Predictable, but stable

Foreign trade policy has done just what the doctor ordered by shunning fiscal incentives,

trade, economy
The preconditions for infrastructure investments are market-determined utility tariffs, robust revenue streams, and workable concession agreements. (IE)

The most striking feature of the new foreign trade policy (FTP) 2023 is, ironically, the tacit admission of its redundancy. Subsequent revisions of the policy “shall be done as and when required and shall not be linked to any date,” the short FTP document avers, while stressing the importance of “policy continuity.” What is needed, it says, is “to respond dynamically to the emerging situations,” leaving little for one to take exception to. The previous version of the FTP was initially for five years till FY20, and saw three extensions, sans any change, till March 31, 2023.

The FTP rightly—and inevitably—shifts away from using fiscal resources to incentivise exports. India’s gross national income surpassed the WTO’s exemption threshold of $1,000 per capita for nations to keep such incentives in 2015. This has resulted in a series of setbacks for the country, at the world body’s dispute panel in recent years, the latest being the SEZ case in 2021. Fiscal support to India’s goods exporters to offset their cost disadvantage from the country’s infrastructure deficit and general economic inefficiencies came to an end in January 2021. Similar benefits for firms exporting services were last given for the fiscal year 2020-21. Commerce and industry minister Piyush Goyal has on several occasions asked exporters to get out of “the mindset of subsidies.” Given this context, and the streamlining of the tax remission for exporters and its extension to around 90% of the tariff lines, FTP has become less suspenseful.

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The short point is that the relative competitiveness of the economy, logistics efficiency, and swiftness of geographical diversification of export destinations will determine the country’s export prowess. These are largely the function of private enterprise and investment, while the government has the role of a facilitator of infrastructure investments and initiator of necessary structural reforms. The preconditions for infrastructure investments are market-determined utility tariffs, robust revenue streams, and workable concession agreements. Given that India’s infrastructure deficit is still huge, the government would have a subsidiary role for at least a few more years as a major investor too, but without upsetting its own fiscal maths. A policy paradigm that recognises all these, is already being developed.

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India’s exports have been outpacing world trade growth in recent years—in FY23, the overall goods-and-services exports are set to be $770 billion, a neat $100 billion higher than in FY22. Ratio of goods exports to GDP grew from 18.18% in FY18 to 21.4% in FY22, even amidst global headwinds and geopolitical uncertainties. But this barely hides the country’s sheer under-performance in the world markets and its huge unharnessed potential—India’s share in world trade is just 2.1% now, while it accounts for 7.5% of the world GDP (adjusted for purchasing power parity). The FTP target of $2 trillion exports (goods and services) for 2030 implies a CAGR of 15%, and a tripling of goods exports in eight years. Merchandise exports had grown in the decade to FY22 only by a third. In the near term, the considerable slowing of world trade—from 3.5% growth in 2022 to the projected 1% in 2023—is a dampener. A likely jump in e-commerce, increased agility of exporters in finding new markets, and the easing of logistical constraints are the best bets for the country. A drive to create Indian brands with global recall and the momentum in the settlement of international trade in rupee are potential accelerators too.

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First published on: 01-04-2023 at 04:30 IST
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