New terms of trade

Policy establishment should build capacity

After rising by over 40 per cent in the last fiscal year, India’s merchandise exports growth has moderated. Although the recent moderation is partly because of the imposition of export restrictions to contain domestic inflation, the surge was not expected to sustain as it was significantly driven by global commodity prices. However, the importance of attaining and maintaining higher levels of exports cannot be overestimated. It can be an important driver of growth, which India has been missing for a while. Before the post-pandemic boom, exports remained virtually flat for several years, which affected the overall economic growth. It is thus important that India builds on the momentum it gained after the pandemic and sustains a reasonable rate of exports growth over the medium term. Since this will need policy support, the government did well last week by restructuring the commerce department.

The Directorate General of Foreign Trade will now only look at regulations and the promotion of foreign trade. It will no longer have the power to make the foreign trade policy. The trade policy division has been bifurcated to handle bilateral and multilateral trade negotiations separately. This is a significant move, as it will help provide focused attention to negotiations on free-trade agreements that India is currently engaged in with a number of countries. However, it’s also worth recognising that just reorganising the commerce department would not help. It should be seen only as a starting point. As this newspaper reported, the idea also is to bring domain experts into the system. This will be critical as India moves forward with new trade agreements.

India needs to build institutional capacity in the trade policy establishment. This will not only help present India’s position more effectively in trade negotiations but also inform the broader domestic policy establishment to take a more practical position on foreign trade. Most economists, for instance, criticised the government’s decision to not join the Regional Comprehensive Economic Partnership or RCEP. Since this has not discouraged trade with China materially, India lost an opportunity to become part of what is seen as the most dynamic trading bloc in the world. To boost trade in a sustainable manner, it is now important to integrate with global value chains. But by remaining out of such a trade agreement and increasing tariffs to protect domestic businesses, it would be difficult for India to become an integral part of any value chain.

As things stand, India’s participation in the global value chain has declined in recent years, which seems to have affected exports. Data compiled by the Word Bank shows that India’s exports of goods and services as a percentage of gross domestic product steadily declined from a high of 25.4 per cent in 2013 to 18.7 per cent in 2020. India needs a comprehensive review as to why this happened to be able to find ways to reverse the trend sustainably. The government thus would be well advised to use the restructuring of the commerce department to build institutional strength. Aside from protecting trade interests at negotiations, which are often fairly detailed and time-consuming, it would also help India prepare for a rapidly changing global economy. The support from exports is essential for attaining higher sustainable economic growth.