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India’s Trade Policy: Challenges Ahead
By S. N. Menon, Secretary, Ministry of Commerce, Government of India

The subject of “India’s Trade Policy – Challenges Ahead” is in itself a difficult one. We would like to look at this topic from the perspective of the formulation of trade policy by developing countries. At the macro level, let us highlight some of the macro-level problems that developing countries face in developing a ‘creditable and sustainable trade policy outcome including effective participation in WTO round’. Without an efficient delivery mechanism at home backed up by three main components:
A clear, precise definition of national interests in policy formulation with a strong sense of how trade policy fits into the overall national economic strategy, Effective negotiating capacity at bilateral, regional and multilateral levels with a good appreciation of the dynamic interaction between these two levels; and Effective domestic implementation of unilateral measure and international agreements.

Achieving these objectives requires inter-alia an effective lead Ministry on trade policy, good inter-agency combination, substantial non-governmental inputs and a strong WTO mission. It is to be noted that the increasing complexity of the WTO in the wake of the U. R. imposes many more demands on trade policy capacity at home. But the latter has not improved in most developing countries, and in some cases even worsened. The size and situation of the bad round makes a bad situation worse. This time, the weaker developing countries do not wish to fall into the U. R. trap of being rushed into agreements they cannot fathom and find very difficult to implement. This accounts in some measure for their present defensive attitude. However, it has been possible to come to a framework agreement at the WTO, which further has prepared the ground-map for negotiations, leading upto the Hong Kong Ministerial in December 2005.

The key is to have clear and sensible trade policies with a coherent overall national economic policy framework developed from below: “good trade policy like charity begins at home, not in the IMF and World Bank, nor indeed in the WTO”.

The emergencies of India as a major player in the global markets have been one of the major accomplishments of the policies of economic reform that the country has been pursuing since the beginning of the 1990s. These policies, which were introduced under the able leadership of Prime Minister, Dr. Manmohan Singh, in 1991, made a major contribution towards releasing the Indian economy from the trap of inward looking policies. As a consequence, the share of India in global merchandise trade, which had declined consistently from the beginning of the 1980s, recovered significantly since the economic reform policies started to bear fruit. For those who are interested in statistics, our exports in 1998-99 was US$ 33.22 billion and this has nearly doubled to US$ 63.5 billion in 2003-04. Our present growth during the current year is hovering around 20% (upto October, 2004). If the trend continues then we should be able to cross an export figure of US$ 75 billion by the end of the current financial year 2004-05. Our objective is to double our exports by 2008-09 so that we have reached a figure of at least 1.5% of the world’s exports. Presently, the figure is around 0.8%. India’s exports as a part of the GDP are around 10.5%.

It is in the trade in services that India has really excelled. Service sector, which accounts for almost 55 per cent of the country’s GDP, has increased more than five-fold since between 1990 and 2003. Not surprisingly, India’s exports of services have been among the highest in the world in recent years – increasing by over 17 per cent per annum. The strong performance of India’s service sector exports has catapulted the country in the league of major service exporters in the world with a share of over 1.5 per cent.

The share of goods and commercial services in total trade of India, clearly highlight the relative position of India. With nearly 30 per cent share of services exports in total exports, India is comparable to many of leading developed countries and is the highest for any Asian countries. In terms of weight of services exports in total exports it clearly beats China, which has a meagre services export share of 9.6 per cent in total trade in 2003. Even developed countries of Asia like Australia and New Zealand have lower share of services exports in their respective total exports. Through its substantial contributions to the growth of these industries, India has long broken the myth that high-tech industries are the exclusive preserve of the developed world. The outstanding performance of the external sector was made possible through a combination of two factors: a pragmatic set of objectives, which has been a feature of the country’s policy framework that has been evolving over the past decade and a half, and the emergence of a rule-based multilateral trading system under the WTO. The deepening and the widening of the trade liberalisation agenda that the WTO has pursued since it was established in 1995, has created tremendous opportunities for developing countries like India in the global economy. At the same time, however, developing countries face a number of challenges posed by the commitments that they have taken under the covered agreements of the WTO.

