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Wednesday, Sep 08, 2004

Opinion

Opinion - Leader Page Articles

The new foreign trade policy

By Muchkund Dubey

The Government has still a long way to go towards fully integrating the trade policy with the development policy.

ON AUGUST 31, 2004, Kamal Nath, Union Minister for Commerce & Industry, announced India's Foreign Trade Policy for the next five years. It is significant that we now have a Foreign Trade Policy in place of the erstwhile Export-Import Policy. In it, Mr. Kamal Nath has tried to articulate trade policy in terms of the nation's development objectives particularly employment generation, which finds a prominent place in the Common Minimum Programme. However, the Government has still a long way to go towards fully integrating the trade policy with the development policy.

Trade has long been recognised as an engine of growth (Ragnar Nurske). Trade promotes growth mainly through the positive and dynamic impact of the operation of comparative cost advantage. In the late 1950s and the 1960s, Raul Prebisch, the Argentinean economist who was the first Secretary-General of UNCTAD (United Nations Conference on Trade and Development), had seen the role of trade in terms of bridging the foreign exchange gap involved in achieving a particular rate of growth. Subsequently, the experience of East and South-East Asia demonstrated that not only did exports help in earning the foreign exchange required for meeting the import content of growth, but the creation of export industries itself constituted a part of the development process. Export industries through their forward and backward linkages in the rest of the economy had a multiplier effect on growth.

On the other hand, export and import themselves depend on the general conditions prevailing in the economy. Empirical evidence has shown that, barring a few exceptions, export industries cannot thrive in isolation. The growth of the economy as a whole provides the springboard for the growth of the export industry.

The new Foreign Trade Policy sets the goal of doubling India's percentage share of global merchandise trade within the next five years. This kind of target has been specified several times in the past, but seldom realised. There is no assurance that this time around it is going to be any different. The target setting exercise would have carried some credibility if it had been broken into sub-targets of goals to be achieved in all the major dynamic export sectors. One hopes such an exercise will be undertaken now to impart greater operational significance to the target.

A few sectors have been identified where export promotion efforts are going to be concentrated. These are: agriculture, handlooms, handicrafts, gems and jewellery, leather and footwear. Most of these sectors have dynamic export prospects in the world market. They also have significant employment potential. But these potentialities, for either export or employment, are not going to be realised by export incentives alone.

A much more comprehensive approach is called for. This would include the removal of infrastructural bottlenecks, induction of new technologies on a large scale, restructuring the organisation of production through institutional changes, and ensuring effective implementation of projects and programmes. Most of these tasks are beyond the scope of the Ministry of Commerce and Industry. It will not be possible to realise these potentials if Mr. Kamal Nath is not fully backed by his colleagues in other Ministries, particularly agriculture and finance.

Ideally, an attempt should have been made in the Foreign Trade Policy document to spell out the measures to be taken in areas other than trade. An estimate of the financial implications of these measures and how the funds were to be mobilised was also needed.

It was surprising that textiles were not included among the dynamic sectors identified in the document. This sector is a principal source of export earning for India and is likely to remain a highly dynamic export sector in the world economy. The integration of this sector into the world trading system following the phasing out of the Multi-Fibre Agreement (MFA) by the year-end opens up vast potentialities. By all accounts, China is poised to emerge as a major global player in this sector.

There is, therefore, an urgent need for India to identify the lines of export in the textile sector in which it has competitive advantage. The country must plan for a massive induction of both resources and science and technology inputs, and generally bring about a restructuring of the textile industry to enhance competitiveness. This cannot brook delay and should have been a part of the Foreign Trade Policy.

Another sector with great potential — services — seems to have received only lip service in the document. There is, of course, a promise of a revamp of the earlier scheme of "served from India," to create a brand, instantly recognised and respected the world over. The Government has also promised to promote the establishment of common facilities centres for home-based service providers. Finally, a new Export Promotion Council for Services is proposed to be set up.

However, on the whole, the new Foreign Trade Policy does not rise to the challenges faced by the country in the services sector. The point of services is missed in the way the target for expanding India's share of the global market is articulated. The new Policy says the objective is to "double our percentage share of global merchandise." This target does not cover trade in services, which has already reached the level of more than 70 per cent of the merchandise trade and is rising at a faster pace.

Though services figure prominently in the Doha Round of Negotiations, in terms of detailed homework the Government is ill prepared to participate effectively in these negotiations. Even basic data relating to these sectors are not available. A study done about a year ago of the educational sector in the context of the Doha Round Negotiations was perfunctory and based on fragmentary data. The conclusions were highly tentative and unconvincing. Hardly any serious work has been done to assess the export potential of individual service sectors and their ability to withstand global competition. It is understandable that a comprehensive exercise of this nature is beyond the scope of foreign trade policy and hence the Ministry of Commerce and Industry. However, the Ministry can assume a coordinating role as a part of the pursuit of its new Foreign Trade Policy.

One of the most unfortunate provisions in the Foreign Trade Policy is its promise of "ensuring that our domestic sectors are not disadvantaged in the Free Trade Agreements/Regional Trade Agreements/Preferential Trade Agreements" that we enter into to enhance exports. This provision gives a negative signal to the outside world.

This carries the implication that the Government of India intends to go back on some of the Free Trade Agreements already signed and that it is going to adopt a very timid and cautious approach to concluding them in future. This comes at a time when India's position in the world economy is going to be critically determined by the flexibility and the nimbleness displayed in taking advantage of the opportunities for bilateral Free Trade Agreements and linking up with Regional Groupings. These have emerged as an essential means for coping with the discrimination implicit in the burgeoning of mega groupings all over the world.

Such Agreements are bound to cause short time localised disruptions in the domestic sectors of the economy because those entering into Free Trade Agreements seek access to our markets in as much as we are also eyeing their markets. We have, therefore, to take a balanced long-term view of the matter. We, therefore, cannot give a blanket assurance that such agreements would not adversely affect our domestic sectors even in the short run. For example, India's exports to Bangladesh, both formal and informal, amount to nearly $3 billion and to Sri Lanka, almost $1 billion per annum. If there is a Free Trade Agreement with Pakistan, our exports to this country can reach a level of $5 billion within a year or so.

If we want at least to maintain if not to expand our present positions in the markets of those countries, the least that they would expect from us is commensurate access to our markets for their products. This is bound to result in some market disruption in the short run. But in the long run this is going to be a win-win situation for South Asia. Therefore, the guarantee in the Foreign Trade Policy for safeguarding our domestic sector in the context of Free Trade Agreements needs to be urgently clarified.

(The writer is a former External Affairs Secretary.)

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