Bibek Debroy: Words full of sound and fury

Much of the what the foreign trade policy seeks to do is outside its purview.

This has been said several times in the pages of Business Standard. But it is a point worth belabouring. We have just had the second Annual Supplement to the Foreign Trade Policy (FTP) 2004-09. Why do we have a FTP? If we read the Preamble to the current second Annual Supplement, we learn that there is a double objective of doubling India's share in global merchandise trade between 2004 and 2009, and of ensuring economic growth by providing a thrust to employment generation. Increasing India's exports, increasing growth and generating employment are no doubt laudable objectives. However, should one attempt to drive this through a FTP, and if so, how?

One might argue that the "how" is set out in the strategy spelt out in the Preamble and we have: (i) unshackling of controls; (ii) simplification of procedures; (iii) neutralisation of taxes on exported products; (iv) facilitating development of India as a global hub; (v) fostering special focus areas that are employment intensive; (vi) facilitating technological and infrastructural upgradation; (vii) avoiding inverted duty structures and protecting sectors that are disadvantaged through trade agreements; (viii) improving the infrastructure network; (ix) revitalising the Board of Trade (BoT) by redefining its role; and (x) activating commercial wings of Indian embassies as providers of information.

This ten-fold strategy may or may not have made some sense in pre-reform India. But in post-reform India, what can the commerce ministry and FTP do about (iv), (v) and even parts of (vi)? The issue is not just redefining the role of BoT, as set out in strategy (ix), but also that of FTP. Fifteen years after the reforms that should already have been done. Consider, for instance, issues such as special focus areas and special products for imparting thrust. Not only is any such identification based on static notions of comparative advantage, with elimination of direct and indirect fiscal concessions, pushed by the reform agenda and by the finance ministry "" what does one do to push selected sectors even if one has managed to identify them successfully? If one scrutinises the details of any recent supplement to FTP, one notices that the only discretion available to push special categories is through duty waiver or duty reduction schemes. This runs into problems with the finance ministry, which is part of the reason why, in the present version of FTP, the chapters on special economic zones (SEZs) and free trade and warehousing zones consist only of blank pages. Indeed, this raises two other issues. First, is there any role for a concept such as SEZs, when there is general liberalisation in the country? When the general liberalisation was missing, one could liberalise in selected enclaves through simplified procedures and discretionary duty reductions. But if procedures are being simplified everywhere and there are unilateral duty reductions, at least on manufactured products, what do SEZs have to offer?

Special labour laws in SEZs are out of the question and there should be better infrastructure everywhere, not just in SEZs. The second point concerns regional trade agreements (RTAs) of the free trade agreement (FTA) or preferential trade agreement (PTA) type.

Should one have these at all? These generally cover manufactured products, as opposed to service sector liberalisation and cross-border investments covered through comprehensive economic co-operation agreements (CECAs). For the non-manufactured category, multilateral liberalisation through WTO is unlikely to be complete. However, for manufactured products, thanks to multilateral liberalisation and unilateral duty reductions, what role do such trade agreements have? They only increase complicated negotiations on rules of origin, value addition (local content) and negative lists. Interpreted thus, from the tenfold elements of strategy, we only have (ii) and (iii) left. In passing, import policy used to be a critical element of FTP, but is virtually irrelevant now, since quantitative restrictions (QRs) that remain are only under Article XX of GATT. And on (ii), it is necessary to distinguish between export procedures that are connected purely with the act of exporting and those that involve export incentives. The former are already simple enough. Complications that remain concern (ii) and this is also linked to (iii). Export incentives, including DEPB, can never be cleaned up and removed as targets for countervailing action by trading partners as long as there is an averaging out in terms of rates. Any averaging breaks the link between indirect taxes paid and exports. That apart, streamlining is impossible as long as we don't have a unified goods and service tax (GST), with all other indirect taxes eliminated. The deadline for the GST is now 2010. Hopefully, there will be an announcement in 2010, saying that there will be no more FTPs.