4 minute read 2 Jan 2020
India’s trade policy: version 2.0 in the making

India’s trade policy: version 2.0 in the making

By Agneshwar Sen

EY India Tax and Economic Policy (International Trade) Associate Partner

Leads the international trade vertical and has held various positions in trade related agencies of the Indian government. He is a travel enthusiast and likes to cook and explore different cuisines.

4 minute read 2 Jan 2020
Related topics Tax Global trade

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In September 1994, the Uruguay Round of negotiations concluded with an agreement to create the World Trade Organization (WTO). This heralded the age of a multilateral system that effectively upheld the rule of law for international trade among its members. Twenty-five years later, while the WTO has been effective in enforcing its trade rules through the dispute settlement system, it has not achieved the same level of success in making new rules for the challenges that globalized trade faces today. Thus, many countries, including India, are re-thinking about their post-WTO trade policy.     

The present state of India’s Foreign Trade Policy

India’s Foreign Trade Policy (FTP) consists of schemes to support the domestic exporting community. These include development policies that help set-up special trade and economic zones in different parts of the country. 

On 14 March 2018, the US filed a complaint at the WTO claiming that India was violating its WTO obligations by maintaining export promotion schemes that are inconsistent with WTO rules prohibiting the export subsidies[1]. The legal basis for the challenge is the provisions under the WTO Agreement on Subsidies and Countervailing Measures (SCM Agreement) which, collectively disciplines subsidies, including those linked to exports. The WTO panel established to examine the complaints, in a report released on 31 October 2019, has concluded that certain benefits arising out of India’s export promotion schemes violate India’s obligations to not maintain export subsidies.

This decision may impact Indian businesses significantly. The schemes under the challenge have historically supported Indian exports and have provided incentives for the reduction of cost of exports and thus, have helped in devising export strategies such as exploring new markets. The broad macro-economic context within which this challenge has been initiated is equally important. The ongoing trade wars between US-China, Europe, etc. are already creating uncertainties for businesses globally including in India. Further, the overall health of the Indian manufacturing sector is sub-par at best. The Indian economy has witnessed a decline over the past few years due to both cyclical and structural reasons. Given this backdrop, several of India’s primary exporting sectors like automobile, pharmaceutical, electronics and IT, and textiles and clothing, are likely to be particularly impacted.

India’s dilemma on regional trade agreements 

Comprising of the ASEAN members, China, Japan, Korea, Australia and New Zealand, in addition to India, Regional Comprehensive Partnership Agreement (RCEP) is poised to be the world’s largest free-trade agreement. With a combined GDP of US$49.5 trillion, about 39% of the global GDP, RCEP would cover nearly 3.4 billion people[2]. There are significant outstanding issues that remain for India till the recent summit that took place in Thailand between 2-4 November 2019. India is negotiating RCEP and has informed its intention to walk-out of the negotiations if its concerns are not addressed in a satisfactory manner. In a statement issued by RCEP’s joint leaders on 4 November 2019, it has been mentioned that all the participating countries will work together to resolve India’s outstanding issues in a mutually acceptable way.[3] India’s final decision to sign up or otherwise to the RCEP Agreement will depend on the outcome of the discussions to be now undertaken with the other participating countries.

While joining the RCEP is expected to help cut through the spaghetti bowl of free-trade agreements that India has signed with various Asian countries, the agreement poses its own challenges. India currently runs a goods trade deficit of US$104 billion with 10 out of the 15 RCEP partners. The country is particularly concerned with the competition that products from China will offer upon signing of this agreement. Appropriate emergency safeguard measures to prevent damaging import surges is a necessity but this is yet to become a part of the RCEP architecture. India’s comparative advantage lies in adjusting in the trade deficit in goods by counterbalancing it with services trade. However, most developed RCEP countries where India can export services, have been unwilling to negotiate wide-ranging disciplines in services that can create new market access for trade in services in this region.

A unique time to redo the trade policy

The current regional and global trade dynamics collectively make a strong economic and strategic case for India to relook at its trade policy afresh and comprehensively, keeping India’s investment and industrial policies in mind. India should also utilize the time-out from RCEP negotiations to carefully examine the lessons learnt from the existing free-trade agreements.

The Government of India is already taking proactive steps. To address the declining private investments, corporate taxes have been recently slashed. A new WTO compatible export support scheme, Remission of Duties or Taxes on Export Products (RoDTEP), has been announced by the Finance Minister of India, which is expected to replace the primary export incentive scheme that has been declared ultra vires by the WTO dispute panel. Given the complexity of applicable WTO rules, there is a need to provide a similar level of support as is given to the present schemes. To show compatibility with WTO-rules, it is essential for the government to carefully work out enough details for drafting the scheme. While doing so, it is also imperative for different industry sectors to help provide the details/ peculiarities of their sector to the government.

Similarly, the WTO panel decision allows India to recast its trade development and promotion efforts, such as through the special economic zones, to meet its developmental objectives. Extensive input from businesses and other stakeholders, alongside systematic coordination with various domestic regulators may help India firm up its negotiating position and update its trade policy to version 2.0 which will account for the contemporary economic realities as well.

  • Show article references#Hide article references

    [1]. For all documents related to this dispute, see: DS541 – India – Export related Measures, available here (accessed on 8 November 2019).
    [2]. See, The Economic Times, Is India ready for RCEP embrace? (29 October 2019), available here.
    [3]. Joint leaders’ statement on RCEP, available here (accessed on 8 November 2019).

Summary

India needs to review its trade policy in a comprehensive manner, keeping investment and industrial policies in mind.

About this article

By Agneshwar Sen

EY India Tax and Economic Policy (International Trade) Associate Partner

Leads the international trade vertical and has held various positions in trade related agencies of the Indian government. He is a travel enthusiast and likes to cook and explore different cuisines.

Related topics Tax Global trade