The opening up of Indian economy was accompanied by all round structural changes. Triggered both by internal and external factors, these changes have also provided the launch pad for future growth. We owe our progress today to the visionary leaders, who throughout the freedom struggle and in the post-independence period believed and propagated a participatory democracy. Today India has an effective participatory, multiplayer democratic structure with a vibrant non-governmental and private sector participation. One another fundamental strength of India has been its success to hold stability and growth through the policies which are “home grown”, designed by people within the country. Whenever there was radical transformation in the global systems and paradigms, India stood on its own parameters of transformation. It has always showed an alternative path and never let ideology and simple textbook models determine policy.

The pragmatism that has been so evident in the making of economic policies has been epitomised by the recently announced Foreign Trade Policy (FTP), the first of its kind in India, which marks a major shift in the thinking of the government towards the conduct of external trade. The magnitude of changes seen in the realm of trade during the past few years has necessitated a shift in focus away from the narrow confines of export-import management, which was essentially the focus of the Export-Import policies of yesteryears, to one that situates trade policy in the larger context of development. An attempt in this direction has been made while identifying the key strategies as (i) unshackling of controls, (ii) creating an atmosphere of trust and transparency, and (iii) simplifying procedures and bringing down transaction costs.

The FTP spells out several initiatives that would be able to contribute to sustained growth of exports from India. The first is the identification of the so-called thrust areas that would lend to strengthening of the country’s export potential. Agriculture, Handicrafts, Handlooms, Gems and Jewellery and Leather and Footwear have rightly been given the pride of place, given their significance in merchandise exports. These sectors would benefit from the Special Focus Initiatives that have been prepared to improve the export performance of these sectors. It has been proposed that further sectoral initiatives in other sectors will be announced from time to time, which would help focus on new areas that are likely to emerge in what is a constantly evolving environment.

One of the key elements of the FTP is the package to boost agricultural exports. During the past decade, India’s potential in the export of agricultural products, in particular agro-processed products has been highlighted many times over. In order to realise this latent potential, a number of initiatives have been taken. The Vishesh Krishi Upaj Yojana introduced to boost exports of fruits and vegetables, flowers, minor forest produce and their value added products, and the emphasis on the development Agri Export Zones are the some of major elements included in the FTP. But while the FTP would help in providing an environment that would provide the necessary impetus to the agricultural sector, a parallel process is also being undertaken to ensure that focused interventions are made in order that the desired goals are realised. For instance, different actors involved in the agricultural sector need to be aware of the fact that the consumers in the larger markets are acutely conscious of food safety standards and that these standards would have to be met in order to gain market access. Steps are therefore being taken to improve the level of awareness of farmers and producers of processed agricultural products about the standards that are being set at an increasing rate by most of the major economies.
The time has now come to have a further re-look at our export promotion strategies. Our personal views are that we should move away from an incentive-promoted export regime, to a situation where we remove the hassles that our exporters and importers face by actively promoting trade facilitation and reducing transaction costs. Our entrepreneurs are innovative and given the right environment they will flourish and can compete with anyone.

But while the policies in the realm of trade acted as the hub for the dynamism that Indian external sector has exhibited over the past decade, it has been the contribution made by several other sectors that has lent stability to the external sector performance. The opening of the financial market in India during the early 1990s has revealed one another strength of Indian economy, i.e., its banking and capital markets. One of the oldest stock markets in Asia – dating back to mid nineteenth century – it is next only to the United States in terms of number of companies registered. In the early nineties, the market proved its credentials in generating capital at the domestic level. During 1991 to 1997, this market raised 100 thousand crore of capital compared to its counterpart the external market (mainly FDI), which accounted for 25 thousand crore. This clearly demonstrates the capacity of this market to generate capital, built over the last four decades of intermediation process.
India has a very well established legal system and an independent judiciary. The Indian judiciary has a long history of enabling enforcement of contracts. The Indian Government has recently undertaken a series of laws to bring the Indian legal system in line with the modern developments, particularly in the areas of: (i) foreign exchange regulation where the restrictive Foreign Exchange Regulation Act, 1973 has been replaced by a more liberal and enabling framework under the Foreign Exchange Management Act, 1999; (ii) monopoly and competition where the old Monopolies and Restrictive Trade Practices Act, 1969 has been replaced with a more modern law, the Competition Act, 2002, which reflects the principles of competition laws formulated by the European Union; (iii) arbitration, where the old Arbitration Act, 1940 has been replaced by the Arbitration Act, 1996 a law that adopts the UNCITRAL arbitration rules; (iv) corporate law, where the Companies Act, 1956 has been amended to provide for concepts such as buy back of shares, issuance of shares with different rights including non-voting shares etc.; and (v) intellectual property, especially through amendments to the Patents Act to bring it in consonance with India’s international obligations.

