Unit 4

Strategy for Trade Policy in India

Q1) Discuss the strategy of trade policy of India during planning period.  

A1) During planning period, trade policy of India changes the composition of foreign trade, destination of export and sources of import, investment pattern of foreign trade, tariffs, consumption pattern etc. The strategy for trade policy in India that leads to general development during planning period are discussed below-

a)     Import substitution: Indian economy was over burdened with excess import during early planning period. Thus, the planning commission formulated import substitution policy to replace foreign products with the products manufactured in India. This policy implies indigenous production of raw materials, intermediate goods, final consumer goods and capital goods. This policy successfully developed the consumer goods industry of India to produce quality goods to satisfy consumer needs of both national and international market.

b)    Export promotion: India formulates export promotion policies to encourage export from the country by facilitating liberal tax policy, subsidy on loans to industries producing exportable items, market support, supply of raw material etc. This policy emphasized technological up gradation, increase in plant size, freer imports and domestic and international competition for the entire industrial sector as being essential for export promotion.  It helps to correct the BOP position of the country by promoting export.

c)     Industrial development: Industrial development of the country is another strategy during that period that had a profound effect on the GDP of the country and the industrial growth as well. The industrial sector also saw great diversification. Initially, the main contributors of the sector were the cotton and the jute industries. But the trade policy of the plans promoted many other small-scale industries. Protecting the domestic market from foreign imports really helped the small and medium scale industries boom in the economy. It even assisted indigenous industries, especially in the automobile and electronics sector.

d)    Development of Public Sector Enterprises: One feature of the earlier five year plans was the massive development of the public sector.  The Industrial Policy 1956 was based on establishment of a socialistic pattern of society as the goal of economic policy. Most of the major industries like telecom, air travel, railways, defence etc. were entrusted to the public sector.

e)     New agricultural strategy: Prevailing crisis in agriculture and serious food shortage necessitated the emphasis on agriculture during the Annual Plans. A whole new agricultural strategy was implemented that involves wide-spread distribution of high-yielding varieties of seeds, extensive use of fertilizers, exploitation of irrigation potential and soil conservation.

f)       Attainment of self-reliance: During fifth plan period, policies were formulated backdrop of economic crisis arising out of run-away inflation fuelled by hike in oil prices and failure of the Govt. takeover of the wholesale trade in wheat. It proposed to achieve two main objectives: 'removal of poverty' and 'attainment of self-reliance'. Promotion of high rate of growth, better distribution of income and significant growth in the domestic rate of savings were seen as key instruments in those policies.

g)    Food, work & productivity: The seventh Plan aimed at accelerating food grain production, increasing employment opportunities & raising productivity. The plan was very successful as the economy recorded 6% growth rate against the targeted 5% with the decade of 80’s.

h)    Fiscal & economic reforms: The eight plan undertook drastic policy measures to combat the bad economic situation introduction of fiscal & economic reforms. Some of the main economic outcomes during eighth plan period were rapid economic growth, high growth of agriculture and allied sector, and manufacturing sector, growth in exports and imports, improvement in trade and current account deficit.

Q2) Discuss in brief recent scenario of world trade

A2) Trend of trade in goods and services

World trade in goods has increased dramatically over the last decade, rising from about US$10 trillion in 2005 to more than US$18.5 trillion in 2014 to then fall in 2016 and reach US$18.8 trillion in 2019. Trade in services greatly increased between 2005 and 2019 (from about US$2.5 trillion to close to US$6 trillion). The value of international trade of both goods and services declined substantially in 2015 and 2016, later recovered during 2017 and 2018, only to level off (services) or fall (goods) during 2019. During 2019 export growth rates for both goods and services greatly declined, with rates for goods from developed countries turning negative. The economic and social disruptions brought about by COVID-19 have resulted in a substantial reduction in global trade. It is expected to fall by about 7 per cent in 2020.

In Q2 2020, the value of global trade in the automotive and energy sectors was about half of what it was in Q2 2019. Trade also declined significantly in chemicals, machineries, metals and ores, and precision instruments. On the other hand, imports increased in office machinery and textiles and apparel. Such increases are linked to the COVID-19 pandemic as these sectors include home office equipment and protective equipment such as masks.

