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Indian Trade Policy: An Analysis

The evolution of humankind has been a much-layered process which took a lot of time and effort, in one of the evolutionary phases, human decided to stay in groups and civilizations begun to formulate. The civilizations lead to various discoveries and practices which have turned out to be revolutionary. One such practice which can be traced back is the trading of one essential to other, which is called a barter system.

From the time of evolution till the very recent COVID-19 pandemic, trade has evolved and changed the meaning of various things in the world. From monopoly to perfect competition, from local trading to world trading and back to local trading (due to COVID-19 situations), the trade has changed from its very first method, from the barter system to money trading system, the trade has brought change and revolution in the world with the manner of trading.

The significance of trade can be understood with some historical events such as, British trading companies who went to various parts of the world and ended up ruling on most of it. We can also refer to Columbus and the discovery of the American region as well, Columbus, who was a merchant, trying to reach India through the sea, found a whole new continent that was not known to the world.

Apart from the geographical and political benefits, various monetary, social, and cultural developments have been resulted due to trade and the current scenario of the world is such that if the international trade is stopped then the nations will suffer to maintain the economic growth and the smooth relations as fear of COVID has resulted in some drastic steps by the countries including refraining import from various countries having higher cases of COVID-19.

Recently, India introduced its new foreign trade policy for 2021-2026 intending to become an economy of USD 5 Trillion along with making India a leader in the area of international trade.

India's economic growth continued to be strong for most of the period of 2015-2020, averaging 7.4% until 2018/19. Several reforms were implemented, including the introduction of the Goods and Services Tax (GST) to harmonize the indirect tax system; the Insolvency and Bankruptcy Code to address the problem of debt in the corporate sector; banking reforms to improve supervision of banks and non-banking financial companies; and, most recently, legislation to improve marketing and reduce regulation of agricultural products. Trade policy remained broadly unchanged as it was under the time frame of the previous trade policy.

Since the first half of 2019, growth has been weaker, mainly due to lower consumption and investment, particularly private investment, with gross fixed capital formation growing by only 1% in the fiscal year 2019/20. Recent cuts in the base corporate rate of tax, from 36% to 22%, and in personal income tax, were announced to boost investment and consumer spending. The authorities estimated that real GDP grew at around 5.1% during April-December 2019 but more recent estimates point to lower growth.

The Government responded to the COVID-19 pandemic by announcing several short and longer-term measures targeting certain sectors of the economy, as well as the rural and urban poor. With lower inflationary pressure due to lower international commodity prices and the impact of the pandemic, monetary policy was also accommodative during the period.[1]

In India, the regulation of foreign trade is done by the Directorate General of Foreign Trade. DGFT is an attached office of the Ministry of Commerce and Industry and is headed by the Director-General of Foreign Trade. Right from its inception till 1991, when liberalization in the economic policies of the Government took place, this organization has been essentially involved in the regulation and promotion of foreign trade through regulation.

Keeping in line with liberalization and globalization and the overall objective of increasing exports, DGFT has since been assigned the role of "facilitator". The shift was from prohibition and control of imports/exports to promotion and facilitation of exports/imports, keeping in view the interests of the country. DGFT is the main governing body in matters related to Exim Policy.

Foreign trade is also regulated by the Foreign Trade (Development and Regulation) Act 1992. The main objective of the Foreign Trade (Development and Regulation) Act is to provide the development and regulation of foreign trade by facilitating imports into and augmenting exports from India. The act has replaced the earlier law known as the Imports and Exports (Control) Act 1947.

What Is Trade Policy?

Trade policy encompasses all instruments that governments may use to promote or restrict exports and imports. Trade policy also includes the approach taken by countries in trade negotiations. While participating in the multilateral trading system and while negotiating bilateral trade agreements, countries assume obligations that shape their national trade policies. The instruments of trade policy that countries typically use to restrict imports and encourage exports can be broadly classified into Price related measures such as tariffs and non-price measures or non-tariff measures.

Trade policies determine the size of markets for the output of firms and hence strongly influence both foreign and domestic investment. Over time, the influence of trade policies on the investment climate is growing. Changes in technology, liberalization of host country policies towards trade and investment, and the growing organization of global production chains within multinational enterprises (MNEs) have all served to make trade policies in home and host countries alike a crucial ingredient in encouraging both foreign and domestic investment and in maximizing the contribution of that investment to development.

Types Of Trade Policy

Trade policies can assume varying dimensions and scope depending on the number of parties involved in the policy.

Consider the following types of trade policies:
National trade policy:
Every country formulates this policy to safeguard the best interest of its trade and citizens. This policy is always in consonance with the national foreign policy.

Bilateral trade policy:
This policy is formed between two nations to regulate trade and business relations with each other. The national trade policies of both the nations and their negotiations under the trade agreement are considered while formulating bilateral trade policy.

International trade policy:
International economic organizations, such as Organization for Economic Co-operation and Development (OECD), World Trade Organization (WTO), and International Monetary Fund (IMF), define the international trade policy under their charter. The policies uphold the best interests of both developed and developing nations. The best example is the Doha Development Agenda which was formulated by the WTO.

The approaches of countries can be divided into two types: Liberalization (free trade policy) and protectionism.

