India’s jumbled trade policy

Author: Soyen Park, Korea University

Since becoming India’s prime minister in May 2014, Narendra Modi has sought to make the country ‘open for business’. But while there is hope that his pro-business policies — often dubbed ‘Modinomics’ — will improve economic growth, aspects of India’s foreign trade policy seem at odds with the country’s aspiration for deeper engagement with the world economy.Indian Prime Minister Narendra Modi addresses business leaders as he launches his "Make in India" initiative. (Photo: AAP) India wants to liberalise its industry and woo foreign investment. Yet it also wants to curb imports and protects its industries. These two contradictory messages have left foreign investors confused, increasing scepticism about the effectiveness of Modi’s policies.

Modi’s record on reforms deserves credit. Since its inauguration, the Modi government has undertaken a number of positive measures to restore investor confidence, improve the business environment and make India an attractive destination for foreign direct investment (FDI). Retrospective taxation has been avoided, FDI norms have been relaxed and plans for a single window clearance system have been announced. Three major reforms — pertaining to labour, land and the GST respectively — are being held up in the upper house of parliament. But the government continues to make strides in other areas, including on arbitration and the bankruptcy code.

Modi’s sweeping efforts attracted US$44.29 billion in FDI during the fiscal year of 2014–1, which was up by 23 per cent compared to 2013–2014. The Financial Times claims that India is now the world’s most favoured investment destination, outpacing China and the United States.

While Modi’s omni-directional reforms to rejuvenate India’s industries have been welcomed, the simultaneous introduction of stricter trade protection measures have left foreign investors perplexed. But India’s pursuit of trade protectionism through non-tariff barriers is not new. According to the WTO, India is the world’s most prominent user of anti-dumping and safeguard measures. It implemented 534 anti-dumping measures (18 per cent of the world’s total) between 1995 and 2014 as well as 19 safeguard measures (13 per cent of the world’s total) between 1995 and 2015.

Efforts by the Modi government to accommodate the concerns of domestic industries are slowly undermining the confidence of foreign investors. In response to concerns raised within the domestic steel industry, the government imposed safe-guard duties and anti-dumping measures on imported steel products in September and December 2015 respectively. It is even considering imposing a minimum import price on steel products to curb imports, particularly those from China. Such measures carry the risk of both violating the General Agreement on Tariffs and Trade and undermining Modi’s promise of an open business environment.

The government’s apprehension towards free trade agreements (FTAs) further undercuts confidence in Modi’s commitment to liberalising India’s economy. The Modi government has stated numerous times that it will revisit and renegotiate existing FTAs since ‘some FTAs were benefiting the partner countries’ rather than India. India’s stance is concerning for both existing FTA partners and those that are still negotiating deals with India such as the European Union, Canada and Australia.

Given that chronic account deficits, particularly trade deficits, have long been considered one of the root causes of India’s economic malaise, India’s apprehension towards rising imports is not incomprehensible. But what the Indian government is overlooking is that India’s inflexibility could hamper Modi’s grand ‘Make in India’ policy. It is inevitable that foreign companies will import intermediate goods and parts necessary to manufacture products. This is particularly true when a country is in the nascent stage of developing its manufacturing sector — like India is. But the Indian government has been turning a blind eye to how imports and FTAs contribute to India’s manufacturing industry — and, in turn, its exports.

Internal incoherence within the Ministry of Commerce and Industry is partly to blame for India’s inconsistent and confusing trade policy. The Department of Industrial Policy and Promotion, which is in charge of FDI and the ‘Make in India’ strategy, wants to open up India. But the Department of Commerce, which is in charge of bilateral and regional FTAs and multilateral trade arrangements, is more cautious. Better policy coordination, whether it is geared towards liberalisation or protection, would provide clarity and help foreign investors to prepare accordingly.

Since the conclusion of the Trans-Pacific Partnership, discussions on the necessity of concluding bilateral and regional FTAs have surged in India. As India’s fear of being left out of global trade pacts increases, liberalisation will be more and more appealing. India’s likely endorsement of the WTO Trade Facilitation Agreement, despite much domestic criticism, is one indicator of this progress.

As the World Bank noted and IMF Chief Lagarde hailed, India is a ‘bright spot’ in a gloomy global economy. Foreign investors are eager to engage with India’s rapidly emerging market. Developing a clearly defined trade strategy is critical if India is to make the most of this opportunity.

Soyen Park, a recent PhD graduate of Korea University, currently resides in New Delhi, India and carries out independent research on Indian economy.

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