Budget 2021: New economic outlook on the anvil – Trade policy perspectives

It is crucial that messaging on Atmanirbhar Bharat must be carefully calibrated such that India is not seen as resorting to protectionist measures

Introduction

In what could be labelled as the world's worst economic deceleration since the great depression in 1930's, the world economy in 2020 is expected to contract by 5% and India around 8%. Barring the shock in the first quarter GDP, the Indian Economy has bounced back sharply and a silver lining from an unprecedented tremor caused by the Global Pandemic. Rising GST collections are testament to the buoyancy displayed by the Indian Economy. Having said that, many sectors remain in need of Government intervention and policy guidance. Indian exports is one such sector, which has been struggling to achieve the desired growth for the last decade. Trade deficit with major trade partners has been on a constant rise. This indicates an urgent need for overhauling the Foreign Trade Policy (FTP). The forthcoming Union Budget assumes greater significance as effective steps are required to provide impetus to the Export Sector, which could prove a growth engine to propel the economy to an ambitious 5 Trillion goal.

Current Policy Environment & Recent announcement

India traditionally follows a Comprehensive 5 Year Foreign Trade Policy (FTP), which is reviewed on expiry of the term. The last FTP came into effect on 1st April 2015 and it was to expire on March 31, 2020. However, the Commerce ministry, citing an unprecedented situation arising due to health crises, decided to grant extension by a year. Commerce Ministry has already announced that India's new Foreign Trade Policy 2021-2026 is under formulation, will come into effect from April 1, 2021. However, apart from expiry of the FTP, there are various factors at play which require India to substantially revamp its' FTP, which we have examined in this article.

WTO perspective

A WTO Panel issued a ruling against India, in early 2020, which held that Export incentives provided by the Indian Government under its FTP are against WTO Principles. This ruling was issued in response to a complaint by the U.S. Government. WTO's covenants on Subsidies and Countervailing Measures (SCM) prohibit any subsidies which are Export Performance related. The WTO Panel concluded that export-oriented units (EOUs), electronics hardware technology parks (EHTPs), bio-technology parks (BTPs), export promotion capital goods (EPCGs), and special economic zones (SEZs) are contingent upon the export performance. The panel also declared that all tradeable duty-free scrips such as duty-free imports for exporters' scheme (DFIS) and merchandise exports from India scheme (MEIS) scrips are also against the WTO Covenants.

The Indian Government has preferred an appeal the WTO Appellate body and has been arguing that it should be given an eight-year phase-out period as was available to other developing countries at the time of signing the agreement. Irrespective of the outcome of the Appeal, the WTO Ruling has forced India to reconsider such schemes which rely on incentives and subsidies to boost exports. In the meantime, the Government has implemented, on an experimental basis, a WTO compliant scheme i.e. Remission of Duties or Taxes on Export Products (RoDTEP) scheme w.e.f. January 01, 2021. However, several aspects under the scheme require further clarity, which trade and industry is craving for. The new FTP & related Budget provisions require a substantive overhaul of India's Export related policies.

Revamp of SEZ Law

India's SEZ Policy after initial success could not sustain to generate enough investment. The export performance of SEZs has also been less than satisfactory and is in dire need of reforms. To revamp the SEZ Law, Baba Kalyani Committee was constituted by the Ministry of Commerce and Industry with a mandate to make the regulations WTO compatible, maximizing utilization of vacant SEZ land, changes to the policy for embracing global best practices and merge the scheme with other Government schemes etc. The Committee submitted its findings to the Government in late 2019 emphasizing need for an urgent implementation.

The Committee's recommendations include review of specific exclusions proposed in NFE computation considering the "Make in India" initiative, sharing of duty exempted assets/ infrastructure between units, removal of sunset clauses for services SEZs (including international financial centers). It also recommended that the incentives may be given to SEZs on the basis of job creation rather than exports, which will align to WTO rules.

