India’s New Foreign Trade Policy and Implications for Canada

Author: Amitendu Palit

 
In April, India announced its long-term Foreign Trade Policy (FTP) for 2015 to 2020. The announcement had been eagerly awaited by those within and outside India for what it would reveal about Prime Minister Narendra Modi's government's vision of world trade.

Higher exports and robust foreign trade are consistent with Modi's emphasis on trade in building 'Brand India' [1] and the success of signature initiatives like 'Make in India.' The new FTP aims to increase India's share of global exports of goods and services from 2% at present to 3.5% by 2020. Doing so will require India to join regional trade agreements (RTAs) and bilateral free trade agreements (FTAs) that will give Indian exports greater access to existing markets and create greater access in new markets. Unless exports contribute more significantly to India's economy, it is unlikely to achieve and maintain a GDP growth of 7% or higher for the coming years.

Domestic Features of India's Foreign Trade Policy

Domestic factors have been among the biggest constraints inhibiting Indian exports. The FTP acknowledges some of these constraints and offers initiatives to improve business conditions, such as

Simplifying and streamlining procedures and red tape. According to the World Bank's Doing Business 2015, India is ranked 126th in the world in 'trading across borders,' reflecting difficulties of moving goods in and out of the country. Its low rank is influenced by factors like delays in preparing documents with exporters, requiring at least a week for processing the documentation. The new Merchandise Exports from India (MEIS) scheme, which encourages 'paperless trade' through online filing and uploading of documents for export and import, will be extended to more products and will significantly reduce such delays. Once other e-governance and trade facilitation initiatives proposed by the FTP are implemented – such as online issue of export obligation certificates, acceptance of mobile applications and 24/7 customs clearance at 18 major seaports and 17 air cargo complexes – business conditions for traders will improve even further.

Incentivizing service exports. For years, export incentives in India have focused entirely on manufacturing. The focus was rationalized on the grounds that merchandise exports comprise 67.5 per cent of India's total exports. [2] At the same time, however, India is a bigger player in global commercial services trade than in merchandise trade. Its share of 3.3 per cent of global commercial service exports is almost double its share of merchandise exports, at 1.7 per cent. Furthermore, India is a net exporter of services (it exports more services to the rest of the world than it imports), whereas it is a net importer of merchandise. These structural characteristics underscore the penetration of Indian service exports in global markets and the need for incentivizing these exports for maintaining their growth.

The Service Exports from India (SEIS) scheme in the FTP covers a wide range of services: business, communication, construction, education, environmental, health, tourism, recreational and transport. The incentives under the SEIS will now apply to 'service providers located in India' instead of just 'Indian service providers.' Thus, foreign-origin service providers that are based in India will also be eligible for these incentives, unlike in the past, when such incentives were confined only to 'Indian' service providers. The larger objective of this subtle but far-reaching change is to encourage greater foreign investments in services, and to position India as a hub for exporting services to third-country markets.

Integrating with other major economic initiatives in the country. The FTP resonates with 'Make in India,' an ambitious initiative of the Modi government to make India a global hub in manufacturing world-class, zero-defect products and services. The government's efforts to enable and facilitate 'Make in India' are evident from its emphasis on increasing exports from industries that are part of the initiative (e.g., defence manufacturing, electronics, engineering, gems & jewellery, leather, pharmaceuticals, and textiles), and from efforts to improve trade facilitation and provide a better trade infrastructure to Indian exporters.

The FTP is correct in assuming that domestic conditions need to improve in order to enhance the competitiveness of Indian exports. The focus gels with the Modi government's overall efforts to minimize the procedural requirements for establishing enterprises, obtaining various functional permits and paying taxes. The FTP complements these efforts by simplifying processes and upgrading trade administration, which, along with efforts to improve the ease of doing business elsewhere in the economy, are essential for the success of 'Make in India.'

Strategic Vision and External Engagement

The FTP is part of Mr. Modi's very active external engagement strategyThe FTP is part of Mr. Modi's very active external engagement strategy, which is driven by India's national strategic interests. Primary among these interests are accessing energy resources, particularly nuclear; connecting to the large Indian diaspora; encouraging foreign investors to participate in 'Make in India'; and building India's case for gaining deeper footholds in major global and regional forums such as the UN Security Council, the G20, the East Asia Summit, and the Asia-Pacific Economic Cooperation (APEC) forum.

