The recently unveiled India’s Foreign Trade Policy 2015-20 sets an ambitious target of $ 900 billion in merchandise and services export for the country by 2020. That would require India’s exports of goods and services to grow at CAGR of 16 per cent in the next five years – a really tough call given the subdued sentiments about growth of world trade.
India’s FTP 2015-20 has introduced a number of good measures to make it easier for exporters such as clubbing all export promotion incentives into one – merchandize export from India Scheme (MEIS).
Reduction of export obligation by 25 per cent under the EPCG scheme is expected to aid indigenous production of capital goods. The introduction of online filing of documents will reduce trade transaction cost and help manufacturing exports.
Merchandise falling under the categories of handloom products, books, footwear, toys and tailored fashion garments, having fob values of up to INR 25000 per consignment and their sale finalized through e-commerce platforms would be eligible for the benefit from the new FTP. This will encourage exports from micro entrepreneurs.
Exports from SEZs hitherto burdened with high minimum alternate tax (MAT) would now be eligible for export incentives. Other notable feature of the FTP is the introduction of transferability of duty free scrips, and allowing them to be used for payment of customs, excise duties and service tax.
However, as things stand today, it would not be easy to achieve the ambitious export target of $ 900 billion especially in the light of near stagnant merchandize exports (that account for two-third of India’s exports) hovering around $ 300 billion for the last three years, and presence of many tariff and non-tariff barriers in top markets. Subdued export markets especially Europe, and Middle East (post the oil price crash) don’t help either. India’s WTO obligations forced DGFT to either maintain or prune incentive schemes keeping in mind the eventual phase out of all export subsidies in the mid-term review of the new FTP.
A high potential export market, Brazil remains largely untapped because of high logistics cost and prohibitive duties on India’s top export items such as textiles & clothing.
Increasing exports to China (with which India has trade deficit of $36 billion in FY 14) should have been the top priority in the FTP, but does not find any mention under the newly introduced MEIS even though it is a top export destination for cotton – fibre and yarn which are troubled by reduced global demand and excess supply in the Indian spinning sector.
Further, some of India’s well -intentioned trade policy actions, though outside the purview of the FTP, are damaging indigenous manufacturing. For instance, allowing duty free import of garments from countries like Bangladesh without any sourcing restriction is actually leading to ever growing exports of Chinese textile material into India via Bangladesh.
Because of India’s FTAs and other trade deals such as Information Technology Agreement (ITA), India’s manufacturing sector is suffering from what is called inverted duty structure i.e. high import duties on raw-materials and lower duties on finished goods. Thus, in textile, one can import an apparel item duty free in India but its basic raw material – raw wool, polyester or viscous fibre will attract 5 to 10% import duties.
Similarly, one can import finished products – laptop or mobile phones at lower costs than all their parts imported separately. The last Union budget did attempt to address some of the cases of inverted duties in electronics sector, but much needs to be done.
Indian exports have to deal with a series of non-tariff barriers in FTA partner countries that need urgent tackling. For instance, Japan as per the terms of India-Japan CEPA allows duty free import of apparels (from India) only if all the materials used for the manufacture of apparels are either of Indian or Japanese origin with the exception of a maximum 7 per cent content by weight that can be sourced from third countries. Indian pharmaceutical companies are not able to push their exports to Japan (despite India-Japan free trade pact) because of the difficulties in dealing with Japanese drug regulators.
No surprise, India’s pharmaceutical exports has grown from $ 47.6 million in FY 2011-12 to $ 56.71 million in FY 2014. However, it fell to $ 25.79 million in first 10 months of current fiscal.
The US-led trade pact, Transpacific Trade Pact (TPP) of which India is not a member, will put India’s top export such as readymade garments at a serious disadvantage vis-à-vis countries like Vietnam. Vietnam will also reap early mover advantage in Russian Customs Union because of its recently concluded free trade pact with Union. India is at a disadvantage vis-à-vis Bangladesh and Pakistan in EU.
The way forward
Indian businesses must realize that because of WTO obligations (if not fiscal compulsions), the government is in no position to continue with export subsidies. To deal with slowing demand and rising cost on a long term basis, India Inc. must develop suitable global strategies for sourcing, production and trade i.e. buy raw material where it’s cheapest, produce where trade policy is favourable (because of the trade agreements) and labour cost is lowest, and sell/export where the demand is.
Further, businesses must align their commercial strategies with the government’s trade policy strategy – that calls for better coordination between government and India Inc. Unfortunately, that’s seriously lacking despite the existence of a no. of industry bodies.
Even the top Indian corporates are not providing required business intelligence to government to be used for trade negotiation. That leads to conclusion of FTAs on less favourable terms or we cede more market access for less. A case in point is India’s trade pacts with ASEAN, Japan and South Korea. If this state of affair continues, India’s $ 900 billion export dream will remain a dream.