New government unlikely to tweak trade policy

The new coalition government led by Prime Minister Modi is unlikely to bring about any major changes in the trade policy that is characterised by high tariff and non-tariff barriers on imports, bilateral trade negotiations for free trade with select countries, and export promotion through some duty exemption schemes for imports of capital goods and inputs required for export production.

The partners in the coalition government are regional outfits like the Telugu Desam Party, Janata Dal (United), Shiv Sena (Shinde faction), Janata Dal (Secular), who are more concerned with securing the interests of their constituencies, parties, and States. Once their demands like ministerial berths and some fiscal concessions are met, they are more likely not to interfere or make demands in the matters that are in the domain of the central government.

The Prime Minister is quite capable of managing such an outcome through negotiations and persuasion.

The present trade policy of protecting domestic producers through tariff and non-tariff barriers is an extension of the core belief of the establishment, which is more likely to remain unchallenged by anyone within the ruling party or cabinet or the coalition partners or for that matter, anyone in the bureaucracy.

There may be some tactical steps backward or sideways for optics but nothing substantial may happen by way of changing the basic policy of protectionism. The Prime Minister is well known for his pragmatism but the nuances of trade policy are not well understood by the elected representatives or the people at large to warrant backsliding on the core beliefs.

The government walked out of the Regional Comprehensive Economic Partnership agreement negotiations between 13 countries in Asia plus Australia and New Zealand fearing that Indian producers will not be able to compete against imports at lower duty rates even after a few years.

That decision and our high tariffs have kept our producers out of global value chains. The government has negotiated relatively less consequential agreements with Australia and the United Arab Emirates (UAE) and is negotiating new trade deals with the United Kingdom, European Union, and some other small countries.

That effort is likely to continue with the government seeking better market access for some services.  In the multilateral trade negotiations at the World Trade Organisation (WTO) also, the government may continue with its present policy of engaging in discussions without contributing anything useful by way of fresh ideas. 

The export promotion schemes like duty exemption scheme, export-oriented units (EOU) scheme, Special Economic Zones (SEZ) scheme, export promotion capital goods (EPCG) scheme, and the schemes for the rebate of state and central taxes and levies (RoSCTL), remission of duties and taxes on exported products (RoDTEP) and interest equalisation scheme on pre and post shipment export credit are non-controversial within the country and so are likely to continue.

An interesting possibility is restructuring the Commerce Ministry on the basis of a report prepared in 2022 with the stated aim to adopt international best practices and prepare for greater multilateral and bilateral engagement with other countries. Establishing a permanent trade negotiating group is one of the ideas under consideration.

Unless someone convinces him about the benefits of lower tariffs and multilateralism, the present protectionist trade policy is likely to continue. 

Email: tncrajagopalan@gmail.com