A trade policy for Viksit Bharat: Let’s reduce tariffs and rethink pacts

Policies should be tailored to specified targets, and in this respect, commerce minister Piyush Goyal has set an ambitious target. Exports of goods and services must rise from $775 billion in 2023-24 to $2 trillion by 2030. 

This implies a growth rate of over 14 % in nominal US dollars. This is three times faster than the IMF projection of global exports of goods and services in the same period.

The trade policy we need to achieve this target requires resolving some internal differences and also evolving a new approach to handling the global environment we now face.

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Resolve internal differences: The key difference arises from the impression in some quarters that ‘atmanirbharta’ or self-reliance implies increased protection for domestic production to reduce imports. 

To be fair, the government has denied subscribing to this view. But protectionism is on the rise everywhere, often covertly supported by business interests, and it is no surprise if this is also happening in India.

Perceptions that the government favoured protectionism surfaced in 2017, when import duties were raised on several items, reversing a policy of gradual reduction of duties that all previous governments had followed until then. It was reinforced when duties were raised in subsequent years.

This year’s budget has sent a welcome new signal by reducing import duties on several items in an effort to make domestic production more competitive. The finance minister also announced a comprehensive internal review over the next six months of India’s tariff structure. 

This is to be welcomed, though I wish the minister had appointed an external expert committee, including retired officers of the revenue service, to present a bold plan for tariff reform. Internal reviews too often end up dusting off old proposals without coming up with drastic changes.

Yet, drastic changes are precisely what we need. Ideally, we should announce that our upper-end duties are too high and they will be brought in line with those prevailing in peer-group emerging market economies. Investors must also have some assurance of stability in the structure proposed.

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This proposal is not new. It was proposed earlier by Arvind Panagariya, the first vice-chair of Niti Aayog and current chairman of the 16th Finance Commission. It has also been proposed by other academics, including Amita Batra (a colleague at CSEP).

Domestic industry would not be adversely affected if reductions are staggered over a few years and parallel steps are taken to achieve some rupee depreciation to offset duty reduction. This would leave industries competing with imports adequately supported while aiding exporters.

External developments that affect trade policy: In addition to restructuring customs duties, our trade policy must deal with two new developments in global trade. 

The first is that advanced countries have lost faith in multilateral trade negotiations (MTNs) and moved towards Free Trade Agreements (FTAs). The second is that global value chains (GVCs) now account for a substantial part of the world’s goods trade.

These developments imply that if we want our exports to benefit from GVCs, we need to (a) attract the multinational companies that dominate them to locate part of their production facilities in India, and (b) we need to join FTAs that ensure seamless duty-free access for parts and components which are essential for GVCs to work. We have recognized the need to welcome FDI in order to attract GVC-related production, but our policy on FTAs needs to be rethought.

This has acquired urgency because of geopolitical developments. There is growing tension between the West and a China-Russia partnership in which Russia is the weaker party. Western countries no longer talk of globalization and trade liberalization. Instead, we have discriminatory trade policy aimed at ‘re-shoring,’ ‘near-shoring’ or ‘friend shoring.’

The discriminatory trade measures against China and Russia will have a negative impact on all sides. The IMF has stated categorically that global growth and world trade will be hurt. 

India will also be hurt by this. However, the attempt to shift trade away from China also offers India an opportunity. MNCs with GVCs heavily concentrated in China will not exit the country completely, but may want to evolve a ‘China plus one policy,’ and India is particularly well placed to benefit from this.

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A sensible customs duty structure on the lines discussed above is one pre-requisite for India to benefit. Equally important is membership of trade pacts which allow the smooth movement of components across borders. 

The Regional Comprehensive Economic Partnership (RCEP) is the world’s largest regional trading arrangement, covering all of East Asia, including China. We were on the verge of joining it in November 2019, but backed out at the last minute. This was reportedly because Indian industry groups were nervous about giving duty-free trade access to China.

If China was the only reason for walking out of the RCEP, we should seriously consider joining the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP). This agreement was originally pushed by the US under President Barack Obama, but the Donald Trump administration took the US out. 

It currently covers 11 countries including Japan, South Korea, Australia and some from Asean. The UK has recently been cleared for membership, so it will soon be 12 countries. China has applied to join the CPTPP, but has not so far been accepted. The geopolitics that is keeping China out is likely to work in our favour if we apply. 

The real problem is that joining will require acceptance of high environmental and labour standards which we have traditionally opposed on the grounds that it restricts our ‘policy space.’ This approach needs a rethink. 

Our ambition to reach developed-country status by 2047 doesn’t sit well with rejecting obligations that other developing countries are willing to accept. These obligations can always be phased in over time, and the length of the adjustment period could be negotiated.

A contentious issue that will come up in negotiating FTAs is the signing of acceptable Bilateral Investment Treaties (BITs). We recently cancelled all existing BITs unilaterally, and proposed that our partners accept our new model BIT. 

The problem is that under the new model, aggrieved investors cannot invoke international arbitration to resolve disputes with the host state without first exhausting all other possibilities under domestic law. This may seem minor, but it ignores the notorious delays which characterize our legal system. 

We cannot expect billions of dollars to pour in for the development of critical industries (and in technologically sensitive areas) without providing investors with speedy redress avenues along the lines that other countries offer.

We have made progress on some FTAs, but the gains are small. We have signed an FTA with the UAE and European Free Trade Association, but this is a very small group of countries. 

We have also signed a limited “early harvest FTA" with Australia, but the coverage is limited. We are negotiating FTAs with the UK and EU. Both are important, but progress will depend on our taking a more flexible line on harmonizing other standards.

One of the problems that could arise is the treatment of restrictions under the EU’s Carbon Border Adjustment Mechanism (CBAM). We could argue that an FTA by definition must rule out CBAM type penalties on trade flows. It is unlikely that the EU will agree. Its CBAM does pose us problems, but we may have to deal with it separately.

The US is our most important trading partner, but it has indicated that it does not propose to sign any more FTAs. However, we should perhaps review our position of not joining the trade pillar of the US-sponsored Indo-Pacific Economic Framework. This does not offer any market access, as of now, but there is no harm in joining it.

It is possible that commerce ministry negotiators find it difficult to get other ministries to agree on the flexibilities needed. Perhaps these issues should be referred to the Niti Aayog to take an overall view and seek clearance at the highest level.

Finally, trade policy is only one of the factors that can deliver strong export performance. Other initiatives, such as developing good infrastructure, reducing logistical costs, development of human skills and improving the ease of doing business, are also important. And these are relevant not just for exports, but for the economy as a whole.