“Trade and FDI are complimentary”

As the Foreign Trade Policy 2015-20 reaches the end of its term, Professor Manoj Pant, Director, IIFT, shares his insights on the highlights of the policy, its impact on trade performance, and the roadmap for policy to propel India’s external trade in the coming years.

IBT: What were the salient features and drawbacks of India’s foreign trade policy during 2015-20? To what extent has it succeeded in fulfilling its objectives?

Professor Manoj Pant: There were many features of India’s FTP 2015-20. Very broadly, there were largely measures to promote exports from India for manufacturing and services (MEIS and SEIS). However, more importantly, the main purpose was to promote exports by reducing complexities and encouraging Make in India. However, the Foreign Trade Policy was drafted at a time when the world trade was stagnant, growing at barely 1% or less per year.

At the same time India’s exports are dominated by China, USA, UAE, Saudi Arabia, Switzerland etc., of which the only economy showing some significant increase is USA. Secondly, as expected subsidy schemes like MEIS faced WTO resistance. Hence, it is creditable that export volumes have at least remained the same.

IBT: What roadmap do you envision for India’s new foreign trade policy and what should be the main actionable areas to address? What are the key parameters which need to be revamped for pushing our exports under the FTP’s purview?

Professor Pant: The main need in FTP is to view it not merely as an Export Promotion Policy but also as a trade promotion channel. This implies two things. For one, it should be recognized that increased exports also entail increased imports. Hence, one needs to avoid protective tendencies as reduced imports could also reduce exports. Focus should be on promoting a value chain as a whole rather than only exports. Second, world trade is dominated by technology. Hence, it is important to integrate FDI Policy into trade policy as one cannot exist without the other. Our empirical work shows that trade and FDI are complimentary. 

You would expect actually a reduction in incentives for exports given the existence of the WTO and alertness of trade partners. The best method of promoting exports is to reduce transactions time, improve banking practices etc. In other words, we need to improve the environment for industry and trade. 

Regarding trade deficit, almost 80% of India’s trade deficit is accounted for by China and ASEAN. China uses many non-tariff barriers to restrict India’s exports of items like pharma and some important services. In addition, it is now acknowledged even officially that ASEAN is a vehicle for pushing exports into India while restricting India’s services exports. So the problem is not trade deficit per se, but that this deficit is pushed up by some of India’s leading trade partners through non-tariff barriers.

IBT: What impact will the current external scenario (e.g. global economic slowdown, Brexit, US-China trade war and sanctions on Iran) have on India’s new FTP?

Professor Pant: It is crucial that India does not respond to the current slowdown with protectionist measures as that would be self-defeating as I have already indicated in question No. 2. It is unlikely that Brexit would have a major impact on India’s trade apart from the general impact of the current economic slowdown, which is most severe in the UK and EU. The US-China trade war could have an impact if continued for long as both these countries are India’s principal trade partners. However, whatever be the end game in this trade war, it is clear that many companies located in China will think of diversifying their production network. While at present, Vietnam is the most obvious choice (in textiles etc.), from the long term point of view, India’s size makes it an obvious recipient. Here the business environment in India will be the most important factor. We have to also think of changes in our product mix, for example machinery and electronics, as these are China’s principle exports. 

IBT: Given the mounting cases against India’s subsidies at the WTO, what factors should be kept in mind to draft policies consistent with WTO’s agenda?

Professor Pant: As India becomes large and in the current market conditions, the cases against India’s subsidies will grow. Export subsidies like MEIS and SEIS will be the obvious culprits. Reducing the cost of production by improving domestic logistics and removing incentives related to size of a company is the correct way forward. 

IBT: How can the FTP shape up India’s framework to adapt to Good Agriculture Practices, as it is crucial for any economy to harmonise standards as a trade policy practice?

Professor Pant: It is my view that India will never be a very large agricultural producer given the size of the domestic demand and the unfavourable land-man ratio compared to agricultural exporters like USA, China, Brazil, Australia etc. India will continue to be an important exporter in traditional items like spices and some foodgrains. But, for the agricultural sector, exports are more likely in the case of processed food where technology, quality assurance and packaging are crucial determinants.

 

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Having a Ph.D. from the Southern Methodist University, USA in 1982, Professor Pant taught at prestigious institutions like Jawaharlal Nehru University, Indian Institute of Management & Delhi University. In 2017, he became the Director and Vice-chancellor of Indian Institute of Foreign Trade. He has also worked in the past with the Ministry of Commerce, Planning Commission and Ministry of Human Resource Development. His areas of interest include International Trade Theory, Foreign Investment, Competition Policy and the WTO. The views expressed here are his own.