Greater collaboration between the government and the private sector, for developing trade-smart schemes and incentives that have long-term sustainability and contribution to the growth of Indian industry, is the only sensible way forward
By Himanshu Tewari & RV Anuradha
Recent global events have significant implications for reshaping India’s trade policy framework. The first important trigger for change occurred in 2013-14 when India’s per capita GNI (Gross National Income, earlier referred to as GNP or Gross National Product), assessed by the World Bank, breached the threshold of $1,000. This development had a ripple effect in India’s status as a ‘developing country’ under the WTO’s Agreement on Subsidies and Countervailing Measures (ASCM), which regulates, among other aspects, export subsidies. In 2017, after three consecutive years of India’s per capita GNI exceeding $1,000, India graduated out of the list of ‘developing countries’ under Annex VII of the ASCM, which basically meant losing the space for foreign trade policy manoeuvrability that India had enjoyed till then as a developing country.
This was the genesis of the second trigger—a dispute challenging India’s export subsidy schemes that was initiated by the US at the WTO in March 2018. The initial consultative phase did not lead to any resolution, and therefore the US sought the establishment of a panel for dispute settlement at the WTO in May 2018. At the core of the dispute was the contention that ‘export incentives’ granted by India under the DFIS, EOU, EPCG, MEIS and SEZ schemes are ‘export subsidies’ that are prohibited under the ASCM. The WTO panel report, published on October 31, 2019, held these schemes to be prohibited ‘export subsidies’. The panel recommended that India should withdraw these schemes in a time-bound manner.
The WTO dispute mechanism allows for countries the right to appeal panel reports with the WTO’s Appellate Body and India has exercised this right. But while an appeal can provide some tactical advantage in the short run, domestic reform is inevitable.
In anticipation of the inevitable, the government has been undertaking suitable steps, such as emphasising that Indian industry should reduce its reliance on export incentives and has to reinvent itself by increasing its competitiveness in the global market based on increased productivity of resources, improved quality, better efficiency and increasing reliance on data-driven business strategies.
The government has also announced December 31, 2019, as the sunset date for the MEIS (Merchandise Exports from India Scheme). There is also anticipation of the launch of a new scheme, the RoDTEP (Remission of Duties or Taxes on Export Products). Another significant initiative by the Indian government was the setting up of a group consisting of SEZ stakeholders under the chairmanship of Baba Kalyani, which has made significant recommendations for SEZ reforms that the government is considering.
These developments need to be seen in the context of India’s positioning in the global trade scenario. This includes recent events such as: (a) India taking a strong stand regarding its crucial and sensitive demands at the RCEP negotiations, while keeping its options open regarding its continued engagement with the RCEP as well as other free trade agreements (FTAs) with strategic trading partners; (b) India’s embracing of the tenets of the WTO’s Trade Facilitation Agreement, which, apart from ensuring compliance with our WTO obligations, has contributed to improving India’s ranking in the World Bank’s Ease of Doing Business report; and (c) India’s adoption of disruptive technologies for trade automation and reduction of transaction costs, which has a role to play for making it an attractive destination for trade and investment.
Seen against this overall backdrop, the tactical and strategic response in appealing the WTO panel report on export subsidies is only a short-term solution. In the long-term, as a member of the WTO, and as party to various FTAs, course correction with regard to formulating WTO- and FTA-compliant incentives and subsidies is inevitable.
Firstly, India’s trade policy of the future ought to consider distinct approaches for trade in goods and trade in services. This aspect has also been highlighted among the recommendations of the Baba Kalyani report on SEZ reform. The distinction between goods and services will also enable designing separate incentives and subsidies for services exports, which neither the WTO nor India’s FTAs currently regulate. With services commanding increasing relevance for India’s growth story, and with the increasing ‘servicification’ of manufacturing, carefully-designed and WTO-compatible services subsidies are an important way forward. Equally, carefully-designed incentive schemes and subsidies for goods, which are compatible with our international obligations, are also essential. There exists sufficient space under both the WTO agreements and FTAs for this.
Secondly, a meaningful trade policy framework needs to be rooted in an evidence-based approach, and rely on microeconomic data from the industry to enable targeted decision-making based on trade data analytics. Early indicators that the government has also recognised and is acting on this imperative is evidenced in the request from the government for microeconomic data from export promotion councils, for quantifying the rate of RoDTEP. In order to be able to respond to such a request and benefit from the scheme that is eventually put in place, Indian industry will also need to be proactive and establish appropriate mechanisms to capture data at the granular level, through innovative changes in accounting systems, IT systems and MIS, as well as ensure auditable record-keeping of the information required to benefit from the scheme. With increasing growth of the digital economy and blurring of lines between the physical and digital economies, the centrality of data-driven insights in informing policymaking is that much more crucial. This necessarily has to be an evolving approach, with the industry informing the design and outcome of the government policy by sharing qualitative data over a period of time.
And finally, the trade policy of the future will have to forego its three-decade old preoccupation with export obligations and foreign exchange earnings. The shift from export growth to broad-based employment and economic growth was highlighted in the Baba Kalyani report as well. This will also enable the new policy to shed the legacy of India’s 1991 balance of payment crisis and look at the world with a new and aspirational approach and a perspective of global leadership.
The ability of the government’s policy to have real benefits will also depend on the extent to which Indian businesses can provide crucial strategic inputs to the government, a theme which was discussed at a recently held CII conference in Mumbai, on the Global Trade Scenario, aptly titled ‘Navigating the New Normal’. Large industry houses, especially, will need to be better equipped with research and appropriate skill-sets, and apportion resources to be able to compliment and supplement government efforts. The government reaching out to industry for collating microeconomic data for informing and refining the RoDTEP scheme is an important starting point. Greater collaboration between the government and the private sector, for developing trade-smart schemes and incentives that have long-term sustainability and contribution to the growth of Indian industry, is the only sensible way forward.
Tewari is partner, Deloitte India, and Anuradha is partner, Clarus Law Associates, New Delhi. Views are personal