What India’s new foreign trade policy can and should do

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This is probably one of the most troubled times for exporters almost anywhere in the world. Whether for political considerations or because of pandemic-induced lockdowns, more and more nations seem to have retreated into protectionist shells. India, now more than ever, needs a strong Foreign Trade Policy (FTP) that can tackle the new normal as nations struggle to cope with a covid-19 pandemic and downturn economic.

The existing FTP, which was scheduled to end in March 2020, has been extended in view of the pandemic until March 31, 2021. Now is the time to develop a new FTP. What will it contain? Will it be strong enough to deal with the unforeseen repercussions of a pandemic, lockdown and an increasingly protectionist world? Here are some expectations of this policy.

Rationalization of the task structure: In a document released in August last year, the Confederation of Indian Industry (CII) argued for a careful calibration of import and export duties. Pushing for India’s increased participation in the global value chain, the document says that creating a transparent import environment will encourage companies to import components and raw materials, which can then be exported after adding valuable. Ideally, India should follow the example of many countries, where a pyramid tariff structure is in place for imports, with the lowest duty on the raw material.

India has set up a program to encourage exporters. The EPCG (Export Promotion Capital Goods) allows the duty-free importation of capital goods provided that at least some of them are used to produce goods for export. However, the program was not as effective as expected.

The problem may lie in the low penalty imposed on companies that do not respect their export obligation. Reports indicate that there are cases of intentional default, where companies find it cheaper to import under the EPCG even after considering the sanctions imposed by the government. This defeats the purpose of the program, which is to increase exports. The new FTP should either strengthen the existing system or reorganize it to promote exports.

The existing FTP focuses on the Merchandise Export Scheme of India (MEIS) – an amalgamation of earlier export promotion schemes. MEIS is essentially an incentive program, under which exporters receive duty credit certificates equal to a percentage of the value of exported goods. These certificates can be used to pay a variety of taxes and duties.

Encouraging exporters may seem like a great idea, except when such incentives run counter to World Trade Organization (WTO) standards. India has decided to retire the MEIS and replace it with a more nuanced scheme of Remission of Duties or Taxes on Export Commodities (RoDTEP).

The government has also introduced the Duty Drawback Scheme (DBK) to help exporters. However, as it stands, the DBK scheme is not entirely efficient, and we would like to see it revised in the new FTP. It offers a duty drawback as a percentage of the export price, but with a cap. In fact, it gives an exporter of expensive, high-quality goods the same DBK as an exporter of cheap goods. The new DBK (or its equivalent) should take into account the value of exports and promote it accordingly.

WTO Compliant Programs: This should be the heart of FTP. The WTO works to dissuade governments from heavily subsidizing exporters in order to provide a level playing field for all nations. The Indian government is well aware of the need to adhere to WTO standards and has already taken significant steps to remove subsidy-based schemes.

However, much more needs to be done at a fundamental level to promote exports and ensure that Indian exports are competitive in the global market. This will mean an overhaul of the government’s foreign trade policy.

Improvement of infrastructure: An efficient and extensive infrastructure network – warehouses, ports, SEZs, quality testing laboratories, certification centers, etc. – will help exporters stay competitive in a tough market. Trade Infrastructure for the Export Sector (TIES) is a good initiative set up to provide assistance in financing export infrastructure, including cold chains, quality testing laboratories, ports, freight terminals, etc. TIES was launched in 2017 for three years.

However, much remains to be done. Industry bodies are pushing for the program to be expanded. With a new lease of life and with more funds at its disposal, TIES can focus on solving two of the main problems facing exporters: warehousing and storage, in particular an effective cold chain.

Technical upgrading and improvement: Like infrastructure, upgrading the technology and skills of exporters could be a good option. This will allow Indian exporters to compete on their edge, rather than relying on government subsidies and other WTO-opposed financial measures. Industry bodies have already called for an agricultural technology upgrade fund, which will not only help the sector, but also boost exports. There are sectoral programs for technological upgrading and skills improvement. What is needed is an apex authority to extend these schemes to all sectors.

Export assistance: Exporting MSMEs form a large portion of Indian exporters. They often ignore global laws and requirements. The government is already offering help to these small players through courses and workshops to keep them up to date with what is happening. This is something the new FTP needs to push forward. In fact, in addition to information on global laws and markets, MSME exporters would need information on the availability of credit. There is also a dire need to educate exporters on intellectual property rights, patents, GIs, etc. These are essential to help exporters stay on the safe side of intellectual property law.

Exports are a vital part of the country’s GDP. Foreign trade should be given sufficient importance and investment. Several good steps have already been taken, but there is still a long way to go. Rather than taking reactive stopgap measures, the FTP could take proactive steps to ensure that exports are sustainable for Indian businesses and compliant with WTO standards. The new FTP could be a further step towards a dynamic export-oriented economy.

(Pushkar Mukewar, CEO, Co-Founder, Drip Capital.)

(The one-stop destination for MSMEs, ET RISE provides news, views and analysis on GST, exports, finance, policy and small business management.)

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