India’s new foreign trade policy: Old wine in new bottles

Author: Nabeel Mancheri, Hiroshima University

The recently released new five-year national Foreign Trade Policy (FTP) of India has set a few objectives.

Given the current financial crisis, it is also intended to provide a confidence boost for the export market. Its objectives are ambitious. Fiscal incentives, institutional changes, procedural rationalisation, and enhanced market access across the world, as well as the diversification of export markets are the trust areas mentioned in the document.

However, the document doesn’t provide any new thoughts and lacks any bold initiative in terms of longer term objectives. It is the same old type of bureaucratic exercise that the Commerce Ministry has been carrying out for decades.

The continuation of the same old policies, such as targeting a set of trade or export goals, mentioning a few sectors of importance and reshaping fiscal packages is as flawed as past approaches.

It lacks proper mechanisms for future planning, and will be unable to examine past failures which have limited the Indian share to a mere 1 per cent of global trade for decades.

The FTP sets a policy objective of achieving an annual export growth rate of 15 per cent, and an annual export target of US$200 billion by March 2011.

In the remaining three years, the FTP proposes a high export growth path of around 25 per cent per annum, and expects to double India’s exports of goods and services. The long term policy objective is to double India’s share in global trade by 2020. This may not be achievable if the Commerce Ministry doesn’t go beyond its traditional way of thinking.

The FTP alludes to the success of Chinese efforts to increase their trade, and recommends adopting a similar strategy to increase exports in the Indian manufacturing sector. This is a positive step, but a lot of ground work will be required to implement this. Change has to come from the bureaucracy first. The productivity of Indian bureaucrats must be increased, corruption must be reduced, and FDI policies must be liberalized to attract greater investment.

As for means, the new FTP appears to be based on three main pillars. Firstly, the short-term objective is to arrest and reverse the declining trend of exports and to provide additional support to sectors hit badly by recession in the developed world. Secondly, support for market and product diversification is targeted. 26 new markets have been added under the Focus Market Scheme. These include 16 new markets in Latin America and 10 in Asia-Oceania. The incentive available under the Focus Market Scheme (FMS) has been raised from 2.5 per cent to 3 per cent. The incentive available under Focus Product Scheme (FPS) has been raised from 1.25 per cent to 2 per cent. Thirdly, objectives and commitments to ensure increased employment opportunities, addressing the issues of labour-intensive exports and making the export business more convenient and trouble free are targeted – by bringing down transaction costs, and improving infrastructure related to exports . Gems and jewellery, textiles, leather, auto components and pharmaceuticals are declared labour-intensive sectors getting special dole and attention in the policy.

Repositioning income tax in the IT sector, and altering the duty on engineering and electronic products, as well as others, are part of a raft of policy measures.

Most of the schemes, however, are geared towards the short term objective of preventing exports further declining, and fiscal incentives do not go beyond the period of 2011.

What difference does it make to raise the FMS from 2.5 per cent to 3 per cent and the FPS from 1.25 per cent to 2 per cent?. Just changing these nominal figures will not have any real impact.

Moreover, these are the acronyms that we have been polishing, renaming and reintroducing with a view to changing the nominal figures in every FTP that the Ministry has released in the past. How many in the export market really bother about these figures mentioned in these policy documents?

A previous post on this same topic by Rajiv Kumar of ICRIER reveals that ‘a recent survey of 400 exporting firms as a part of a study showed that up to 20 per cent of exporters do not avail themselves of export incentives due to the hassles involved and more than 50 per cent admitted to having had to incur some expenditure to avail the benefits under various schemes’. So the problems lie else where, not in the tips the government provides every five years.

The new FTP proposes the promotion of ‘Brand India’ through six or more ‘Made in India’ shows to be organized across the world every year.’

This is a supplementary step, and it should not be a wholly government funded program. Indian multinationals and Small and Medium Enterprises (SMEs) should be brought in as main sponsors and be encouraged to carry it in the future with the help of industrial organisations abroad.

Moreover, it is not only the brand that matters but the quality, competiveness and availability of Indian products in foreign markets. People see the price and quality first before looking at what country has produced it.

Have the FTPs ever looked to increase quantity in an existing market? For example, the availability of Indian manufactured goods in Japan and Australia is minimumal, where the people are aware of the quality of Indian manufactured items such as textile and leather products, and it will be true in other markets too around the world.

Take any department storeroom in Japan or Australia. For every 30 or 40 Chinese commodities on display, there will be perhaps one from India. It is not a problem of concessions or incentives. Here, trade agreements play an important role in increasing the trade and investment between countries. So along the measures mentioned in the FTP, India has to push forward its FTA policies, encourage the private sector to open up and let them provide the incentives for more interaction between Indian and foreign companies.

In this era of global competitiveness, there is a desperate need for Indian exporters to upgrade their technology and reduce their costs. Accordingly, an important element of the FTP is to help exporters upgrade technologically. It is hard to believe that we only realised very recently the importance of technology and importing needed capital to increase the quality and productivity of our manufacturing sector, as the new FTP proposes to promote the imports of capital goods for certain sectors.

Whether the initiatives proposed in the new FTP, by which the government envisages to achieve such an ambitious outcome, will be sufficient is unclear. In particular, it is doubtful whether export-related duty exemptions and preferential treatment of economic agents are the best way to promote economic efficiency and growth. So there are many structural impediments to overcome before we redraft these occasional exercises of fiscal sops. On the one hand, across-the-board liberalisation efforts should be continued. On the other hand, duty exemptions and other privileges geared mainly towards export promotion are to be enhanced. In fact, if the first objective is realised, the second, at least when it comes to import duty exemptions, becomes redundant. It seems that across-the-board import duty reduction can be of more benefit economy-wide than selective duty exemptions in export sectors. Moreover, the larger question of making Indian exports more competitive needs a much more comprehensive set of policy responses. Such a policy response is not limited to one Ministry and therefore, the government as a whole needs to act in unison if these basic problems are to be addressed.

Nabeel Mancheri, is Research fellow, Graduate School of International Development and Cooperation, Hiroshima University.

SHARE: