Towards adopting the first best trade policies

Updated: Jul 27 2006, 05:30am hrs
Indians are beginning to be respected everywhere which is a pleasant change from the past. Throughout the past three decades, I have travelled with an Indian passport, and for the most part, with a UN laissez passer, and I seldom experienced expeditious immigration clearance. There was total ignorance and misconceptions about India.

But now, I am greeted with a smile at every airport. Some countries even give Indians a visa at the port of entry, a privilege accorded to developed countries citizens. All this is the result of our impressive economic performance in the last 15 years. Yet, we are still a small global player in terms of exports, imports and FDI. We need a quantum jump in trade to make Indias presence fully felt in the global arena.

I would move towards the first best trade policies. Let us help multilateral rules guide global trade. Given its slow pace, emphasise bilateralism and regionalism within the WTO framework. And finally, reduce tariffs to Asean levels immediately. The exchange rate is already competitive.

These policies call for an India willing to yield on Nama so long as the EU and the US move on agriculture and are willing to liberalise Modes 1 and 4 of Gats. I would suggest we move first, because we need multilateralism more than the EU and the US. We should build upon our Ceca with Singapore, and quickly conclude agreements with Korea, Japan and move towards an Asian Economic Community. Simultaneously, we should begin work on a Ceca with the EU, and an FTA in services with the US.

In the next Budget, we should reduce our maximum tariffs to 5%, with removal of most exemptions to neutralise the revenue impact of such a move. Or better still, have a uniform tariff of 6% like Chile with no exemptions. Our present tariff level is a deterrent for potential exporters.

But what is preventing us from doing this The resistance is coming mostly from the industry, and for solid reasons. Given the red tape and massive transaction costs, the poor state of infrastructurepower, ports, roads, airports, the high excise duties and other state and local levies, and the inflexible labour laws, industry needs protection from external competition to survive.

India needs a quantum jump in trade to make its presence felt globally
Among other things, India should reduce tariffs to Asean levels
Industry will have to balance tariff protection with domestic reform
Indian industry does not enjoy a level playing field with its global competitors. Hence, for good reasons, it opposed the dilution of Nama in the Doha Round negotiations, is against simple rules of origin without a long negative list in the FTA discussions, and is afraid of reducing tariffs to Asean levels.Government must immediately act on these fronts and devise innovative incentives to compensate industry for the loss of legitimate tariff protection that it enjoys.

The industry is ready for external competition if these constraints are removed. It has often emphasised the need for domestic reforms to prepare it for competition. But perhaps its defensive stance of protection comes out a bit more prominently in the press. Industry should come out clearly with all the behind-the-border roadblocksinfrastructure, multiplicity of taxes and fee, massive transaction costs, and rigid labour laws, and state that it is not opposed to a lower tariff under Nama or in the Budget, provided these constraints are removed. Maybe, industry should balance pushing on these fronts with safeguarding tariff protection. The pre-Budget submissions from the industry should be pro-active on these reforms.

The industry should push more on trade facilitation to reduce transaction costs of trade. It should emphasise that trade procedures should be transparent with minimal signatures, and the cargo dwell times should be closer to international norms. Industry should work with the government to improve the ports, airports, roads, and container services, ensure availability of uninterrupted power and water supply, and emphasise the need to develop skilled manpower to overcome impending skill shortages.

Industry should emphasise that no FTA should be signed without a thorough study calculating the impact of such a move on industry, and offering adequate compensation for the losses.

By emphasising these domestic reforms, industry will need to partner the government in adopting first best trade policies without hesitation. Indian growth then will be lasting and unstoppable.

The writer is principal advisor, CII. These are his personal views