Delusional Politics
Page 18
India is one of the few major countries which has the good fortune that the Constitution provides clear powers to the government of the day to enter into international agreements. 7
Given this, discussion of our stance at multilateral settings, including the WTO, in the Parliament has an overdose of politics. Trade policy is directly linked to national interest and economic prosperity and we need to develop a bipartisan consensus on the subject. This will strengthen the hands of the government of the day in negotiating with our international partners.
Bipartisan consensus should be supported by bringing in trade expertise to the government fold. Rather than generalist administrators, the government needs advice and assistance from the best in the business, whether they are in the commerce ministry or other ministries, Indian trade or economic service or chambers of commerce or think tanks. While the first steps in this process have been taken, the process itself needs to be taken much further.
The idea must be to depoliticize trade policy as much as possible in a democratic polity such as ours.
The important and positive developments that have happened since the Modi government came to power in 2014 pertain to the domains of trade-related infrastructure and ease of doing business. Some of these initiatives are listed below:
Implementation of Goods and Services Tax to simplify India’s taxation regime.
Deleting obsolete laws and regulations from the books.
The Delhi-Mumbai industrial corridor to develop twenty-first century smart cities for expanding India’s manufacturing and services base.
Implementation of Make in India Programme to transform India into a global design and manufacturing hub. A core component of this programme is to promote foreign direct investment in India.
Implementation of National Waterways Act 2016 to promote connectivity and rejuvenate India’s inland waterways.
Implementation of Digital India Programme to ease government-business interface and thereby promote ease of doing business.
The private sector has undeniably played an important role in India’s economic development since independence. But the time has come when massive investments are needed from it for both infrastructure and for acquisition of latest technology. Evidence, however, is strong that although massive reforms have been undertaken by the present government, there has not been a corresponding increase in investment by the private sector. How does one explain the reluctance of the private sector, especially in the face of the most industry-friendly government? The reason has to do with the short-term calculations of most of our private sector and the inability to take the leap in terms of technology and market developments. This is not a new phenomenon and the textiles industry displayed this kind of short-term focus in the wake of the Uruguay Round. The result is there for everyone to see.
All short-term considerations are bound to boomerang in the long run and this is something the private sector must reckon with. For the private sector to be a force multiplier, it has to be prepared to take risks in terms of both massive investment and latest technology. 8
India is on the fringes of the global value chain today. The chief of the Asian Development Bank (ADB), Kenichi Yokoyama, said in November 2017 that ‘the heart of the global value chain resides in Southeast Asia at the moment, and that India plays only a small part in that’. 9 He went on to add that ADB is working with Government of India to improve the situation. So, why is India on the fringes of the global value chain today? Well, there are many reasons for this. But we will begin with the issue of trade-related infrastructure.
The best example of this is to take the top twenty container ports of the world.
RankPortVolume 2016 (Million TEU)
1 Shanghai, China 37.13
2 Singapore 30.90
3 Shenzhen, China 23.97
4 Ningbo-Zhoushan, China 21.60
5 Busan, South Korea 19.85
6 Hong Kong, S.A.R., China 19.81
7 Guangzhou Harbor, China 18.85
8 Qingdao, China 18.01
9 Jebel Ali, Dubai, United Arab Emirates 15.73
10 Tianjin, China 14.49
11 Port Klang, Malaysia 13.20
12 Rotterdam, Netherlands 12.38
13 Kaohsiung, Taiwan, China 10.46
14 Antwerp, Belgium 10.04
15 Dalian, China 9.61
16 Xiamen, China 9.61
17 Hamburg, Germany 8.91
18 Los Angeles, U.S.A. 8.86
19 Tanjung Pelepas, Malaysia 8.28
20 Keihin Ports, Japan 7.61
Source: World Shipping Council, http://www.worldshipping.org/about-the-industry/global-trade/top-50-world-container-ports.
No port in India figures in the top twenty in the world. On the other hand, there are plenty from China, Singapore, Dubai and some other countries in South East Asia. So, the first step is to build massive trade-related infrastructure. This we have finally started doing under the present government as infrastructure development is at the heart of its economic policy. A good example to cite here is the Sagarmala Programme. Predicated on the mantra ‘P for P’, i.e. ports for prosperity, the project aims to revitalize old ports to make them among the finest in the world. 10 As part of this programme, more than 577 projects, at the cost of Rs 8.57 lakh crore, have been identified for implementation between 2015 and 2035. This will be done across the areas of port modernization and new port development, port connectivity enhancement, port-linked industrialization and coastal community development. As of 31 March 2018, a total of 492 projects, with an estimate cost of Rs 4.25 lakh crore, were under various stages of implementation, development and completion. 11
The world merchandise trade (valued at USD 16 trillion) can be broadly divided into two parts: small basket (30 per cent value) and big basket (70 per cent value). 12 Ironically, 70 per cent of India’s exports belong to the small basket category, i.e. small diamonds, jewellery, rice, buffalo meat, shrimps, etc. 13 These are not only low value but are also at the fringes of the global value chain. At the higher end of the value chain are electronics, telecom and engineering goods. This is what India needs to target. Of course, in both auto components and pharma products we are already part of the global value chain and the challenge is to see if we can move up the chain. In addition to trade-related infrastructure, there is a need for trade facilitation and access to the latest technology. Finally, there is a need for specialized skills and for a massive effort on research and development. This alone will enable India to become a central part of the global value chain in a large number of products and services.
