Is India's trade policy aiming too high?

CALCUTTA, India, Sept. 3 (UPI) -- In a bid to catch up with China for a larger share of the global trade, India's new government unveiled its new government's first foreign trade policy earlier this week. The plan is ambitious, to say the least, with the government hoping to increase the country's exports to to 1.9 percent of global trade by 2009 from the current 0.8 percent.

For that to happen, experts said India's exports would need to grow at 21 percent a year, which it has yet to do. For year ending March 2004, India's exports grew at 13.5 percent over the previous year, and in the current year the target is 16 percent. Asking for a 20 to 21 percent growth rate under the circumstances is therefore a tall order said experts.

Yet Kamal Nath, the Commerce and Industry Minister who unveiled the new foreign trade policy, remains undeterred.

"The target means that the country has to increase its exports from $62 billion a year to $175 billion by 2009, which I do not think would be difficult to achieve," Nath said.

"The strategy would give special emphasis on sectors that can achieve a quantum jump in exports," Nath added, arguing that "new sunrise industries have been identified for exports push."

Indeed, with many of the barriers of foreign trade- like freeing a number of exportable and importable items and reduction of import duties- being removed over the past several years, the new foreign trade policy is more of a facilitator to trade and focuses on simplification and rationalization of measures for exporters.

For instance the policy has simplified several procedures aimed at cutting down transaction costs, including increasing the validity of licenses and entitlements issued under various schemes to a uniform 24 months. The policy has also reduced the number of paperwork required for import of certain restricted items.

The age restriction on import of used capital goods -like machinery, etc- has also been removed to make import of such goods cost effective and Indian industry more competitive. There are several countries that were moving away from the manufacture of specific commodities. For instance, Scotland had decided to stop steel production. Equipment and machinery from such countries can now be easily imported.

The trade policy has reduced the minimum depreciated value for such plant and machinery imports to $5.5 million from $11 million, which means that Indian manufacturers can now import even older machines. Smaller textile makers were finding it difficult to import equipment as the threshold was pegged at a higher level. They too can expect to be more competitive with the leeway in this policy, according to commerce ministry officials.

In line with special export zones in countries like Dubai, the new policy has also paved the way of setting up free trade and warehousing zones, which are aimed at making India a global trading-hub. In these zones foreign direct investment would be permitted up to 100 percent of the development and establishment costs.

"The intention (for creating these zones) is to bring an international trading hub right on our shores so that our local industries can make purchases easily without having to travel abroad," said G K Pillai, director-general of foreign trade.

Pillai added that no manufacturing would be permitted in these zones. "The main activity here would be trading however activities like repackaging would be permitted". Two such zones could come up on the east and west coast of the country.

Perhaps the most important feature of the new policy is that fact that the government has stressed India's strenght as a service provider. "Served from India" would be the new mantra for India's services sector which would be built up as a brand said Nath.

According to the industry, this new thrust on services exports from the country would broaden the country's from the dominance of IT and software services exports.

"We expect other services like accounting, medical, legal etc to come to prominence now. Besides, with a nodal agency, it will be easier for the government to undertake negotiations and frame policies on a larger basis," said Amit Mitra, secretary general of the industry lobby Federation of Indian Chambers of Commerce- FICCI.

Services sector accounts for about 51 percent of the country's GDP.

The policy also mandated the government to establish a common facility centre for home-based service providers, particularly in areas like engineering and architectural design, multi-media operations, software developers etc in the state and district-level, to draw home-based professionals into the services export arena.

Admittedly, even as M R Ahmed, president of Federation of Indian Exports Organization, says, "The foreign trade policy not only aids growth in of India's exports but also aids in the growth of the economy," but the moot question that still remains is, would India be still able to achieve the ambitious targets it has set or itself?

"This does seem a tall order, says Vivek Bharat, an advisor to industry lobby FICCI. "But there are success stories in India that show that it can be done."

According to Bharati, during the 90s, India clocked the fastest average export growth of 17.3 percent per annum in services' exports in the world, leaving China behind at 15.8percent. In fact, it topped the group of world's 15 largest exporters of services outperforming all neighbors in Southeast and East Asia and also the US, Canada, Japan and countries of the European Union. During five years ending 2000, India's services' exports grew by 23.2percent per annum, nearly six times that of all world exports and India's our market share by 2001 had reached 1.4 percent, which is double the market share India had in merchandise trade.

The other emerging success story to bank on is automobiles. In only four years from 2000-01 to 2003-04, India's export of cars has gone up more than five times from 23,000 to 1,26,000, and that of two-wheelers has more than doubled to reach 2,65,000. With auto components also on a roll, this sector will soon rival software and ITES as a leading export sector of the country.

A feature that is common to both automobiles and software exports is the openness of these sectors to foreign competition and FDI and India is now emerging a sourcing destination in these sectors for global majors. Both in ITES and automobiles, MNCs have made India a hub for their global production and supply chains and this has inspired Indian companies too to aggressively enter the global fray. The BPO story was led by foreign investors, and a similar story is now unfolding in autos, where Hyundai, Suzuki, Ford took the initiative and now Tata Motors and Toyota have joined the bandwagon. In the case of autos, what has helped the cause is a rational import duty structure and falling local taxes in the domestic market.

And, Bharti feels that a similar story could be repeated in a number of other sectors, such as where India has comparative advantage such as in a range of crops and horticultural products, textiles, etc.

But the full potential in this sector cannot be realised by according duty free credit entitlement to exporters or allowing them to import capital goods without having to pay import duties.

Therefore, says Bharti, "What India needs is a root-and-branch reforms, and this policy does exactly that."