Make FTP an integral part of economic management and diplomacy

The announcement of India’s Foreign Trade Policy (FTP) for the 2009-2014 period comes just as the World Trade Report 2009 has forecast a 10% drop in global trade in volume terms. The FTP nevertheless correctly reaffirms India’s commitment to utilise the external sector as an important driver of growth and competitiveness.

India’s decision to sign preferential trade pacts with Southeast Asian nations and South Korea represents a strong signal in this direction. It also demonstrates the country’s remarkable perseverance, and goodwill in engaging the rest of Asia, particularly as these trade pacts do not include services and manpower access, two areas of relative competitive advantage for India. It is now up to Southeast Asian nations and South Korea to demonstrate their seriousness and goodwill in engaging with India.

India must give high priority to concluding an economic agreement with the newly elected government in Japan, led by the Democratic Party of Japan, which goes beyond just merchandise trade. It should include services, investments, and manpower flows to take advantage of complementarities between a rapidly ageing Japan and a favourable demographic phase of India in which the proportion of working population in the total population is rising. Both the countries can expand their economic space and strategic leverage through deeper engagement.

India has in the recent past had some success in expanding its share of the global trade. Its share of global merchandise trade increased from 0.83% in 2003 to 1.45% in 2008, while its share in global service exports doubled from 1.4% in 2003 to 2.8% in 2008. In spite of these achievements, India’s share of global trade in goods and services at 1.64% in 2008 remains considerably below its needs as well as potential.

The 2009-2014 FTP envisages doubling of India’s share in global trade to around 3.2% by 2020. There, however, does not appear to be a robust empirical or strategic foundation for the proposed target year; nor is there a convincing roadmap for achieving the target.

The FTP exhibits continuity in overall thinking and in policy thrusts and instruments. Thus, it emphasises the need to focus on traditional labour-intensive export sectors of textiles, leather, and handicrafts, with relatively minor initiatives for technology upgradation of these sectors; proposes a variety of sector and activity specific tax and other incentives, while expanding their geographic scope to include new potential markets; minor refinements in administrative procedures to reduce transaction costs; and promise of speeding up of electronic trade facilities.

It also promises that when the goods and services tax (GST) is introduced in 2010, the exports of goods and services will be zero rated, i.e. exports will be taxed at zero percent, but all taxes paid on inputs needed to generate exports will be refunded in a timely manner with very low transaction costs.

This is standard international practice. In implementing zero rating of exports as the dual stage GST at the Centre and in the States is being envisaged, careful planning, consultation, and coordination will be needed if this promise is to be kept.

There are several traditional measures in the FTP, such as Made in India shows in various countries, which would be helpful and merit inclusion. What is striking, however, is the lack of articulation of how the gap between India’s required level and its actual trade levels is to be narrowed in as short a time as possible, while enhancing the trade potential through coordinated initiatives across ministries, and also involving states and the private sector.

India’s total trade will reach $1 trillion in the next few years (in 2008, it was $670 billion, around 55% of the GDP). This will require corresponding physical, financial, administrative and strategic economic diplomacy infrastructure. The FTP is unfortunately not very forthcoming on how such comprehensive infrastructure should be brought about.

The goals of FTP should be integrated with strategic imperative of expanding the Indian diaspora. This particularly applies to Japan, Myanmar and Indonesia in Asia; South Africa and Nigeria in Africa; Israel, Egypt, Iran and Turkey in the Middle East; Brazil and Mexico in Latin America; Kazakhstan in Central Asia; and Russia.

The role of economic diplomacy, including assessing India’s foreign representatives on the extent to which they contribute to expanding India’s economic space and strategic leverage, has also not received requisite attention. This suggests that the FTP should be presented jointly with the plans by the ministry of external affairs and the ministry of overseas Indian affairs.

As with goods, India’s export basket for services remains narrow and geographically concentrated. Thus, in 2007, nearly four-fifths of $92 billion in services exports were accounted for by “other commercial services,” mainly software and related services. The software services remain heavily concentrated on the United States, though in recent years welcome diversification to other markets such as Japan and Europe has been achieved.

Travel services, potentially an important driver of growth and employment, accounted for merely one-eighth of the total exports. In net terms (exports minus imports), travel services were of fairly negligible importance. Thus, a truly coordinated FTP would involve developing a joint plan with the tourism (and other) ministries to set strategy, tactics, and targets for travel services exports, and for minimising outward flow of travel receipts.

Another area of services is the financial services. As India continues to grow, the import of financial services will also increase substantially. By some estimates, unless India develops Mumbai (or another city) as at least a major regional financial centre, the total value of financial services imported may rival the import bill for petroleum products. This will put additional pressure on India’s already stretched balance of payments.

The FTP is symptomatic of a major structural deficiency in policy making and its implementation in India. This is the tendency of the ministries, and even different divisions in the same organisation such as the Indian Railways, to think and act in a compartmentalised manner. India cannot continue with mindset and with governance structures of the 19th and 20th centuries.

It is imperative that the reports of the second Administrative Reform Commission and of other bodies such as the Knowledge Commission, which are designed to strengthen governance structures be given greater prominence in public policy debates, with requisite urgency in achieving results and outcomes.

The writer is professor, Lee Kuan Yew School of
Public Policy, National University of Singapore
Views are personal.