India Foreign Trade Policy Review
By Georgi Ninov - Research Analyst
The Indian Commerce and Industry Ministry released a review of the Foreign Trade Policy (FTP) for the period 2015-20 on December 5. The most discussed point of the presentation was the enhancement of the scope of the Merchandise Exports from India Scheme (MEIS) and the Service Exports from India Scheme (SEIS). The government announced that incentives worth 8,450 crore INR (1,3bn USD) would be applied to facilitate exports in labor-intensive sectors such as leather and footwear, hand-made carpets, agriculture and marine products. This incentive was seen with relief among companies involved in the above-mentioned sectors since uncertainty caused by major economic developments like GST [read more] and demonetization [read more] had caused significant troubles regarding exports.
While the MEIS and SEIS initiatives could be considered as a positive sign regarding short-term issues, the lack of discussion on the export target was more alarming. The original FTP had set an overly ambitious goal of reaching 900bn USD value of exports by 2020, or almost triple as much as the imports peak value of 314bn in 2013-14. However, during the following three fiscal years exports were never able to outpace this result and the question now is not whether India's exports would reach 3.5% of global (another FTP goal), but whether they would remain around 2%. Data for the period April-October 2017 is mildly optimistic, with constant annual growth (except for October) [read more] and amounting 169mn USD – an improvement compared to the previous two fiscal years, but still not reaching the highest achievements.
Several explanations for the lackluster export results could be considered. External factors such as the global slowdown of trade since 2012 have objectively played a role, although global competitors like China and Vietnam have fared far better than India during the 2015-17 period. The currently strong rupee has also been blamed for the lack of competitiveness of India's exports - in general, a weaker currency stimulates exports (since goods become cheaper) and thus affects trade balance positively. In the case of India this effect could be monitored in the periods November 2008 to October 2009, June 2013 to April 2014 and January to August 2016.
Nevertheless, as the FTP review acknowledged, the challenges that are halting exports' development in India remain mostly internal. Infrastructure plays a crucial role in competitiveness as high transaction costs affect prices of goods exported. The FTP review admits that logistics' cost in India is twice as high as in the developed economies. The 2017-18 budget [read more] showed the government's commitment to improvements in infrastructure and same should be expected in the upcoming 2018-19 budget.
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