The Foreign Trade Policy, 2021-2026, of India will come into effect on 1st April 2021 as announced by the Union Ministry of Trade and Industry on 12th January 2021. It was stated that the policy will be implemented for five years. and will strive to make India a leader in international trade. This prospect is encouraging and supported by various factors. The first is India’s rapid recovery from the economic consequences of the Covid-19 pandemic.
The IMF, in its latest World Economic Outlook report, projected double-digit growth of 11.5% for India, while hailing India’s decisive steps and prudent policymaking to deal with the pandemic. Second, the dynamics of international trade have changed significantly as a result of the pandemic, for example, supply chains are being redesigned and companies are looking for alternative locations to China. It is an opportune time for India to capitalize on the business opportunities that have emerged as a result of the changing global order. Third, while many countries around the world are still reeling from the pandemic, India’s external sector has shown impressive resilience, as evidenced by a current account surplus, robust FDI inflows and growth. supported by foreign exchange reserves.
With all these factors in place, the time has come for India to reorient its foreign trade policy to build a self-reliant India that would focus not only on boosting domestic manufacturing but also on transforming India into a an important link in the global value chain. In this context, the following suggestions are made for effective decision-making.
(1) Deepen exports
A diversified export basket is an integral part of a prudent trade policy. In the wake of the pandemic, economies with few export commodities (such as oil-exporting countries in the Middle East) have been found to suffer more than those with diversified exports. At the same time, however, too much diversification makes it difficult to deepen a country’s exports. For example, in India, the top five export commodities (petroleum products; drug formulations; pearls and gemstones; iron and steel; and machinery and electrical equipment) together account for less than 30% of total exports. This implies that a large share of Indian exports come from a very wide range of products. Too much diversification prevents an economy from realizing the benefits of specialization and economies of scale. By contrast, in Bangladesh, the top five export products (including textiles, garments and footwear) account for more than 90% of its total exports, enabling it to become a global hub for these products (Economic Survey , 2020-21). Therefore, foreign trade policy should focus on incentivizing the manufacture of those Indian products which are competitive in the global market and have the potential to meet large-scale global demand.
(2) Exploiting Competitive Advantage in Exports
In recent years, India’s dominant exports have been capital and technology intensive (such as transport equipment, machinery, etc.). While this should continue to be encouraged, there is also a need to boost exports in sectors where India has an inherent role. competitive advantage due to the fact that it is a labor-rich country. The products in which India is known to have revealed a comparative advantage include labor intensive products such as cotton, carpets, textiles, etc. resources for export growth.
(3) Integration with the global value chain
Another post-Covid insight is the importance of deepening India’s presence in the global manufacturing value chain. The Indian pharmaceutical industry is a good example. While India is the world’s largest supplier of generic drugs, it has been overly dependent on China for the supply of Active Pharmaceutical Ingredients (APIs) and Key Raw Materials (KSMs). During the pandemic, this has limited India’s ability to manufacture generic drugs due to supply chain disruptions from China. Aware of this, the government notified a Production Linked Incentive Scheme (PLI) on July 21, 2020 for the promotion of domestic manufacturing of KSM and critical APIs, with a financial outlay of Rs. 6,940 crores. This was done with the aim of reducing India’s reliance on imports of these items from other countries, deepening its presence in the pharmaceutical manufacturing supply chain and reduce the risk of supply chain disruption for Indian drug manufacturers.
Keeping this momentum, the future foreign trade policy should aim to encourage the development of components and the manufacture of raw materials in sectors such as electronics, automobiles, etc. This would lead to a shorter supply chain (because fewer countries are involved) and promote exports as well as investment. . A step in this direction has already been taken in the Union budget 2021-22, where customs duty rates have been increased not only for finished products but, in some cases, on the components necessary for the manufacture of finished products covered by the PLI regime.
(4) Leverage Foreign Trade Agreements (FTAs)
India’s experience with FTAs has not been very encouraging. According to the Revenue Department of the Ministry of Finance, for many Indian FTAs, the balance of trade is unfavorable to India. In fact, India’s trade deficit with ASEAN, South Korea and Japan widened after entering into FTAs with them. The Ministry of Finance also observed that revenue losses more than doubled to nearly Rs 26,000 crore in 2018-2019 due to lower import duties which had to be implemented as part of the ASEAN-India FTA.
A similar picture is seen for India’s trade deals with South Korea and Japan. For example, pharmaceuticals are India’s strength but are not among its main exports to Japan. Japan’s domestic market is relatively self-sufficient, and the Japanese market prefers domestic brands to foreign brands. Obviously, the benefits are not mutual. FTAs should therefore be renegotiated in such a way that the tariff reduction and increased market access are applicable to goods and services that have a large or captive market in the partner country. This would help realize the expected benefits of the FTA.
(5) Establish links with the micro, small and medium-sized enterprises (MSME) sector
There is an urgent need to empower the MSME sector and make it more robust. Since the MSME sector in India forms the backbone of the business community, export opportunities could only be effectively tapped when this sector becomes competitive in terms of scale, cost and efficiency. Furthermore, through policy measures (such as local content requirements), backward and forward linkages can be created with the MSME sector, which will not only make it an important part of the manufacturing value chain, but also competitive in serving global brands.
In summary, with sound economic fundamentals in place, a foreign trade policy that aligns with the objectives of ‘Aatmanirbhar Bharat’ has the potential to make India an important player in global trade dynamics over the long term.
Dr. Niti Bhasin is a guest contributor. The opinions expressed are personal.