Welcome rethink on FTAs

Exports can enable sustainable economic growth

The government seems to be resetting its position on trade policy. The Union commerce secretary recently said India would fast-track free trade agreements (FTAs) as the country needed to engage with the rest of the world. Since the world is moving towards bilateral and regional trade arrangements, such deals would be important. Union Commerce and Industry Minister Piyush Goyal has endorsed this position. During an interaction with export promotion councils on Thursday, Mr Goyal said that “early harvest” agreements with a host of countries, including the UK and Australia, were progressing fast. An early harvest deal is a precursor to an FTA, in which the trading partners reduce tariff barriers on limited goods to promote trade. Though the US is not looking at a new trade agreement, the minister said India was working on market access issues to promote bilateral trade. He also reiterated his position that Indian industry should become more competitive and not seek protection. This is a welcome change in the thinking of the government, which was seen to be moving towards protectionism in recent years.

The government has clarified that the Aatmanirbhar Bharat campaign doesn’t mean that India intends to go down the import substitution path, though its policy interventions have been giving a different impression. Economists Arvind Subramanian and Shoumitro Chatterjee have pointed out since 2014 tariffs have been increased in about 3,200 product categories, affecting about 70 per cent of imports. The progressive reduction in tariffs after 1991 resulted in an export boom and helped India grow at a higher rate in the first decade of this century. However, a reversal in policy position affected trade over the last several years.

International trade is recovering at a faster pace with the rebound in the global economy from the Covid-induced contraction and India is reaping the benefits. Thus, this is a good time to revisit the trade policy and push as many FTAs. India also needs to focus more on trade at this point because of its domestic macroeconomic position. Recovering from a contraction, the Indian economy will grow at a higher rate this year, but sustainability in the medium term remains uncertain. The government’s ability to drive demand will remain constrained because of existing higher levels of deficit and debt. Therefore, exports could become a driver of growth if the policy is carefully adjusted. The government should also re-evaluate the overall tariff policy to strengthen India’s position as a more open economy.

A review of the position on the Regional Comprehensive Economic Partnership (RCEP) is also required. It is likely that conditions in FTAs with the European Union, or the UK would be testing compared to the RCEP. If India is open to FTAs with other countries and groups, the RCEP should not be an exception. One of the biggest concerns — both from an economic and strategic point of view — is the presence of China. However, staying away from the RCEP is not an answer. In today’s complex supply chains, it may not be easy to distinguish goods coming into India from other countries with significant value addition in China. Besides, being a member of the most dynamic trading bloc will allow India to become part of the global supply chain, which will make it more competitive and help utilise other FTAs that are being negotiated more effectively. The way the government reshapes its trade policy in the near term will determine India’s growth trajectory in the medium to long run.