During 2020, exports of COVID-19 medical supplies like personal protective equipment, disinfectants, diagnostic kits, oxygen respirators and other related hospital equipment from China, the European Union and the United States rose from about US$ 25 to 45 billion per month. On a year-over year basis the trade of these products has increased by an average of more than 50 per cent since April 2020.

With more than US$2 trillion traded, chemicals represent a substantial share of world trade in goods. Other significant sectors include machinery and motor vehicles, communications products and fuel commodities, oil, coal and gas and petroleum products, communications equipment, non-metallic minerals, machinery, light manufacturing sectors, textiles, apparel and tanning, agricultural sectors – which include food, vegetable and animal products, oils and fats, and tobacco and beverages, travel and transportation, telecommunication, IT and professional services,  insurance.

Trend in imports and exports

Growth in trade volumes has slowed down substantially in the last few years, especially for developing countries, before picking up again in 2017 when import and export volumes grew at the highest rate since 2011 for this group of countries. In 2015 and 2016, volume growth both in relation to imports and exports was exceptionally low or in some cases negative in the three largest economies. In 2017, the growth of import and export volumes recovered significantly, with still positive but lower rates in 2018. During 2019, most growth rates for volumes of imports and exports for the largest economies were close to zero, or even negative in the case of the United States of America. The exceptions were export volumes from China, which grew close to 2 per cent in 2019. Imports and exports have remained substantially below 2019 levels for Brazil, India, Japan, and the Russian Federation. On the other hand, signs of a tepid recovery are found in the statistics of the European Union, Republic of Korea, and South Africa. In major economies, both imports and exports recovered significantly compared to 2016, but they maintained their level in 2019. While import volumes have been growing relatively more than export volumes for developing countries, the opposite has happened for developed countries. The relatively larger increase in the volumes of imports can be explained by the increase in consumer demand in developing countries.

Trend of trade in different regions of the world:

In 2018, South-South trade saw a stronger rebound than other types of trade and  they represented more than half the trade of developing country regions (imports and exports). South–South trade share varies by region, from about 40 per cent in Latin America to over 60 per cent in South Asia and East Asia.  Since 2005, China has become an increasingly important partner for all other developing country regions. While agricultural trade flows experienced some large percentage increases, in particular exports from the European Union to China and the United States of America to China and Mexico, some manufacturing flows decreased significantly, in particular exports from China to the United States of America. Exports of natural resources to China also experienced significant increases, while flows to other destinations, particularly the European Union, decreased. Trade related to developed countries remains an important part of international trade, especially in relation to imports. BRICS countries account for an important part of developing countries’ trade, especially with respect to trade in intermediates and exports of consumer products. The exports of goods and services have increased for a large number of countries across the world, in Europe, East Africa, North America, East, South and Southeast Asia. However, between 2014 and 2019 some Sub-Saharan and West African countries, along with some South American ones experienced strong decreases in exports. During the same period, only few countries, mainly in Africa and Central Asia, increased their competitiveness as compared to their key trading partners.

Q3) What are the changes has taken place in recent trade policy of India.    

A3) The changes of recent trade policy are highlighted in the following points-

1) Merchandise Exports from India Scheme (MEIS):

Merchandise Export from India Scheme (MEIS) scheme is introduced by merging old 5 different schemes i.e. Focus Product Scheme, Market Linked Focus Product Scheme, Focus Market Scheme, Agri. Infrastructure Incentive Scrip and VKGUY.

2) Service Exports from India Scheme (SEIS):

Served from India Scheme (SFIS) has been replaced with Service Exports from India Scheme (SEIS). SEIS shall apply to ‘Service Providers located in India’ instead of ‘Indian Service Providers’.

3) Duty credit scripts to be freely transferable and usable for payment of custom duty, excise duty and service tax:

a) All scripts issued under MEIS and SEIS and the goods imported against these scripts would be fully transferable.

b) Scripts issued under Exports from India Schemes can be used for the following:-

(i) Payment of customs duty for import of inputs / goods including capital goods, except items listed in Appendix 3A.

(ii) Payment of excise duty on domestic procurement of inputs or goods, including capital goods as per DOR notification.

(iii) Payment of service tax on procurement of services as per DOR notification.

c) Basic Customs Duty paid in cash or through debit under Duty Credit Scrip can be taken back as Duty Drawback as per DOR Rules, if inputs so imported are used for exports.

