In a counterfactual world where the Covid-19 pandemic didn’t exist, expectations from the upcoming Foreign Trade Policy (FTP) would have starkly differed from what it must accommodate today.
With the global economic downturn and the surmounting uncertainties about the future, needless to say, the FTP has to be re-engineered to capture the new normal. Perhaps the further delay in announcing the FTP would give the policy tank more time to research and launch new schemes for the trading community.
From addressing the many new problems that emerged due to supply chain disruptions to preparing itself for the potential global policy changes like the EU Carbon Border Tax, the focus should be on developing India’s domestic front. Only through devising robust infrastructure to facilitate trade and formulating relevant and resilient schemes like RoDTEP can India put itself on the global trade map and strive towards better export performance and growth. The government should look at these timely schemes and consider their results while brainstorming and drafting the future FTP.
Industry-wise, here are a slew of measures that the government can adopt in FTP 2022-27.
India’s shipping industry needs to be seriously revamped considering the ongoing crisis that the sector is facing. In 2020, the government had formed a committee of experts tasked with studying the feasibility of manufacturing containers in Bhavnagar- one of India’s key trade hubs. Unfortunately, the skyrocketing steel prices required in the production of these containers and lack of technical knowledge to build the metal boxes as per international standards have demotivated many parties.
However, this is the time to rise to the occasion. The government must take advantage of the container shortage situation by setting up manufacturing facilities for container production and educating the interested players. Since India at present does not possess a container manufacturing unit and is entirely dependent on China for the same, the policymakers should develop schemes that will give freight price certainty to the traders.
As of 2018, India ranks 44th in the Logistics Performance Index. To secure lower logistics costs and boost its ranking, India needs to put in more effort to improve the overall shipment processing lead times at custom clearance houses as well as further develop the entire national transport system. The plan to introduce ‘freight smart cities’ to enhance urban freight efficiency is a move in the right direction.
In addition to this, the National Logistics Policy, which is currently being reviewed by the cabinet, promises sweeping changes in logistics infrastructure. The aim is to reduce logistics costs that stand at 13-14% of GDP to under 10%, in line with more developed regions. The government should rapidly roll out the policy as it might help Indian exporters regain their competitive edge in the global markets.
As per data obtained from the Department of Commerce, pharma exports for FY-21 (Apr 2020-Mar 2021) reached an impressive $24.44 billion in the pandemic year. Keeping this in mind, the government recently revised the Market Access Initiative, an export promotion scheme that covers this sector, among many others.
Pharma exporters can gain financial assistance under this scheme for product branding, research, and development, training, promotion of traditional Indian products and services, etc. This way, the pharma exports would continue to remain high and can be transformed into a permanent-growth sector for the country. The government should ensure that the interested parties can reap the scheme’s benefits and sustain themselves to stay on top, heading into the post-pandemic era.
Besides this, the FTP should focus on the following elements:
With traditional lending institutions like banks becoming more risk-averse in the wake of the pandemic, the new FTP should involve provisions to promote the upcoming non-traditional sources of funding/lending for the MSME sector. The RBI can involve fintech companies and provide regulations and direction for further growth. The recently passed Factoring Regulation (Amendment) Bill that empowers the RBI to regulate the manner of transaction details filing with the Central Registry for transactions done through the TReDS is a good move, to begin with.
Besides this, the bill also promises to provide financial aid to the MSMEs by ensuring a smoother capital cycle and healthier cash flow. Thanks to this bill, the MSMEs which contribute one-third of India’s GDP can have greater access to formal sources of credit.
Recently, a lot is being talked about climate change, and its growing consequences on global trade, especially after the European Union (EU) announced its plans of imposing trade restrictions for environmental reasons. Be it levying a carbon border tax on its imports from countries with less stringent norms to control industrial greenhouse gas emissions or shifting away from fossil fuels; the EU is keen on taking green measures regarding trade.