Under the liberalization is understood the minimum of state interference in foreign trade, which developed based on free-market forces of supply and demand, and under the protectionism - the state policy, which protects the domestic market from foreign competition through the use of tariff and non-tariff trade policy instruments.

These two types of trade policy characterize the measure of state intervention into international trade.

If under the conditions of liberalization policy, a basic regulator of foreign trade is a market, then protectionism practically excludes the operation of free-market forces. It is assumed that economic potential and competitiveness at the world market of separate countries are different. Therefore a free action of market forces can be unprofitable for the less developed countries. Unlimited competition from more powerful states can result in economic stagnation and the formation of inefficient economic structure in less-developed countries

The protectionism policy contributes to the development of certain industries in the country and often is a necessary condition for the industrialization of agrarian countries and unemployment reduction. However, the removal of foreign competition reduces the interest of domestic producers in the implementation of scientific and technological progress, improving the efficiency of production.

Trade Policy 2015-2020: Key Aspects

Objectives:
It aims at doubling the overseas sales to $900 billion by 2019-20.

It provides a framework for increasing exports of goods and services as well as generation of employment and increasing value addition in the country, in line with the 'Make in India' program.

Integrating foreign trade with the "Make in India" and "Digital India" Programme.

Salient features:
  • MEIS scheme: A single Merchandise Exports from India Scheme (MEIS) has been formulated by merging five existing schemes to promote merchandise exports.
  • The incentives are to be provided in the form of duty scrips as % of FOB (free on board) value of exports.
  • SEIS scheme: The Services from India Scheme (SFIS) has been replaced by Service Exports from India Scheme (SEIS). SEIS will be only for India-based service providers and will be based on net foreign exchange earned.
  • Both the SEIS and MEIS schemes apply to SEZ units.
  • To ensure trade facilitation and ease of doing business, Paperless Trade and Online filling of forms have been provided.
  • E-commerce export applies to items worth up to Rs 25,000 per consignment.
  • Provision for Export oriented units (EOUs), Export hardware technology park, and software technology park.
  • The Duty-free scrips (a form of credits) are provided to the exporters under various export promotion schemes of the government. The scripts may be transferable or nontransferable.

Achievements
2015 policy, which focused on improving India's performance in existing markets/products and exploring new markets/products - has been praised as "progressive" for the following reasons:
  • It consolidated a range of export incentives with different eligibility criteria into two schemes the Merchandise Exports from India Scheme (MEIS) and Services Exports from India Scheme (SEIS).
     
  • It offered export incentives under these two schemes in the form of duty credit scrips, which can be used by exporters to pay import duties. The scrips are fully transferable, which means that if an exporter does not need them, they can pass them on to another.
     
  • It reduced export obligation from 90% to 75% for capital goods sourced from local manufacturers under the Export Promotion Capital Goods Scheme (EPCG).
     
  • It allowed manufacturers who are "status holders" (entrepreneurs certified by the DGFT as having helped India become a major export player) to self-certify their manufactured goods as originating from India. This helps them qualify for preferential treatment under various bilateral and regional trade agreements.
     
  • It identified 108 micro, small and medium enterprise (MSME) clusters for focused interventions to boost exports.
     
  • It promoted the paperless processing of various DGFT licenses and applications.

Failures
The policy has also had its fair share of criticism. Some of its provisions have been challenged at the World Trade Organization (WTO) by the United States. Some sticking points:

In 2019, a WTO dispute settlement panel, acting on Washington's complaint, said India's export subsidy provisions violate WTO rules and must be withdrawn. These include tax incentives under the popular MEIS and SEIS. As India's per capita gross national product is over $1,000 per annum, it can no longer offer subsidies based on export performance, the panel ruled. This controversy reinforces the growing view in India that the country needs to move away from subsidies and think of other ways to help its exporters.

There is a strong belief in India (bolstered by its trade policy) that free trade agreements (FTAs) haven't worked for it. One indication of this came in November 2020 when India decided to not be a part of the Regional Comprehensive Economic Partnership (RCEP), the world's largest FTA. Experts and economists believe this cost India a golden chance to be a major player in exports.

Foreign Trade Policy, 2021-2026

It will come into effect from 1st April 2021 for five years. It will strive to make India a leader in the area of international trade to make India a USD 5 Trillion economy.
  • By boosting exports: both merchandise and services, through Systematically addressing domestic and overseas constraints related to the policy
  • Regulatory and operational framework for lowering transactions costs and enhancing the ease of doing business,
  • Creating a low-cost operating environment through efficient, cost-effective, and adequate logistical and utility infrastructure.

Significance
  • Correcting the imbalances within India: By improving operations of the domestic manufacturing and services sector in combination with efficient infrastructure support.
  • Growth and employment: By channelizing the synergies gained through merchandise and services exports.

Conclusion
Over the past few decades, significant transformations are happening in terms of growth as well as trends of flows and patterns of global trade. The increasing importance of developing countries has been a salient feature of the shifting global trade patterns. Fundamental changes are taking place in the way countries associate themselves with international trade and investments.

Trading through regional arrangements which foster closer trade and economic relations is shaping the global trade landscape in an unprecedented way. Alongside, the trading countries also have devised ingenious policies aimed at protecting their economic interests.

End-Notes:
  1. https://www.wto.org/english/tratop_e/tpr_e/s403_sum_e.pdf

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