IN order to successfully navigate the international trade arena, India’s new government will be tasked with lever-aging India’s growing role within the international trading system to achieve both its domestic and international objectives. As the geo-economic landscape has seen a shift in recent years, emerging economies have increasingly begun to play a more pronounced role in a number of global economic issues, and as the world’s fourth largest economy, India’s role in this system has become more prominent.

At the most recent ministerial conference of the WTO in Bali, Indonesia in early December 2013, India’s growing role as a voice for the poor was amplified as it fought to ensure that the outcome would favour not only the poor within its own borders, but those of the developing countries as well. While the members did indeed arrive at a consensus after a protracted week of negotiations, the sheer effort reflected the much larger problem of not only divergent interests between different groups of countries but that of aligning domestic development objectives with international trade commitments. While the first challenge will require the combined political will of all WTO members, the second will have to be addressed by country leaders within their own borders. It is in tackling this second challenge that India’s new government will need to think strategically to leverage the benefits of the international trading system in order to achieve its national objectives.

India’s approach to trade promotion has followed a two-pronged approach, dealing with both supply-side and demand-side constraints. It aimed to first implement domestic policies to enhance its supply capacity and second, address the demand-side of trade promotion by engaging in international trade negotiations to secure better market access. While the latter was achieved by India’s engagement in multilateral as well as plurilateral trade negotiations, the former was accomplished through India’s National Foreign Trade Policy (NFTP) which is adopted every five years, and augmented with annual supplements in order to streamline policy and thereby develop a more comprehensive and better trade capacity.

 

A complementarity between these two aspects is, therefore, imperative. However, in the past, planning and administration of policy instruments under the NFTP has often taken its own course without thorough consideration of the sectoral needs that get preferential market access through trade agreements. Recent studies undertaken by CUTS International indicate that India has immense trading potential with its neighbouring countries in many sectors and products. However, most of these products are not included in the list of focus markets and focus products selected under India’s current NFTP.¹ Indeed, in order to strengthen the functioning of the NFTP, there is a need for better coordination between the NFTP and other domestic policies, including with state governments.

More attention needs to be focused on the interface between trade and other policies such as competition, standards, government procurement, and manufacturing to ensure policy coherence. Incidents such as when products with a high import demand in countries with which India has formal trading agreements fail to receive assistance as focus products are reflective of a lack of policy coherence with other government strategies. Herein lies one of the major challenges and opportunities that India’s new government must tackle.

Instruments that impact trade performance can be divided into three categories: (a) schemes which pertain to the development of production capacities within countries; (b) the reduction of trade costs facilitating the movement of the outputs of these productive operations across borders;² and (c) export promotion activities which include identifying the formal export process, identifying potential markets abroad after concluding free trade agreements, studying their specific demand profile and finding specific business partners.³ A strategic and comprehensive foreign trade policy that incorporates these three features will play a crucial role in achieving India’s national objectives over the next five years.

 

In recent years CUTS International has been engaged in research that has afforded an opportunity to act as a conduit linking those who frame the NFTP to those affected by it. India’s current national trade policymaking process tends to be centralized and as yet there are no established channels of communication between the grassroots beneficiaries and policymakers. During our research we identified five priority areas that the incoming government will need to address in order to maximize benefits from India’s NFTP in the coming years: (i) inclusiveness with respect to SMEs (small and medium enterprises) as major beneficiaries; (ii) coordination with external trade negotiations; (iii) linkages between NFTP and FDI policy; (iv) role of the NFTP in exploring and strengthening participation of Indian business units in regional/global value chains; and (v) the role of NFTP in domestic policy and regulatory reforms for better economic governance.⁴

 

India’s Foreign Trade Policy 2009-14 was formulated with an objective to double India’s exports of goods and services by 2014, while simultaneously aiming at doubling India’s share in global trade by 2020.⁵ NFTP 2009-14 and its annual supplements contain several such specifically targeted schemes, tailor-made to use trade expansion in the labour-intensive goods sector as an instrument for employment generation. These objectives were envisaged to be achieved through the use of fiscal incentives, providing full refund of indirect taxes and levies, institutional measures, change in procedures, increased market access around the world, diversifying export markets and improving infrastructure in order to reduce transaction costs. However, the policy lacked certain supportive features that would have facilitated inclusiveness and access to a larger set of stakeholders.

The implementation of such schemes often lacked inclusiveness, resulting in small and medium scale operators and enterprises (SMEs) often unable access the benefits. One of the major challenges faced by SMEs, particularly those in the informal sector, is a lack of both awareness and understanding of how to operate in the international business environment. In developing countries like India, stakeholders at the grassroots are often unaware of the various support schemes that are offered by their own governments. Hence, in order to create a more inclusive NFTP, measures need to be put in place to ensure increased awareness of the NFTP’s schemes and policy instruments by local level stakeholders.

