Today's Editorial

A trade policy for Viksit Bharat: Let’s reduce tariffs and rethink pacts

Relevance: GS Paper III

Why in News?

The budget speech gave pride of place to the long-term goal of Viksit Bharat and also said that reforms in many areas would be needed to achieve it.

More about news:

• This year’s budget has reduced import duties on several items in an effort to make domestic production more competitive.
• Policies should be tailored to specific targets, and in this respect, the commerce minister has set an ambitious target. Exports of goods and services must rise from $775 billion in 2023-24 to $2 trillion by 2030. 
• This implies a growth rate of over 14 % in nominal US dollars. This is three times faster than the IMF projection of global exports of goods and services in the same period.
• The trade policy we need to achieve this target requires resolving some internal differences and also evolving a new approach to handling the global environment we now face.

Resolve internal differences:

• The key difference arises from the impression in some quarters that ‘atmanirbharta’ or self-reliance implies increased protection for domestic production to reduce imports. 
• To be fair, the government has denied subscribing to this view. But protectionism is on the rise everywhere, often covertly supported by business interests, and it is no surprise if this is also happening in India.
• This year’s budget has sent a welcome new signal by reducing import duties on several items in an effort to make domestic production more competitive. The finance minister also announced a comprehensive internal review over the next six months of India’s tariff structure. 
• Yet, drastic changes are precisely what we need. Ideally, we should announce that our upper-end duties are too high and they will be brought in line with those prevailing in peer-group emerging market economies. Investors must also have some assurance of stability in the structure proposed.
• Domestic industry would not be adversely affected if reductions are staggered over a few years and parallel steps are taken to achieve some rupee depreciation to offset duty reduction. This would leave industries competing with imports adequately supported while aiding exporters.

External developments that affect trade policy: 

• In addition to restructuring customs duties, our trade policy must deal with two new developments in global trade. 
  • The first is that advanced countries have lost faith in multilateral trade negotiations (MTNs) and moved towards Free Trade Agreements (FTAs). 
  • The second is that global value chains (GVCs) now account for a substantial part of the world’s goods trade.
• This has acquired urgency because of geopolitical developments. There is growing tension between the West and a China-Russia partnership in which Russia is the weaker party. Western countries no longer talk of globalization and trade liberalization. Instead, we have discriminatory trade policy aimed at ‘re-shoring,’ ‘near-shoring’ or ‘friend-shoring.’
• The discriminatory trade measures against China and Russia will have a negative impact on all sides. The IMF has stated categorically that global growth and world trade will be hurt. 
• India will also be hurt by this. However, the attempt to shift trade away from China also offers India an opportunity. MNCs with GVCs heavily concentrated in China will not exit the country completely, but may want to evolve a ‘China plus one policy,’ and India is particularly well placed to benefit from this.
• The Regional Comprehensive Economic Partnership (RCEP) is the world’s largest regional trading arrangement, covering all of East Asia, including China. We were on the verge of joining it in November 2019, but backed out at the last minute. This was reportedly because Indian industry groups were nervous about giving duty-free trade access to China.
• Our ambition to reach developed-country status by 2047 doesn’t sit well with rejecting obligations that other developing countries are willing to accept. These obligations can always be phased in over time, and the length of the adjustment period could be negotiated.

• FTAs:

• • India has made progress on some FTAs, but the gains are small. We have signed an FTA with the UAE and European Free Trade Association, but this is a very small group of countries. 
  • India has also signed a limited “early harvest FTA" with Australia, but the coverage is limited. India is negotiating FTAs with the UK and EU. Both are important, but progress will depend on our taking a more flexible line on harmonizing other standards.
  • One of the problems that could arise is the treatment of restrictions under the EU’s Carbon Border Adjustment Mechanism (CBAM). We could argue that an FTA by definition must rule out CBAM type penalties on trade flows. It is unlikely that the EU will agree. Its CBAM does pose us problems, but we may have to deal with it separately.
  • The US is our most important trading partner, but it has indicated that it does not propose to sign any more FTAs. However, we should perhaps review our position of not joining the trade pillar of the US-sponsored Indo-Pacific Economic Framework. This does not offer any market access, as of now, but there is no harm in joining it.

• If India want its exports to benefit from GVCs, it need to:

• Attract the multinational companies that dominate them to locate part of their production facilities in India, and 
• It needs to join FTAs that ensure seamless duty-free access for parts and components which are essential for GVCs to work.

Finally, trade policy is only one of the factors that can deliver strong export performance. Other initiatives, such as developing good infrastructure, reducing logistical costs, development of human skills and improving the ease of doing business, are also important. And these are relevant not just for exports, but for the economy as a whole.