India, too, must look at its reforms and see where it stands in terms of eco-friendly initiatives. Having said that, the policy tank is already working on a new draft that will replace the existing rules on plastic waste management. After being paused due to the pandemic-induced economic slump, the single-use plastic ban will again come into effect next year. Besides this, new reforms must also be launched to make Indian exports more sustainable.
To achieve the ambitious target of $700 billion service exports by 2028, India needs to be much more integrated with the global economy and accelerate its digital transformation to become a vital player.
MSMEs in the service sector usually lack the means to adequate funding. Thus, policies under the new FTP should definitely focus on developing mechanisms that help financiers better analyze the health of service firms and disseminate more funds to them.
Competing with China
Going into the post-pandemic world, it is time that the policymakers realize the need to persify manufacturing and supply facilities to various locations outside China. India needs to position itself as a manufacturing hub by setting up schemes and proposals to lure foreign companies to develop production units in the country, with many nations now looking for alternative geographies to China. This will not only help reduce India’s reliance on China but also help India emerge as a key player in the global supply chain.
Moreover, in a bid to grab a larger piece of the trade pie after the fallout of the US-China relationship over an ongoing trade war, India can aggressively start tapping into new opportunities.
Free Trade Agreements
Currently, India is not part of any major regional economic arrangement. After opting out of the Regional Comprehensive Economic Partnership (RCEP), India must consider reigniting trade negotiations. As per the latest information, it is said that the policymakers are planning to initiate 20 Free Trade Agreement (FTA) talks, out of which six are on the priority list. The lack of FTAs has been affecting the textile and garment sector, which has already been burdened with high costs of raw materials and tough competition with rival markets of China and Vietnam.
While the talks with the EU, UAE, and Australia need to be fast-tracked, the new FTP should also focus on building strategic relationships with perse nations so our exporters can benefit from the concessional tariffs in major markets. Since more countries are now looking to adopt the ‘China-plus-one’ strategy, India needs to quickly strengthen its relations. Even commerce and industry secretary BVR Subrahmanyam believes that India has to engage with the rest of the world, without which it will be shut from global markets.
Moreover, dedicating more trade corridors by signing product-specific MoU’s with different economies to persify and establish new markets could be another way of boosting India’s export-led growth.
Schemes & Reforms
After the government announced the RoDTEP scheme, a fraction of the exporter community was shocked at the surprisingly lower refund rates of 0.5-4.3%, comparing it with the now redundant MEIS scheme. However, the trade fraternity is hopeful that the government will come up with a solution to clear the pending arrears under the former two incentive schemes– MEIS and SEIS. While the forthcoming FTP may involve new export promotion programs, such as the district export hubs initiative to scale up production, experts feel the government should also take a look at the old schemes and analyze what went wrong and what went right rather than merely developing new initiatives.
A shift in Export Basket
For India to reach its ambitious target of $1 trillion exports by 2026 and to march on the path to sustainable recovery after the pandemic, India needs to reexamine the components of its export basket. The country’s exports have to lessen their dependence on volatile commodities like oil, gems, and jewelry that are sensitive to prices and move towards a more consumer-led and predictable export mix.
The new FTP should encourage manufacturing and export of value-added final goods or even intermediate goods with strong global demand. India needs to persify towards manufacturing more complex products that require the integration of advanced technology.
Digitization & E-commerce Exports
The importance of e-commerce and digitization cannot be ignored, advancing in the post-pandemic world. Efforts should be made to reduce unnecessary bureaucracy by moving towards paperless and digital mechanisms. With this thought in mind, an array of digital platforms can be used to boost exports of micro and small businesses. Especially now during these times, giant aggregators like Amazon are reducing layers of complicated processes for exporters. And India can make the best use of these modern services.
With the FTP being extended yet again, schemes like RoDTEP need to be fine-tuned as exporters will heavily rely on it for the next six months until the government launches novel schemes under the new FTP. So, the time has come to maximize this scheme to garner the best results. Only when India can address at least some of these significant concerns can it truly achieve its export objectives.
(The writer is CEO & Co-Founder, Drip Capital)