4) Status Holders:

Business leaders who have excelled in international trade and have successfully contributed to country’s foreign trade are proposed to be recognized as Status Holders and given special treatment and privileges to facilitate their trade transactions, in order to reduce their transaction costs and time. The nomenclature of Export House, Star Export House, Trading House, Star Trading House, Premier Trading House certificate has been changed to One, Two, Three, Four, Five Star Export House.

5) Higher level of rewards under MEIS for export items with high domestic content and value addition:

It is proposed to give higher level of rewards to products with high domestic content and value addition, as compared to products with high import content and less value addition.

6) Online filing of documents/ applications and Paperless trade in 24x7 environments:

DGFT already provides facility of Online filing of various applications under FTP by the exporters/importers. However, certain documents like Certificates issued by Chartered Accountants/ Company Secretary / Cost Accountant etc. have to be filed in physical forms only. In order to move further towards paperless processing of reward schemes, it has been decided to develop an online procedure to upload digitally signed documents by Chartered Accountant / Company Secretary / Cost Accountant. In the new system, it will be possible to upload online documents like annexure attached to ANF 3B, ANF 3C and ANF 3D, which are at present signed by these signatories and submitted physically.

7) Online inter-ministerial consultations:

It is proposed to have online inter-ministerial consultations for approval of export of SCOMET items, norms fixation, Import Authorisations, Export Authorisation, in a phased manner, with the objective to reduce time for approval. As a result, there would not be any need to submit hard copies of documents for these purposes by the exporters.

8) DGFT is currently working on the following EDI initiatives:

Q4) Write a brief note on multilateral and bilateral trade agreement. 

A4) Multilateral trade agreement involves agreement among three or more countries without discrimination among themselves regarding tariff and other trade barriers to promote trade and investment among the member countries.  The member countries follow common tariff and non-tariff barriers of trade for non-member countries. There are large numbers of multilateral trade agreements are made by different countries of world. Some of them are highlighted in table 1-

Table 1: examples of multilateral trade agreements

Some of the advantages of multilateral trade agreements are-

Some of the disadvantages of multilateral trade agreements are-

Bilateral trade agreement refers to agreements between two countries without discrimination between them regarding tariff and other trade barriers to promote trade and investment between the member countries.  The member countries follow common tariff and non-tariff barriers of trade for non-member countries. Some examples of bilateral trade are-

Some of the benefits of bilateral trade agreements are-

Some of the disadvantages of bilateral trade agreements are-

Q5) State the advantages and disadvantages of multilateral and bilateral trade.

A5)  Multilateral trade agreement involves agreement among three or more countries without discrimination among themselves regarding tariff and other trade barriers to promote trade and investment among the member countries.  The member countries follow common tariff and non-tariff barriers of trade for non-member countries. There are large numbers of multilateral trade agreements are made by different countries of world. Some of them are highlighted in table 1-

Table 1: examples of multilateral trade agreements

Some of the advantages of multilateral trade agreements are-

Some of the disadvantages of multilateral trade agreements are-

Bilateral trade agreement refers to agreements between two countries without discrimination between them regarding tariff and other trade barriers to promote trade and investment between the member countries.  The member countries follow common tariff and non-tariff barriers of trade for non-member countries. Some examples of bilateral trade are-

9.     ASEAN–China Free Trade Area (ACFTA).

10. ASEAN–Hong Kong, China Free Trade Agreement (AHKFTA).

11. ASEAN–India Free Trade Area (AIFTA).

12. ASEAN–Japan Comprehensive Economic Partnership (AJCEP).

13. ASEAN–Korea Free Trade Area (AKFTA).

14. ASEAN–Australia-New Zealand Free Trade Area (AANZFTA).

15. EU – Japan Economic Partnership Agreement.

16. US – EU United States (TTIP – Transatlantic Trade and Investment Partnership).

Some of the benefits of bilateral trade agreements are-

Some of the disadvantages of bilateral trade agreements are-

Q6) Write a brief note on GATT

A6) The General Agreement on Tariffs and Trade (GATT) has signed on October 30, 1947, by 23 countries and came into effect on January 1, 1948. It was a legal agreement to minimize barriers to international trade by eliminating or reducing quotas, tariffs, and subsidies while preserving significant regulations. The member countries conducted meeting annually to discuss the issues related to trade. The outcomes of different meetings are-

In 1993, by the end of the Uruguay Round, has negotiated the creation of the WTO. The General Agreement on Tariffs and Trade (GATT) covers international trade in goods. The Goods Council has 10 committees dealing with specific subjects (such as agriculture, market access, subsidies, anti-dumping measures and so on). The workings of the GATT agreement are the responsibility of the Council for Trade in Goods (Goods Council) which is made up of representatives from all WTO member countries.

