Trade policy in times of global financial crisis

Trade policy in times of global financial crisis

Diversification of the export basket, improvement in trade-related infrastructure and a full refund of all indirect taxes are some of the laudable initiatives contemplated to achieve the goal.

As concentration of exports in a few markets, facing an economic slowdown, may hasten transmission of the adverse impact of the financial crisis, the FTP (which will be reviewed after two years) seeks to encourage diversification of India’s exports to new emerging markets. This is extremely relevant because almost 40% of India’s exports head to developed country markets. The FTP adds 26 new markets under a “focus market scheme" and expands the category of products under a “focus product scheme". While exporters would avail the benefits of these schemes in the short term, the long-term implications are more important. Successful implementation of these schemes could cushion, if not totally insulate, India’s exports from adverse economic and financial developments in a few big markets.

The FTP promises improvements in trade-related infrastructure, another issue of long-term importance. Jaipur, Srinagar and Anantnag have been recognized as “towns of export excellence" for handicraft; Kanpur, Dewas and Ambur recognized as such for leather products; and Malihabad for horticultural products. This initiative would help improve export prospects of the designated products. However, the overall objective of buttressing trade-related infrastructure can only be achieved through more ambitious measures aimed at reducing port congestion, cutting down on cargo turnaround time, setting up cold chains for agricultural exports, and so on. While these would require close coordination between the department of commerce and other ministries of the central and state governments, the burden lies on the department for establishing an effective mechanism to quickly address the underlying problems.

The third issue of long-term significance contemplated in the FTP is a full refund of all indirect taxes and levies on exports. It needs to be ensured that the rebate adheres to all the relevant requirements of the World Trade Organization’s Agreement on Subsidies and Countervailing Measures (ASCM). Else, the benefit of duty rebate could be offset by the importing country levying a countervailing duty. This has been the experience in most of the export incentive schemes being implemented in India. Although less than 5% of India’s exports presently suffer countervailing duties in foreign markets, this effectively shuts the market for products concerned. With the trend in incidence of these duties and their duration steadily increasing, fresh thinking is required on how to bring the existing incentive schemes and the proposed goods and services tax (GST) in line with requirements of the ASCM. This would ensure that exporters do not lose with one hand what they have gained with the other.

The composition of India’s export basket has changed during the past five years with a significant increase of 25 percentage points in the share of engineering goods, petroleum products and chemical products. On the other hand, the share of exports of employment-intensive sectors, such as textiles, gems and jewellery, and leather products has been eroded by 15 percentage points. Some of the specific initiatives for the leather and gems and jewellery sector announced in the FTP could enhance exports and linked employment in these sectors. However, if significant employment is sought to be generated through exports, more targeted initiatives are required for two sectors that have a high export-employment multiplier—textiles and food processing. This can be food for thought for the supplement to the FTP in 2010.

Yet another area which requires more attention in the FTP is service exports. One of the main drivers of India’s growth in the period of global economic crisis has been the services sector, which explained around 88% of the growth rate in real gross domestic product (GDP) in 2008-09. However, the contribution of service exports to the GDP growth and employment has been rather modest. Innovative interventions are required so that the information technology-business process outsourcing service exports deepen their presence by entering into super speciality segments and by bringing new areas, such as legal process outsourcing, clinical research outsourcing, mobile applications, and energy efficiency and climate change into their ambit.

Given the limited policy instruments available to the minister of commerce and industry for regulating imports and enhancing trade, overall the FTP provides a useful blueprint for facing challenges arising from the global financial crisis. An important lesson learnt is the need to reduce dependence on a few big markets. Annual supplements of the FTP in future may need to provide additional traction for enhancing the competitiveness of exports and entering new markets.

Abhijit Das is deputy project coordinator and officer in charge, Unctad India Programme. The views expressed are his own.

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