 

Acknowledging and, in certain cases, addressing the conflict of interest faced by certain stakeholders is imperative to ensuring an inclusive NFTP. The interests of different parties must be taken into consideration while evaluating the NFTP and suggesting changes. This requires greater effort to increase interaction with sub-national actors, such as the state governments, in implementing India’s NFTP. The Inter-State Trade Council, among others, can play a key role in ensuring a continuous dialogue between state governments and union territories. Revitalizing such groups could play a necessary and key role in advising the Government of India on measures for providing an enabling international trade environment within the states themselves. This would provide a framework for the states to be partners in international trade and export efforts.⁶ State WTO cells could also be strengthened in order to generate awareness of sub-national actors on India’s trade policy and other related matters.

Second, an examination of recent trends towards what are commonly known as mega-regional trade agreements shows that emerging countries, including India, find themselves excluded from these negotiations. While there has been much speculation regarding why members were left out, these countries, none the less, need to adopt a proactive approach to managing this current shift in order to avoid the backlash of exclusion such as trade diversion, as well as the establishment of international trade rules outside the WTO. Keeping in mind its national interests, it is imperative for India to continue with the mandate of negotiating trade agreements at the multilateral as well as bilateral and regional levels.

There is a need to resuscitate and broaden the mandate of bodies such as the (now defunct) National Advisory Committee on International Trade, to help conduct periodic reviews of the impact of trading agreements on the Indian economy. There is enough evidence to show that India’s current trade agreements fail to take advantage of its core competencies. Therefore, going forward, mechanisms to conduct sustainability impact assessments in order to understand economic, social and environmental sustainability of future trade agreements are necessary in order to develop India’s negotiating positions.

 

Third, it is important to align India’s foreign trade policy with its FDI policy in light of significant backward and forward linkages that exist between trade related sectors and FDI. Given India’s position along its development trajectory, she is poised to benefit not only from efficiency-seeking FDI that seeks to locate production process in low cost regions, but also market seeking FDI. While the NFTP has indeed opened up certain sectors, this objective has not been similarly reflected in India’s FDI policy and has thus resulted in sub-optimal utilization of this policy. Owing to the fact that companies are off-shoring not only their manufacturing processes but also their business functions, there is an increase in FDI flows which are aimed at tertiary sectors rather than only secondary sectors. Given India’s strength in this sector, an FDI policy that incorporates India’s comparative advantage in this area could enhance export competitiveness. Attracting FDI into cluster development or economic corridors could also work to further align India’s NFTP and FDI policy.

 

Fourth, global value chains (GVCs) remain an area that India has not adequately explored. There has been little deliberation on how policies and instruments as contained in the NFTP can be used to facilitate the participation of business units into both regional value chains and GVCs. GVCs first emerged as regional supply chains in East Asia, with Japanese investors taking the lead. This fragmentation of production improved the cost competitiveness of the final products which were then able to compete with products from other developed countries. Over time, multinationals from other developed countries moved to the region for improving their cost competitiveness. What emerged from this phenomenon were GVCs with production spread across countries, regions and continents, gathering cost advantages to become globally competitive.⁷ While India is one of the top 25 exporting countries in the world, it has one of the lowest foreign value added trade share at only ten per cent and the lowest rate of GVC participation.⁸ The NFTP could play a key role in exploring and strengthening participation of Indian business units in both regional and global value chains to enable it to leverage the large potential for growth in this area.

Last, the NFTP needs to play a role in domestic policy and regulatory reforms for better economic governance. While a number of developed countries have successfully used their foreign trade policy instruments for improving overall domestic economic governance, in India the NFTP is often approached as a stand alone-policy. Coherence between the NFTP and other major macroeconomic policies is crucial for domestic policy and regulatory reforms to ensure complementarity between all major macro-economic policies.

 

India’s manufacturing policy is an example of a macroeconomic initiative that was undertaken by the government to increase the percentage of manufacturing from the current level of 15 per cent to 25 per cent of GDP by 2025. However, better coherence with the NFTP will help enhance the sector’s contribution to GDP growth which has remained stagnant in recent years. Similarly, although the extant public procurement rules follow the principle of non-discrimination which is in line with India’s commitment at the WTO, a transparent, competitive and fair public procurement policy would ensure better market accessibility as well as reciprocity for domestic suppliers to venture into other government procurement markets. Institutional and macroeconomic reforms, which seek to improve the business climate and provide a better foundation for the economy to generate growth and competitiveness, must ensure that companies are able to take advantage of aligning trade opportunities.⁹

The second of India’s two-pronged approach to trade promotion is achieved by its engagement in multilateral as well as preferential and plurilateral trade negotiations. The effectiveness of a sound domestic policy improves if it is accompanied by a coherent external strategy that enables it to leverage the benefits of the international trading system. While India initially followed a closed economic policy, post economic reforms, India’s participation in the global economic arena has hugely increased. After liberalizing its economy and joining the WTO in 1994, India is a protagonist of the multilateral trading system. However, as the global landscape has changed with a proliferation of preferential trading agreements, India too has increasingly begun to participate in these preferential trading agreements. In part this was mirroring a global trend post the problems with the Doha Round. But equally, the success of India’s first FTA with Sri Lanka in 1999 ushered in a new attitude towards interaction with its trading partners and the global trading system as a whole. Today, India has signed about 15 PTAs and many more are in the pipeline.

