Foreign trade: Going beyond a phrase

India's trade policy needs to expand on what 'self-reliance' means

India’s foreign trade policy was last updated in 2015. It was supposed to last for five years, until 2020. But, to an extent because of the complexities caused by the pandemic, it has been extended by six months at a time since then. The global economy has not yet emerged completely from the pandemic-related disruptions; and to those have been added the uncertainties due to inflationary pressures worldwide and the Russian invasion of Ukraine. Thus, the Union commerce ministry has postponed the release of a new foreign trade policy yet again. While it is understandable given the global situation, the fact is that a new comprehensive trade policy is overdue. This is because the broader attitude towards external trade links in the country has clearly changed since 2015, but there is no clarity about the new direction for policy.

In 2015, the government was clearly doubtful about the benefits of freer trade. New agreements were put on hold, older agreements were scrutinised, and bilateral investment treaties were scrapped. Subsequently, the prime minister introduced the concept of aatmanirbharta, or self-reliance, in his first major policy speech after the Covid-19 pandemic hit India. It is not clear what self-reliance specifically means in the context of foreign trade policy. Some have interpreted it as increasing the capacity and competitiveness of domestic industry. Others have seen the possibility of modern industrial policy that focuses on certain sunrise sectors such as electric vehicles or microchips. But in practice, much of the action on “self-reliant” policy has been straightforward import substitution. Yet, meanwhile, the government has also acted on multiple new free trade agreements, signing a comprehensive partnership with the United Arab Emirates, a more limited agreement with Australia, and moving discussions forward with the United Kingdom and the European Union among others.

There are clearly contradictory impulses here. This is not surprising, since “self-reliance” is after all one short phrase and does not constitute a policy statement on its own. This is the gap that a foreign trade policy should ideally fill. The production-linked incentive (PLI) scheme is a revealing illustration of the problems of having an incoherent approach to foreign trade. It is not very clear if the PLI scheme is meant as a temporary bridging mechanism, an export promotion system, an investment promotion scheme, or a geo-strategic play to reduce dependence on China. What is certain is that such schemes, unless their aim and purpose is clearly defined, tend to expand in scope in response to rent-seeking. The expansion of the scheme will also have fiscal implications.

More and more sectors are being brought under PLI schemes. As former Reserve Bank of India governor Raghuram Rajan recently pointed out, there is also no obvious reason why after the subsidies end, the productive capacity will remain in use if it becomes uncompetitive. There has to be clear visibility on how temporary subsidies lead to a permanent increase in competitiveness. This is not obvious in the PLI scheme at present. In the absence of this understanding, the errors of the past will be repeated. Import substitution paradoxically led to weakness on the external account for decades before the 1991 reforms; it is the opposite of “self-reliance”. These issues need to be clearly examined and understood going forward.