Role of FTP in the 5 trillion economy goal

FTP is expected to be a key economic driver and effective reforms may prove to be a gamechanger for Indian Exports. The key focus should be to make Indian goods and services globally competitive and remove regulatory and procedural hurdles faced by exporters. The new FTP is expected to address policy issues ailing the Export competitiveness of Indian goods and services. New FTP instead of focusing on subsidies and incentives must enable the manufacturing sector to achieve world class quality products and make India an attractive destination for manufacturing.

The Commerce Ministry has announced that the FTP would create District Export Hubs to engage with states and union territories for mobilizing the potential of each district of the country. The Ministry has also identified special focus initiatives areas i.e. Agriculture, Handlooms, Handicraft, Gems & Jewellery, Leather, Marine, Electronics and IT Hardware manufacturing Industries and Sports Goods and Toys sectors. A focused policy coupled with platform to showcase India's manufacturing capability is required to achieve the desired export growth.

Free Trade Agreements (FTAs) and Regional Trade Agreements (RTAs)

Another important aspect, likely to guide India's trade policy is improving the trade ties under FTAs and RTAs. Importantly, India's decision not to join the Regional Comprehensive Economic Partnership (RCEP) raises substantive challenges. India's refusal to join RCEP is rightly or wrongly viewed as a protectionist measure to shield the domestic industry from rapid inflow of imported goods and harming competitiveness of products manufactured in India. With India having a huge trade deficit with most RCEP countries, it was feared to further increase post RCEP. On the other hand, India''s decision to not sign the RCEP could also significantly impact market access of Indian goods in RCEP Countries.

This necessitates India to carefully redesign the FTP to counter the RCEP including rethinking its' strategic ties and reinvigorate the existing FTAs including the India-Japan FTA. It is also important to highlight that India has not signed any Free Trade Agreements (FTA) since 2012 despite being in constant negotiations with the EU and USA. FTA negotiations have failed to yield outcome due to insistence by the other side that India substantially reduce the import tariffs. A greater need is felt to intensify efforts for a trade deal with the EU and USA amid a growing anti-China sentiment and opportunity for alternate supply chain. Post-Brexit, affords a fresh opportunity for trade agreement with the UK.

India's decision to terminate all its Bilateral Investment Treaties (BITs) in 2017 and to re-negotiate fresh agreements under the 2016 model has been a source of concern. The model BIT contains terms which have remained contentious including the condition allowing international arbitration only after all domestic options have failed and not permitting tax laws to be challenged. India is expected to put out a policy statement to expedite BITs with strategic trade & investment Partners to catapult as a favourite destination.

A change in the U.S. administration is likely to signal a new approach towards multilateralism on trade issues, particularly on Trans-Pacific partnership and expected to lead to a more allies-based approach, leading to stable trade policy.

Recent policy changes & possible improvisations

India has been proactive and taken steps to boost investment and exports. In a significant step in September 2019, it reduced corporate tax rate to 15% for new manufacturing units making it amongst the most competitive. This has resulted in a surge in investment making a case for service sector. Production Linked Incentive (PLI) Scheme has also been highlighted for investments in specified sectors such as pharmaceuticals, telecom, electronics etc. It is anticipated that the scope of the PLI Scheme will be extended to other sectors.

An impetus is required to boost manufacturing in white goods, medical equipment & healthcare infrastructure. Further, Covid-19 has given an opportunity to boost digital entrepreneurship and start-ups and policy directions for such sunrise industries would become crucial to sustain the recovery.

Summary

For decades, the FTP has remained focused on incentives and subsidies. It is crucial that messaging on Atmanirbhar Bharat must be carefully calibrated such that India is not seen as resorting to protectionist measures. Instead, it must be demonstrated that India is open to taking on the challenge to improve its export competitiveness as well as an environment to encourage local manufacturing. The current macro-economic scenario demands similar re-imagination of the Export and foreign trade policies. Upcoming FTP and Budget would play a crucial role in deciding the trajectory and role of India in the Global Economy.