 

Nonetheless, India remains excluded from the major mega-regional trade agreements that are becoming a prominent feature of today’s trading environment. These FTAs could pose a threat to its economic security. India’s pursuit of its own mega-regional trading agreement, namely the Regional Comprehensive Economic Partnership (RCEP) Agreement, is a unique move on its part to counter the negative impacts that could stem from these FTAs as well as establish it as a regional power. The benefits of this trading agreement are immense. It provides an opportunity for India to further integrate into regional production networks, consolidate overlapping FTAs within the region and thus increase trade and development opportunities in the region and enable congruence with its Look East foreign policy.

India’s foreign trade policy also needs to keep in mind its strategic and security interests. In order to play a role commensurate to its size and potential, India needs to reinforce all elements of its state power, not only economic but military as well. India must also ensure that it follows a strategic trade policy in respect to providing sector-specific market access to some of its critical trading partners from whom it can secure new and possibly dual technologies for indigenous defence production. Over a period of time, such a strategic trade policy could help the country develop a military-industrial complex, generating employment opportunities and ensuring a better balance of trade.

While India remains one of the highest end users of defence equipment, a country with the world’s third largest pool of technical manpower and scientific talent, and with a track record of indigenously excelling in high-end technologies of space, nuclear, information technology, it is still dependent on foreign sources to meet 70 per cent of its defence requirements.¹⁰ Simultaneously, it has to get its act together on a National Offset Authority under a whole-of-government approach to be able to capture cross-sectoral deals when negotiating with foreign defence equipment suppliers.

 

In order to effectively tackle specific issues of development, India’s NFTP requires a whole-of-government approach. In pursuit of a country’s overall national interest, government agencies cannot function as separate entities. A whole-of-government approach requires complex coordination for optimum outcomes. This method is designed to establish a common approach and understanding to problem solving in what is commonly referred to as policy coherence.

In order to ensure this coordinated approach in forming and implementing India’s trade policy, including negotiating trade agreements, the Department of Commerce, the Department of Revenue, and the Ministry of External Affairs need to work in tandem. The Inter-State Trade Council and State WTO cells would also need to be effectively integrated into policy formulation to ensure increased engagement with state governments, and better political buy-in for India’s trade policy.

To successfully navigate the international trade arena, India’s new government will need to pointedly address the five gaps as outlined above. An inclusive NFTP that is not designed as a stand-alone policy, but is strategically integrated into all aspects of Indian foreign policy, has the potential to help India achieve both its domestic and international objectives. As India’s role within the global economy continues to grow, the possibility of garnering more benefits from the international arena to help achieve its domestic objectives is increasing and a well-balanced NFTP could help achieve this goal. It is imperative that the next Foreign Trade Policy (2014-19) include not only a gamut of policy instruments which are capable of being adjusted to macroeconomic shocks and ripple effects from the outside economies, but also instruments which operate seamlessly with other domestic macroeconomic policies to function as a welfare-inducing policy instrument.¹¹

 

Footnotes:

1. CUTS, ‘Grassroots Reach Out of National Foreign Trade Policy: Evidences From Indian States.’ Available at: http://www.cuts-citee. org/pdf/Grassroots_Reachout_of_Foreign_Trade_Policy.pdf, 2012

2. Trade costs can be defined as the costs incurred in getting goods to the final user other than the marginal cost of producing the goods. Trade cost related issues encompass tariffs, non-tariff impediments, transport costs, freight and time costs.

3. O. Cadot, et al, ‘Where to Spend the Next Million? Applying Impact Evaluation to Trade Assistance.’ Available at: http://www.voxeu. org/sites/default/files/file/next_million_WB.pdf

4. CUTS , ‘Development Dimensions of India’s National Foreign Trade Policy’. Available at: http://www.cuts-citee.org/NFTP/, 2013.

5. Strategy for Doubling Exports in Next Three Years (2011-12 to 2013-14), Government of India, Ministry of Commerce & Industry, Department of Commerce. Available at: http://commerce.nic.in/ann/StrategyPaper.pdf, accessed on 12.12.2013.

6. Government of India (DGFT), ‘Constitution of Inter-State Trade Council.’ Available at: http://dgft.gov.in/exim/2000/istcouncil.pdf

7. R. Banga, ‘Measuring Value in Global Value Chains’, UNCTAD. Available at: http://unctad.org/en/PublicationsLibrary/ecidc2013misc1_bp8.pdf

8. UNCTAD, ‘Global Value Chains and Development, Investment and Value Added Trade in the Global Economy.’ Available at: http://unctad.org/en/publicationslibrary/diae2013d1_en.pdf

9. A. Rodriguez-Clare, ‘Coordination Failures, Clusters and Microeconomic Interventions’, Inter-American Development Bank, Working Paper Number 544, 2005.

10. http://www.vifindia.org/article/2012/february/06/India-s-Defence-Production-and-Research-Need-for-Transformational-up- gradation

11. CUTS, ‘Development Dimensions of India’s National Foreign Trade Policy’, Available at: http://www.cuts-citee.org/NFTP/, 2013.