Reevaluating India’s Trade Policy - Budget Announcements, Tariff Strategies, and Global Integration

Context:

• While the Union Budget is not the primary forum for trade-related announcements, it has become an important medium to communicate India’s global economic policy.
• The upcoming budget is expected to address trade deficits, currency stability, and export promotion.
• However, questions arise regarding the frequent policy changes and their impact on India’s external trade objectives.

Challenges with Frequent Tariff Adjustments:

• Policy instability: Frequent changes in customs duties create uncertainty and hinder investment and trade expansion.
• Example of mobile phone components: The fluctuating tariffs on lenses, Printed Circuit Board Assemblies (PCBAs), and chargers demonstrate inconsistency in trade policies, negatively impacting manufacturers.
• Impact on exports and FDI: Instability in trade policy discourages foreign investment and stagnates India’s export growth, which remains at around 2% of global exports.

The Need for Comprehensive Trade Policy Reform:

• Lowering tariffs alone is insufficient: Trade reforms should go beyond tariff reductions to ensure long-term consistency.
• Policy consistency: A dedicated committee should be established to draft and maintain a stable trade policy.
• India’s Trade Agreements dilemma: The government remains hesitant to join global trade blocs like RCEP and CPTPP due to concerns about trade deficits and protecting domestic industries.

RCEP vs CPTPP:

• RCEP: Regional Comprehensive Economic Partnership. It is a free trade agreement between 15 Asia-Pacific countries, signed in November 2020 and came into effect on January 1, 2022.
• CPTPP: Comprehensive and Progressive Agreement for Trans-Pacific Partnership. It is a free trade agreement between Canada and 10 other countries in the Indo-Pacific.
• Some difference between RCEP and CPTPP:
  • CPTPP has an Investor-state dispute settlement (ISDS) provision, which allows foreign investors to sue states in international arbitration tribunals. RCEP does not have an ISDS provision.
  • CPTPP includes provisions for labor issues and environmental protections, while RCEP does not.

Reevaluating Trade Agreements - RCEP vs CPTPP:

• Impact of Free Trade Agreements (FTAs): India’s trade deficit is often driven by intermediate goods imports, which improve domestic manufacturing.
• Growth in finished goods exports: Despite concerns, India has maintained a surplus in finished goods trade with ASEAN countries.
• Simulation analysis:
  • RCEP risks: Heavily dominated by China, RCEP could exacerbate India’s trade deficit.
  • CPTPP benefits: With the exclusion of both the US and China, CPTPP offers a more balanced trade environment, potential for export growth, and alignment with India’s long-term economic goals.

The Way Forward:

• Trade openness alone is not enough: Structural reforms must accompany trade liberalization to address domestic inefficiencies.
• Reevaluation of trade pessimism: India must base its trade policy on informed discourse rather than nationalistic narratives.
• Strategic engagement with Global Value Chains (GVCs): A well-thought-out trade policy can help India achieve its ambitious export target of $2 trillion by 2030.

Conclusion:

• India’s trade policy needs a shift from protectionism to strategic global integration.
• A stable and well-structured trade approach, supported by long-term policy consistency, will enhance India’s competitiveness in the global market.

Q1. What are the salient features of India’s Trade Policy?

Ans. India's trade policy aims to integrate the Indian market with the global economy to promote economic growth. It includes policies to promote exports, facilitate imports, and encourage sustainable trade practices. 

Q2. What are the challenges faced by India’s Trade Policy?

Ans. India faces significant challenges in the area of trade policy, the global economic slowdown, increasing protectionism, the stalled mega-trade deals that could in time be revived, and perhaps more important, its own domestic preoccupations.

Q3. How is India's trade relations with ASEAN?

Ans. ASEAN constitutes around 11% of India's global trade; primarily facilitated by the ASEAN-India Free Trade Area (AFTA) which includes agreements on goods, services, and investment, allowing for substantial bilateral trade between the regions. 

Q4. What are the advantages and disadvantages of free trade agreements?

Ans. FTAs can force local industries to become more competitive and rely less on government subsidies. They can open new markets, increase GDP, and invite new investments. FTAs can open up a country to degradation of natural resources, loss of traditional livelihoods, and local employment issues.

Q5. How India will benefit from its strategic engagement with Global Value Chains (GVCs)?

Ans. India can significantly benefit from strategic engagement with GVCs by experiencing increased economic growth, job creation, higher productivity, access to new markets, technology transfer, and knowledge exchange. 

Source:IE