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Priorities for Indian trade policy

Financial Express, India

Priorities for Indian trade policy

Tariff reduction and addressing transaction costs should come first


5 May 2005

Recent writings on trade policy have focused excessively on free trade agreements/regional trade agreements (FTAs/RTAs) and their usefulness to India. While discussions are on for FTAs with Asean, Bimstec and CECA with Singapore, possible FTAs with China, Japan, GCC, South Africa, Mercosur, Australia, USA and the EU are being considered. The importance attached to this topic, at the expense of serious discussions on second-generation trade reforms, is frightening. Given the tough road ahead in becoming a major global player, burdened with a below 1% share in global exports, it is an opportune moment to prioritise trade policies. These, in order of importance, are trade liberalisation done unilaterally, multilaterally and bilaterally (FTA/RTAs).

On unilateral trade liberalisation, the unfinished tasks are tariff rationalisation and trade facilitation. Our tariffs are still very high by world standards. Although peak non-agriculture tariffs have been reduced to 15% in the last Budget, an average tariff level of over 20% is hurting our exports and discouraging potential exporters. And may not allow us to fully benefit from the recent removal of textile quotas. The garment exporters need duty-free (or low duty) access to quality inputs as a normal course, rather than the cumbersome routine of advance licenses, or waiting for duty drawback payments. The same arguments apply to other sectors. The best option is to move quickly towards a low uniform tariff, as in Chile. And to neutralise revenue loss by removing all exemptions.

Simultaneously, we need to sharply reduce transaction costs, the major deterrents to exports and inflow of FDI. Simplified documentation requirements (in terms of minimum forms and signatures), a fully automated cargo clearance system, with no face-to-face contact between importers/exporters and officials, and an easy duty payment facility, can increase competitiveness. Clearance of cargo must be done in hours, as against days.

India is also trying to jumpstart a rapid export drive through Special Economic Zones (SEZs). We should move away from their antiquated form, towards development of growth poles and clusters, as in East Asia and China. These initiatives should be mainly driven by the private sector and state governments, with minimal interference from the Centre.

The second priority is to ensure multilateralism survives. India should continue to be proactive in the Doha Round negotiations, with a stronger push for liberalisation of trade in services. We should be prepared to make some concessions in agriculture and non-agricultural market access (Nama), to achieve significant gains in services (especially in Modes 1 and 4). This is also contingent upon a reduction of tariff peaks and trade-distorting policies in agriculture by industrialised nations. We need to guard against being a net loser in the talks.

Given our high tariffs and transaction costs, FTAs/RTAs are only the third priority. The existing roadblocks have to be eliminated to strengthen bilateral economic relations and boost trade and investment. This is, in any case, a prerequisite for a successful FTA. An analysis of the pros and cons of a FTA must be undertaken ahead of signing one. An FTA is not an equally attractive alternative to multilateralism. Also, given our comparative advantages in services, we should not emphasize FTAs in goods only, but must make determined efforts to include services, especially with the developed countries. We should initiate a dialogue with both, USA and the EU, on an FTA in services.

The government, in particular, needs to focus on the services sector. This is our area of dynamic comparative advantage. We need to ensure we have a clear strategy for expansion of trade in healthcare, education and tourism, in addition to IT and ITeS. We need to seek involvement of the private sector in strategy formulation. In conjunction with the above trade policy measures, complementary policies such as a modern infrastructure network (especially airports and ports), reliable access to water and electricity, flexible labour laws and de-reservation for the small-scale sector need to be in place. Finally, we must focus on maintaining sound macroeconomic policies, with an emphasis on reducing the overall fiscal deficit.

The writer is principal advisor, CII. His views are personal