Q7) Write a brief note on UNCTAD.             

A7) UNCTAD is a permanent intergovernmental body established by the United Nations General Assembly in 1964. The headquarters are located in Geneva, Switzerland, and have offices in New York and Addis Ababa with Currently, 195 member states.  The conference ordinarily meets once in four years. The primary objective of UNCTAD is to formulate policies relating to all aspects of development including trade, aid, transport, finance and technology. The creation of UNCTAD in 1964 was based on concerns of developing countries over the international market, multi-national corporations, and great disparity between developed nations and developing nations. The United Nations Conference on Trade and Development was established to provide a forum where the developing countries could discuss the problems relating to their economic development. The organisation grew from the view that existing institutions like GATT (now replaced by the World Trade Organization, WTO), the International Monetary Fund (IMF), and World Bank were not properly organized to handle the particular problems of developing countries. Later, in the 1970s and 1980s, UNCTAD was closely associated with the idea of a New International Economic Order (NIEO). It extends support developing countries to access the benefits of a globalized economy more fairly and effectively.

UNCTAD makes efforts to help countries to:

Different conferences of UNCTAD are-

Q8) Write a brief note on WTO.                  

A8) The World Trade Organization (WTO) was established in 1995 by Uruguay Round negotiations of GATT as global international organization dealing with the rules of trade between nations. The head office of WTO is in Geneva, Switzerland and currently it has 164 members. The GATT mainly dealt with trade in goods, the WTO and its agreements also cover trade in services and intellectual property. The WTO provides a forum for negotiating agreements aimed at reducing obstacles to international trade and ensuring a level playing field for all, thus contributing to economic growth and development. The WTO also provides a legal and institutional framework for the implementation and monitoring of these agreements, as well as for settling disputes arising from their interpretation and application.

The main activities WTO are:

WTO stands for-

Q9) Discuss about the BOP and BOT situation of India.                    

A9) The Balance of Payments (BOP) records all economic transactions between residents of a country and the rest of the world. The BOP account mainly consists of the current account and the capital account. The current account includes the transaction of goods, services, primary income, and secondary income between the residents and the rest of the world. The current account balance is largely driven by the movement of goods and services. The capital account comprises credit and debit transactions under non-produced non-financial assets and capital transfers between residents and non-residents. The overview of India’s BOP since 1991 are highlighted in the following points-

In balance of trade, data records the value of merchandise trade of India with its trading partners. India has been recording sustained trade deficits since 1980 mainly due to the strong imports growth, particularly of mineral fuels, oils and waxes and bituminous substances and pearls, precious and semi-precious stones and jewellery. In recent years, the biggest trade deficits were recorded with China, Switzerland, Saudi Arabia, Iraq and Indonesia. India has maintained an overall trade deficit since 1990 and in the past decade, the deficit has increased manifold. India’s share export of merchandise goods in 2015 was 1.5%. India records trade surpluses with the US, United Arab Emirates, Hong Kong, United Kingdom and Vietnam. India trade gap was revised slightly lower to USD 12.62 billion in February of 2021 from a preliminary of USD 12.9 billion in February of 2021. Still, it remains higher than USD 10.16 billion a year earlier. Exports increased 0.7% to USD 27.93 billion, better than initial estimates of a 0.3 per cent drop. Sales went up the most for other cereals (546.5%); oil meals (245.45%); iron ore (167.79%); jute (45.53%); rice (30.78%); and meat, dairy & poultry products (26.43%). In contrast, shipments fell for oil seeds (-25.19%); leather (-21.62%); petroleum products (-20.87%); cashew (-18.62%); and gems & jewellery (-11.19%). Imports jumped 7 per cent to USD 40.54 billion.