While the initiatives taken during the past decade are yielding positive results for India in terms of export growth, the increasing pressures of engaging in bilateral and regional economic integration are posing formidable challenges for maintaining the momentum of growth of the external sector. In recent years India has also been taking some measured step in the direction of regionalism and thereby also expanding its mandate under the multilateral commitments. These efforts are being guided by a two-track approach combining both multilateralism and regionalism.

The free trade agreements (FTAs) and the regional trading agreements (RTAs) are creating multiple layers of commitments, which would make investment planning for the firms operating in India more challenging than ever before. These processes of bilateralism and regionalism are creating uncertainties and complexities of such magnitudes that in many cases they appear to be a far cry from the transparent and predictable processes that are the basis of the functioning of the WTO.

In case of India, the movement towards free trade agreements received a major impetus with the signing of a Framework Agreement for establishing a Free Trade Area (FTA) between India and Thailand (on 9 October 2003). A framework Agreement for Comprehensive Economic Cooperation was also signed between India and ASEAN in the Second ASEAN-India Summit at Bali in Indonesia during October 2003. The Framework Agreements include provisions relating to FTA in goods, services and investments and are aimed at strengthening India’s trade and economic cooperation with its Southeast Asian neighbours, consistent with the country’s Look East Policy.
At the sub-regional level, the SAARC is scaling new heights with the beginning of talks on the proposed free trade. The creation of South Asian Free Trade Area (SAFTA) is expected to create synergies, which would aid the process of development in the region.

Another contributor to India’s recently acquired dynamism is the ever-deepening involvement of the technologically superior and skilled Indian Diaspora around the world in the domestic economy today. Specific policy initiatives and other channels of fostering intervention have facilitated this interaction. Major beneficiaries of these policies have been the industries operating in the high-tech industries in India, like computer software and engineering services. This interaction is expected to increase in the years to come and these would provide new opportunities for closer economic ties.

A trickle down effect of the benefits of the emphasis on technical education has had significant spread effects, evidence of which is provided by the homemade but world-class technological breakthroughs. Indian technologists have been able to develop a range of products that has brought high-tech within the reach of the less advantaged sections of the society. The wireless internet connectivity developed by Indian Institute of Technology in Madras, which helps in providing low cost internet access and the low cost computing tool largely focused for use in rural areas named the “Simputer”, are examples of this development. Indian technologies can provide convergence space for high-cost-high-tech and similar-low-cost alternative technologies to the world. Some the alternative technologies developed by India have provided an answer to the growing digital divide.

The issue of competitiveness has become a central preoccupation of both the advanced and developing countries in an increasing open and integrated world economy. India is open to a healthy competition and has been among the most successful societies, which has survived the race of fittest. A study carried out of World Economic Forum (WEF) showed that in the area of microeconomic competitiveness, covering political, legal and social institutions and business environment, Indian competitiveness has substantially increased, represented by its cross-country rank. From a position of 44th rank in 1998 (MICI ranking), we have improved our position to 37th rank. A similar improvement was seen in the case of Company Operation & Strategy Ranking and the Quality of the National Business Environment Ranking. During the last fifty years and more, India has demonstrated high standard of conduct through a combination of qualities like: democracy; socialism; and leadership of “non-aligned” nations during the cold war. All these have given India a high moral status combined with economic superiority.

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