Obtaining membership in APEC is particularly important. Modi's administration has been trying to engage various APEC members, bilaterally and by reinvigorating the 'Look East' regional policy into the 'Act East' strategy. [3] The latter is likely to see India expand and deepen its engagement with Southeast Asia, including on strategic and security issues, and extend this engagement to countries in Northeast Asia, evident from Mr. Modi's travels to Australia, China, Japan, Korea and Mongolia, all APEC member countries (except Mongolia, which is aspiring for APEC membership).

But while domestic reforms will enhance the competitiveness of Indian exports, India still needs greater access to foreign markets. World trade is increasingly governed by regional and bilateral agreements that allow selective and discriminatory market access to the members of these agreements. India thus needs to enter into meaningful bilateral and regional trade and investment agreements to expand its exports in global markets.

The FTP notes the emergence of mega-regional trade agreements (RTAs) like the Trans-Pacific Partnership (TPP) and the Transatlantic Trade and Investment Partnership (TTIP) and the negative impact they are likely to have on existing preferences for Indian exports in the TPP and TTIP markets. Indian exports receiving preferential tariff treatments in these markets might find their advantages eroding following across-the-board tariff eliminations in the mega-RTAs. There are particular concerns over textiles, garments, leather and food exports, which could be affected by the higher standards these RTAs would impose to ensure the safety of people, plants, animals and the environment.

At the same time, the FTP indicates that future engagement in bilateral and regional free trade agreements (RTAs or FTAs) would be driven by not only the market sizes of negotiating partners, but also by their ability to supply critical inputs and complement the Indian economy. This has obvious reference to global value chains into which Indian industries can integrate with regular access to imported raw materials and intermediates for use in manufacturing final products. The reference is presumably also for countries that can supply critical energy resources such as crude oil, natural gas and uranium.

Challenges of the Foreign Trade Policy

India has an unflattering reputation as a trade negotiatorAlthough the FTP articulates objectives that will guide future engagement in trade agreements, it does not indicate how New Delhi will negotiate with various countries for deeper market access. India has an unflattering reputation as a trade negotiator. It has been held responsible for stalling progress at the World Trade Organization (WTO) more than once. Its refusal to yield on the issue of greater market access in several areas has held up negotiations on comprehensive FTAs with the EU, Australia and Canada. While it has concluded comprehensive trade and investment agreements with Japan, South Korea, Malaysia, Singapore and ASEAN (Association of Southeast Asian Nations), the scope of these agreements has been relatively limited compared with agreements these countries or regions have signed with other trade partners.

India's active engagement in RTAs and its bilateral trade negotiations with various countries is somewhat inconsistent with its overall defensive posture in trade negotiations. RTAs and FTAs create discriminatory preferences between negotiating partners; India needs to be more generous in yielding market access for obtaining similarly meaningful access for its exports and investments in partner markets.

Ultimately, the FTP's silence on whether India's trade negotiating posture will change in the future is disappointing. While it mentions the objectives that will guide strategies for pushing exports in various markets and regions, it does not indicate whether India's ongoing or future negotiations with these markets will be characterized by a more forward-looking and liberal approach. The absence of such an approach will constrain the possibility that India will secure trade agreements that entail meaningful market access for its exports.

The FTP and Implications for Canada-India Trade

The FTP includes Canada among India's 'traditional' markets, for which the export strategy focuses on moving up value chains and increasing existing market share. With respect to these markets, which also include the US and EU, the FTP points to the possibility of rationalizing customs duties for sourcing imported inputs for Indian final product manufactures, as well as efforts to supply inputs to final producers in these countries.

The Canada-India bilateral trade in goods is currently around US$5.2 billion, or only 0.7% of India's total merchandise tradeThe Canada-India bilateral trade in goods is currently around US$5.2 billion, or only 0.7% of India's total merchandise trade.[4] Both countries' exports reflect their respective comparative advantages. India's major exports to Canada include agriculture and marine products (fish and prawns, basmati rice, corn), pharmaceuticals (antibiotics and formulations for retail sales), garments and textile products (cotton t-shirts, kitchen linens, bed sheets and bed covers), jewellery (diamonds and gold jewellery set with diamonds) steel plates and wooden furniture. And Canada's main exports to India include agriculture products (peas, lentils), fuel (coking coal), fertilizers (potassium chloride), wood (chemical wood pulp), newsprint, jewellery and precious metals (unworked non-industrial diamonds, unwrought non-monetary gold), aircrafts and project-related imports (mostly electricity projects).