Trade policy also has to prepare for tomorrow’s fourth industrial revolution. Artificial intelligence, robotics, cloud computing, automation, 3D printing, e-commerce and blockchain technology are all here to stay. NITI Aayog along with line ministries needs to take a good look at all the possible implications for an economy such as India’s. It is already clear that some of these will have a large effect on key sectors which could do with massive improvements in efficiency. These include agriculture, health and education. Again, it is clear that we cannot leave this to generalist administrators. The government needs to listen to experts and specialists in this domain.
In the Indian context, the Fourth Industrial Revolution will essentially be about urban services and this could be a big win-win for India. Seventy per cent of the India of 2030 is yet to be built. 14 The prime minister’s three flagship schemes—Swachh Bharat, Pradhan Mantri Awas Yojana and Smart Cities Mission—and their successful completion will introduce a paradigm shift. The affordable housing scheme requires the building of 10 million homes so that every Indian will have a home by 2022. Housing was how China climbed the economic ladder as well. 15 India today is a USD 2.8 trillion economy 16 with a 50 per cent external sector. 17 At the current rate of 7 per cent plus growth, by 2025, India’s per capita GDP is expected to reach USD 5000, propelling India to a USD 5 trillion plus economy.
Two other issues are critical for India’s trad
e policy. First, our approach to free and regional trade agreements; and second our approach to multilateral trade negotiations, especially in the WTO.
India has been a reluctant convert to free and regional trade agreements. For a long time under the GATT and even under the WTO, India was the most fervent supporter of the MFN-based (Most Favoured Nation) trade. This was laudable up until the time every major trading nation entered into a free or regional trading agreement. India was almost the only odd man out. To make matters worse, the GATT and then the WTO did not undertake a serious examination of the compatibility of the free or regional trade agreements and just blessed every such agreement reported to it. This, in retrospect, was a mistake since many free or regional agreements were more trade-diverting than trade-creating and actually undermined the open and non-discriminatory nature of the multilateral trading system. This being the case, India had no choice but to join the bandwagon of countries signing such agreements. As of date, India has signed some nineteen free trade agreements (FTAs)/preferential trade agreements (PTAs), which are highlighted in the table below:
No. Name
1 Agreement of Cooperation with Nepal to Control Unauthorized Trade
2 Agreement on Economic Cooperation between India and Finland
3 Agreement on SAARC Preferential Trading Arrangement SAPTA
4 Agreement on South Asia Free Trade Area SAFTA
5 Asia Pacific Trade Agreement APTA
6 CECA between The Republic of India and the Republic of Singapore
7 Comprehensive Economic Cooperation Agreement between India and Malaysia
8 India Africa Trade Agreement
9 India Chile PTA
10 India Afghanistan PTA
11 India ASEAN Agreements
12 India Bhutan Trade Agreement
13 India Japan CEPA
14 India Korea CEPA
15 India MERCOSUR PTA
16 India Nepal Trade Treaty
17 India Sri Lanka FTA
18 SAARC Agreement on Trade in Services SATIS
19 Treaty of Transit between India and Nepal
Source: Department of Commerce, Government of India, http://commerce.nic.in/trade/international_ta.asp?id=2&trade=i.
India’s experience with FTAs has been a mixed one. But this may also be because one of the criteria used by most observers is that if imports exceed exports under a FTA, then somehow it is not considered in India’s interest. This may be too narrow a view. Imports may exceed exports, but what is important is whether this leads to efficiency, economic growth and job creation. The other yardstick used for arguing India has not gained much is that utilization rates in the FTAs signed so far have been low (a meagre 5 per cent and 25 per cent). Efforts need to be made to understand why this is low and how this can be augmented. The other grievance is that the area of services, where India holds a competitive advantage, is not opened up enough by our trading partners. This is a justifiable argument and our partners must understand that any tariff concessions they obtain from us is significant because of the size of our market. Given this, it is only fair that we get access to Mode 4, i.e., movement of professionals. Lastly, there is also the eternal question of technical barriers to trade (TBT) and sanitary and phytosanitary (SPS) standards of our products, which is difficult to negotiate in the context of FTAs since mutual recognition and equivalence cannot be determined beforehand.
Despite all of the above points, which are indeed valid, there is no getting away from the fact that FTAs are here to stay, and India has to simply find a way to deal with it from a position of advantage. The WTO is under tremendous strain and there is a real danger that MFN-based trade may be seriously undermined by growing protectionist sentiment around the world. Given this, FTAs may be a way out for several countries, and India will have to cope with this trend.
Against this background, a lot rides on India’s participation in the Regional Comprehensive and Economic Partnership Agreement (RCEP).
