Free trade agreements can give exports a boost

One must underscore the urgency of free trade pacts with major trading partners like the US, UK and the EU. India currently is not part of any major regional grouping. It decided to keep out of RCEP on grounds of self-interest. But it needs to rapidly enter into other FTAs that will give it the benefit of concessional tariffs in major markets. The current anti-China sentiment may benefit India, but these trends tend to be transitory.

Halting growth: Export of pharmaceutical products did rise but it was not enough to prevent the decline in other sectors of the economy. Tribune photo

Sushma Ramachandran

Senior Financial Journalist

India is facing an export slump. At a time when many other segments of the economy are recording healthy upswings, the exports have declined by 12.2 per cent during the April-February period of 2020-21. February has recorded a meagre rise of 0.67 per cent after 6.2 per cent and 0.1 per cent growth in the preceding months, showing that the economic recovery is far more fragile than envisaged earlier. Even more worrying is the fact that the two biggest areas, petroleum products and gems and jewellery, have fallen by 20 per cent and 11 per cent, respectively. There may be some reason to cheer as exports of pharma products have risen by 16 per cent, but this is not enough to stem the decline in other sectors.

Even before the pandemic, exports were lagging. There have been enough excuses in the past to explain the slow growth, including global recessionary trends. Right now, one can blame the pandemic. There is also tendency for a hosanna-like approach whenever a few products like the PPE kits or ventilators enter the world markets. The old cliché that one swallow does not make a summer applies well to this kind of approach. Export growth needs to rise consistently, rather than sporadically. Otherwise, India has little hope of becoming an international economic power. Trade has been the key for the rise of economic superpowers like China as well as the tiger economies of Southeast Asia. India, on the other hand, has not paid enough attention to exports. As a result, the sector has faced roadblocks like red-tape and a failure to outline a long-term approach, especially in agro and commodity exports.

Solutions to the export imbroglio are numerous. First, import of inputs for export-oriented industries needs to be made easier. Recently, for instance, it was found that anti-dumping duties were being levied on inputs for manufactured goods, which in turn, led to higher costs for domestic producers. It also affected export industries. India is currently the world’s biggest user of anti-dumping duties, on the grounds that cheap imports, especially from China, are hurting local industries. This issue now seems to have been flagged by the Niti Aayog which could lead to a slowdown in the rapid imposition of anti-dumping levies.

Another major problem has been the withdrawal of concessions giving relief on input taxes. Many concessions are no longer compatible with the World Trade Organisation’s regulations. A new export subsidy to replace these was launched nearly three months ago, but in true bureaucratic style, is yet to be implemented. The Remission of Duties and Taxes on Export Products (RoDTEP) gives tax relief on production inputs like electricity, diesel, panchayat and stamp duties. The new subsidy was introduced on January 1 this year, but rates have yet to be notified. The result is that exporters cannot factor it into prices and thus goods continue to be uncompetitive in overseas markets.

A second area which needs a fresh look is the continuing rise of import tariffs in recent years. On the grounds of trying to make the country Aatmanirbhar (self-sufficient), import duties on raw materials and finished products available within the country are being hiked. This goes counter to the entire process of dismantling import controls and reducing tariffs that had begun with the 1991 economic reforms. Domestic industry needs to sharpen its competitive edge to face competition from imported goods. Otherwise, it can never succeed in world markets. Sheltering industry from global competition should only be a temporary feature in case some sectors need protection for a brief period. This lack of global competition has an impact on development of export industries as well.

Besides, creating protectionist barriers invites similar reactions from trade partners. In the case of the US, the Trump administration may have complained unjustly about high tariffs in some areas like motorcycles, but customs duties here are undoubtedly higher. The unequal nature of the relationship is inevitable to some extent given that India remains a developing economy. At the same time, there has to be some quid pro quo in trade ties. For instance, the restoration of the long-standing concessional Generalised System of Preferences (GSP) on Indian exports to the US withdrawn by the earlier regime, is likely to hinge on greater access for American goods to this country’s markets.

In this context, one must underscore the urgency of concluding free trade pacts with major trading partners like the US, the UK and the European Union. India currently is not part of any major regional grouping. It decided to keep out of the Regional Comprehensive Economic Partnership (RCEP) on grounds of its own self-interest. But having taken this bold decision, it needs to rapidly enter into other FTAs that will give it the benefit of concessional tariffs in major markets. Negotiations with the European Union on an FTA have been taking an inordinately long time. These were launched in 2007 and then stalled since 2013 though a fresh dialogue finally began last month. The EU is India’s largest trading partner accounting for 11.1 per cent of total trade. While there is a feeling that the current anti-China sentiment may benefit India, the fact is that these trends only tend to be transitory. The negotiations need to be revived and finalised quickly in order to ensure the country is integrated into global and regional supply chains.

As of now, India’s share of world trade is a meagre 1.7 per cent. This needs to be raised significantly in the years to come. The pandemic may be one reason for slowing exports, but these had fallen by 1.36 per cent even in 2019-20. A turnaround is definitely possible as exporters’ associations claim higher orders have already come in for processed food, pharmaceuticals, chemicals and electronics. But there has to be recognition within the government that exports are essential for reviving the economy. This has to be in tandem with a long-term vision for exports involving effective bilateral and regional trade pacts and cutting the red tape around export incentives. Otherwise, India will have to be content with playing a minor role on the world trade scene.