The export baskets of both countries have limited diversification. From a value chain perspective, India's major exports to Canada are largely meant for final consumption. Canadian exports of coking coal are used as upstream inputs in electricity production in India. Chemical wood pulp might also be used as an intermediate. Given the structure of exports, jewellery trade between Canada and India appears to have fallen into an interesting value chain pattern: Canada is exporting unworked non-industrial diamonds to India, which are probably being worked upon in India's diamond processing facilities and exported to third-country markets for final consumption. Some of these might be re-exported to Canada, given India's exports of worked non-industrial diamonds to Canada.

The FTP's focus on increasing India's presence in value chains in traditional markets should augment bilateral trade in products for which such value chains already exist. Apart from jewellery, Canada is already integrated into India's energy value chain through its exports of coking coal. New energy value chains can emerge from Canada's uranium exports to India, where, like coal, Canadian exports would be used as upstream inputs in producing energy for final consumption in India. [5]

On the other hand, from an Indian perspective, the Canadian market will remain an important final destination for its pharmaceutical and textile exports. Retaining existing shares in these products in the Canadian market would require Indian exporters becoming more familiar with evolving quality standards in Canada, particularly the new standards likely to become effective after the passage of the TPP.

Future prospects for India-Canada bilateral trade depend on quick conclusion of the bilateral FTA and investment agreement. The FTP expresses hopes for a conclusion of these agreements by the end of the year. In terms of the negotiating challenges that need to be overcome, the FTP mentions India's sensitivity in reducing import duties for giving greater market access to agriculture exports from Canada, the difference in negotiating principles between the two countries on services (Canada prefers a 'negative list' approach, with which India is uncomfortable) [6] and India's concerns over whether market access commitments agreed to in the FTA would be implemented at the sub-federal level in Canada. The FTP is silent over whether India might change its negotiating posture on some of these issues.

Concluding Thoughts

From a strategic perspective, the FTP fails to provide a clear road map of how India will secure meaningful access in major world markets through RTAs and FTAs to increase its share in world exports of goods and services by 2020. The policy does not mention whether India is willing to shed inhibitions and engage the rest of the world in trade negotiations as a constructive and forward-looking participant, in contrast to its traditionally defensive and inward-looking posture.

Trade is critical in realizing India's aspirations for strategic influence in global and regional affairs, but it will require a radical change in India's outlook. In this respect, the FTP is focused more on setting the house in order and does not live up to the strategic ambitions implicit in Prime Minister Modi's external engagement strategy.

Amitendu Palit is Senior Research Fellow and Research Lead (Trade and Economics) at the Institute of South Asian Studies (ISAS) in the National University of Singapore (NUS). He can be reached at isasap@nus.edu.sg. The views expressed here are personal, and not necessarily those of the institution that he works for.

[1] Modi has identified five T' – trade, talent, tradition, technology and tourism – for building 'Brand India.' "Narendra Modi shares his vision of 'Brand India' in 5 Ts," NDTV, 20 January 2014, http://www.ndtv.com/cheat-sheet/narendra-modi-shares-his-vision-of-brand-india-in-5-ts-548337
[2] India's total exports in 2013 were US$464.2 billion, out of which merchandise exports were US$313.2 billion and service exports US$151 billion. See http://stat.wto.org/CountryProfile/WSDBCountryPFView.aspx?Language=E&Country=IN.
[3] Prime Minister Modi articulated the 'Act East' strategy in his remarks at the ASEAN-India summit at Myanmar in November 2014 by emphasizing on a more action-oriented strategy for engaging Southeast Asia. See http://thediplomat.com/2014/11/modi-unveils-indias-act-east-policy-to-asean-in-myanmar/.
[4] Export Import Data Bank Version 7.2; Department of Commerce, Government of India; http://commerce.nic.in/eidb/iecnt.asp.
[5] During Prime Minister Modi's visit to Canada in April 2015, India and Canada announced a C$350 million deal for supply of 3,220 metric tonne of uranium by the Canadian uranium producer Cameco Corp to India over the next five years. See http://www.theglobeandmail.com/news/politics/canada-india-agree-to-major-uranium-supply-deal/article23967494/.
[6] 'Negative list' assumes equal degree of market access in all services except those specified in a negative list.

The views expressed here are those of the author, and do not necessarily represent the views of the Asia Pacific Foundation of Canada.

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