The Association of Southeast Asian Nations (ASEAN) has free trade agreements with six partners, namely People’s Republic of China (ACFTA), Republic of Korea (AKFTA), Japan (AJCEP), India (AIFTA) as well as Australia and New Zealand (AANZFTA).
In order to broaden and deepen the engagement among parties and to enhance their participation in the economic development of the region, the leaders of sixteen participating countries established the Regional Comprehensive Economic Partnership (RCEP). The RCEP was built upon the existing ASEAN+1 FTAs with the spirit to strengthen economic linkages and to enhance trade- and investment-related activities as well as to contribute to minimising development gap among the parties.
In August 2012, the 16 Economic Ministers endorsed the Guiding Principles and Objectives for Negotiating Comprehensive Economic Partnership. The RCEP negotiations were launched by Leaders from 10 ASEAN Member States (Brunei Darussalam, Cambodia, Indonesia, Lao PDR, Malaysia, Myanmar, the Philippines, Singapore, Thailand and Viet Nam) and six ASEAN FTA partners (Australia, People’s Republic of China, India, Japan, Republic of Korea, and New Zealand) during the 21st ASEAN Summit and Related Summits in Phnom Penh, Cambodia in November 2012.
The objective of launching RCEP negotiations is to achieve a modern, comprehensive, high-quality, and mutually beneficial economic partnership agreement among the ASEAN Member States and ASEAN’s FTA partners. The RCEP negotiations commenced in early 2013.
The RCEP negotiation includes: trade in goods, trade in services, investment, economic and technical cooperation, intellectual property, competition, dispute settlement, e-commerce, small and medium enterprises (SMEs) and other issues. 18
One way for India to approach the RCEP negotiations is to prepare itself thoroughly based on its experience of FTAs with Singapore and ASEAN. These FTAs have given us a lot of experience, both good and bad, and this can be brought to bear on the talks. To walk away from RCEP would be a mistake on our part. It would be in our interest to negotiate and negotiate hard to achieve a deal that defends our national interest. If nothing else, this will keep us in good stead when it comes to negotiating in the WTO at a later stage.
It might be useful to draw some redlines in consultation with stakeholders and then take everyone into confidence so that there are no surprises in the outcome of these negotiations. The features that should not be underestimated while doing a cost-benefit analysis of our participation in the RCEP are: the potential gains of India being a greater part of the global supply chains; the access to technology our industries will gain; and the fact that our products will meet global standards on TBT and SPS.
The Foreign Trade Policy announced by the government (2015–20) had the following to say on FTAs:
Signing an FTA is the beginning, not the end of the process. Recognizing that it is important to review whether the concessions under these agreements are being gainfully utilized and have resulted in meaningful market access gains, an ‘Impact Analysis’ of FTAs has been instituted. Further, it is necessary to simplify and ease rules of origin criteria to position India effectively in global and regional value chains. The likelihood of duty inversions will continue to be closely monitored to ensure that industry is not put to any disadvantage. A system for capturing preferential data will be put in place at the earliest. 19
It remains to be seen how quickly the above will be implemented. One welcome development is that a web portal on FTAs has been developed (http://indiantradeportal.in/) that provides both MFN and preferential tariff rates, rules of origin, and SPS and TBT standards under various FTAs signed by India. It also captures the trade flows from major trading partners. The data is provided at the eight-digit level of the Harmonized System of classification. The portal will be maintained and regularly updated by the Federation of Indian Export Organisations.
The Government of India took a laudable initiative in launching the Foreign Trade Policy for the period 2015–20. 20 The vision is to make India a significant participant in world trade by the year 2020 and to enable the country to as
sume a position of leadership in the international trade discourse. The government aims to increase India’s exports of merchandise and services from USD 465.9 billion in 2013–14 to approximately USD 900 billion by 2019–-20 and to raise India’s share in world exports from 2 per cent to 3.5 per cent.
The FTP for 2015–20 seeks to provide a stable and sustainable policy environment for foreign trade in merchandise and services; link rules, procedures and incentives for exports and imports with other initiatives such as ‘Make in India’, ‘Digital India’ and ‘Skills India’ to create an ‘Export Promotion Mission’; promote the diversification of India’s export basket by helping various sectors of the Indian economy to gain global competitiveness; create an architecture for India’s global trade engagement with a view to expanding its markets and better integrating with major regions, thereby increasing the demand for India’s products and contributing to the ‘Make in India’ initiative; and to provide a mechanism for regular appraisal in order to rationalize imports and reduce the trade imbalance. 21
The Foreign Trade Policy (2015–20) is an excellent presentation of the objectives and goals of the country’s trade policy. If at all there is any point on which it could possibly be criticized is that it does not dwell much on where the resources are to be found, the various functions of the stakeholders and the means of implementation.
This is important because the endeavour to make India a significant participant in world trade by the year 2020 cannot be accomplished by the Union government alone. State governments have an important role to play. But so does the private sector, the chambers of commerce and even the public sector. It has been mentioned that the Indian industry must be ready for the challenge emanating from FTAs such as RCEP. But equally, the private sector must take risks and invest both within the country and outside.