments, and horizontally, across various departments and ministries. Secondly, coherence between the FTP and India’s domestic policy framework was also evidenced by the discussion of its close integration with a number of very important initiatives such as Make in India, Digital India and Skills India. The goal of the Make in India initiative, particularly, is to help the Indian economy achieve global recognition, promote the country as an investment destination, spur manufacturing and promote employment. Make in India encompasses initiatives for skill development to ensure the availability of skilled manpower for manufacturing, to improve the ease of doing business through initiatives such as self-certification of documents and innovative revenue models. To this end, the new FTP reduced export obligation (EO) for domestic procurement under the Export Promotion Capital Goods (in the case when capital goods were procured from indigenous manufacturers), from 90 per cent to 75 per cent in order to promote the domestic capital goods manufacturing industry. The FTP also provided higher rewards for the export of items with higher domestic content and value addition. Linking these initiatives to the FTP helps address a gap that was left neglected in previous policies. Providing a level playing field It is estimated that if India is to address its infrastructure gap it requires a capital injection of one trillion dollars. As a result, the pervasive lack of good roads, bridges and ports contribute to increasing costs for Indian exporters. The objective of one of the major highlights of the new FTP, the ‘Simplification and Merger of Reward Schemes,’ was to ‘provide rewards to exporters to offset infrastructural inefficiencies and associated costs involved and to provide exporters with a level playing field. By simplifying access to rewards for Indian exporters, the FTP is demonstrating the importance of taking domestic measures to level the playing field for its own exporters who often incur additional costs due to infrastructural deficiencies. In the previous FTP 2009-14, under Promotional Measures, there were five different schemes for manufacturers, namely, Focus Product Scheme, Market Linked Focus Product Scheme, Focus Market Scheme, Agri. Infrastructure Incentive Scrip and Vishesh Krishi and Gram Udyog Yojana (Special Agriculture and Village Industry Scheme) for rewarding merchandise exports with different kinds of duty scrips with varying conditions attached to their use. Under the new FTP, all of these schemes have been merged into a single scheme, the Merchandise Export from India Scheme (MEIS). The scrips issued under this scheme will also have no conditionality attached to them. The new FTP also replaced the Served from India Scheme (SFIS) with Service Exports from India Scheme (SEIS) which will now apply to service providers located in India, regardless of their constitution or profile, instead of Indian service providers. Trade facilitation and enhancing the ease of doing business Trade facilitation and enhancing the ease of doing business were also major focus areas of the new FTP. While in the past the focus of trade negotiations was on the removal of tariff barriers, today’s major trade barriers are non-tariff and trade facilitation-related barriers. The decision to approve a Trade Facilitation Agreement at the Bali Ministerial was testament to the growing importance of facilitating the smooth and speedy flow of goods across borders, particularly in light of the growing relevance of global value chains. Trade facilitation, specifically, has long been an issue in South Asia including India. However, while India fairs better than its South Asian counterparts according to the OECD Trade Facilitation Indicators, it is considerably worse than the average of the top quartile for the bulk of the trade facilitation areas covered. Indeed if India wants to enhance its competitiveness as the global level, addressing its trade facilitation constraints domestically could foster its trade growth. India’s trade facilitation performance: OECD Indicators Source: OECD (2014), OECD Trade Facilitation Indicators, available at: With regards to ease of doing business, despite progress in the last two decades India currently ranks 142nd out of 189 countries on the Ease of Doing Business index. And even then the situation does not seem to be improving given that India dropped two positions from 140 in 2014. In light of India’s position as the fourth largest economy (according to purchasing power parity), the difficulty of engaging in business activities is indeed a significant domestic constraint to fully participating in trading activities. Ease of Doing Business in India Source: World Bank Group (2015), Ease of Doing Business in India, available at: The importance that the government has placed on both these issues is evidenced by the renaming of Chapter 1 of the FTP to Legal Framework and Trade Facilitation. Section B is solely dedicated to Trade Facilitation and Ease of Doing Business. The main changes that the government has implemented to address these concerns have included moving closer towards a paperless processing of reward schemes. As a measure to increase ease of doing business, landing documents of export consignment as proofs for notified market can now also be digitally uploaded and online inter-ministerial consultations have also been introduced. There has been increased simplification of procedures/processes, digitisation and e-governance, such as the creation of a facility that allows the uploading of documents in Importer/Exporter profiles; there will no longer be a need to repeatedly submit copies of permanent records/documents with each application. The global context While indeed India has taken a number of steps to address its domestic scenario, the FTP, more specifically, the FTP Statement, recognises the growing number of mega-regional agreements, namely: the Transatlantic Trade and Investment Partnership, the Trans-Pacific Partnership and the Regional Comprehensive Economic Partnership agreements; it notes however that the mega-agreements will challenge India’s industry in many ways, ‘for instance by eroding existing preferences for Indian products in established markets such as the US and the EU and establishing a more stringent and demanding framework of rules.’ Again however, India’s approach to this growing concern is inward: ‘Indian industry needs to gear up to meet these challenges for which the Government will have to create an enabling environment.’ India’s market strategy is also outlined comprehensively noting that India’s future bilateral/regional trade engagements will be ‘with those regions and countries that are not only promising markets but also major suppliers of critical inputs’. However, the FTP Statement notes that signing an FTP is the beginning, not the end of the process. In recent years there has been widespread concern regarding the benefit of signing FTAs, therefore the institution of an Impact Analysis of FTAs as well as an intensive FTA outreach programme is a welcome approach to tackling the issue. Additionally, the FTP has also been framed within the context of the multilateral trading system noting that, given the current discussions at the WTO regarding the eventual phasing out of export subsidies, its export promotion efforts will lean ‘towards more fundamental systemic measures rather than incentives and subsidies alone’. Conclusion India’s foreign trade policy is the framework within which India engages in trade and with the release of the new FTP India has used this opportunity to implement meaningful domestic economic reforms. There are three important ways that the new FTP has sought to address India’s domestic constraints. Firstly, by establishing coherence between its domestic policy framework and its trade policy, India is mainstreaming its trade activities reifying a departure from the past when trade was considered a residual economic activity as opposed to a means to achieve strategic and security interests. Indeed, if approached effectively, trade can play a crucial role in helping India meet its developmental objectives. Secondly, by easing access to rewards for Indian exporters, the FTP is reiterating the importance of undertaking steps to level the playing field for its own exporters who often incur costs due to infrastructural deficiencies. While the long-term solution will require increased investment in infrastructure, the streamlined reward system provides a solution to exporters in the short-term. Thirdly, as trade barriers have moved away from tariff measures to non-tariff and trade facilitation-related barriers, India’s attention to improving trade facilitation and ease of business reflects an acknowledgement of the impact that a hampered production and export process can have on trade. Unquestionably, many factors hindering India’s growth and development have been due to its own domestic limitations. In making an effort to address these issues, while seemingly unambitious, these reforms have the potential to significantly advance India’s objectives of inclusive growth and economic development.
The FTP... reforms have the potential to significantly advance India’s objectives of inclusive growth and economic development