Finance Minister Arun Jaitley must be given credit for a very impressive Budget under the most challenging economic circumstances. It is a Budget that succinctly outlines the government's economic agenda, supplementing, but not repeating, the policies laid out clearly in the BJP's election manifesto. I am most impressed with its emphasis on trade policy as a prerequisite for India's outward-oriented high inclusive growth strategy. It emphasises trade facilitation - surprisingly, for the first time in a Budget since Jaswant Singh's Interim Budget in 2004-05 - by highlighting the urgency of implementing a single window for facilitating trade.
References were also made in the speech to several next-generation trade reforms: an industrial corridor management in which the states and the private sector play a much greater role; revamping and transforming SEZs into modern zones with greater connectivity to global supply chains and hopefully, minimal government controls; emphasis on logistics through better port management and shipping; and a greater window for FDI in key sectors. One expects the government to spell out the details of the next-generation trade and investment reforms in the coming months.
I will focus here on trade facilitation. India faces several problems in seamless trade transactions and the costs involved in trading with India are significant. Gains have been made over the last decade in terms of reducing transaction costs, but even so India is still far below the current international standards. Cargo turnover times at Indian ports and airports are too high; the trading process is cumbersome and bureaucratic, with numerous documents required for export and import clearance. In addition, there is no clearly designated authority to lead the trade facilitation effort, and be accountable.
Hence I was most surprised that prior to the December 2013 Bali WTO Ministerial there was a reluctance in some quarters to accept the WTO Trade Facilitation Agreement (TFA). There was clearly no economic logic behind this opposition, since trade facilitation goes to the root of the core policy priority outlined by the government, i.e., the urgent need to reduce the enormous transaction costs that stifle Indian entrepreneurship to unleash a real economic revolution. Trade facilitation challenges are not a philosophical counterpoint in economic diplomacy, but a real, everyday barrier that keeps competent Indian entrepreneurs, including most SMEs, from becoming full players in the international value chains. By stifling Indian entrepreneurship from taking advantage of global markets, India is losing out on the chance to develop a competitive manufacturing sector urgently needed for job creation.
Moreover, India has unilaterally put in place almost everything required under the TFA, including a substantial part of what is called the 'best endeavour' clauses, i.e. non-binding but recommended trade facilitation reforms. India, contrary to popular belief, has always set itself ambitious trade facilitation targets.
But, while India is already more or less compliant with all provisions under TFA, this is no reason for complacency on the part of the policy-makers. Transaction costs continue to remain high, and India's performance in major indices measuring trade facilitation and efficiency of cross-border movement of goods is still dismal. The World Bank's Doing Business Indicators ranks India 132 out of 189 for trading across borders. Needless to say, most of our competitors (newly industrialised economies, and fast-growing large emerging nations) are ranked ahead of India.
Some of the key unresolved recommendations of past studies that should be in the immediate agenda of the government are:
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Reliance on a trust-based system, in which importers self-certify. Audits can be conducted ex-post; there should be minimal physical inspection
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Movement towards a paperless system with minimum face-to-face contact and signatures
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Cargo time at ports reduced to levels comparable to the best performers in Southeast Asia - in other words, from weeks to hours.
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Quarterly monitoring of this cargo dwell time in major ports and airports by an Inter-Ministerial Trade Facilitation Committee (IMTFC) with the full attention of the prime minister, preferably chaired by him.
- As outlined in the Budget, a move towards a comprehensive single-window system that not only integrates customs with allied agencies and DGFT, but with excise as well. This single-window needs to run on a single operating platform, be maintained by a single service provider, and not be a message exchange system between different operating environments.
The other area of policy intervention would have to be in the area of logistics infrastructure development. The various freight corridors would need to be made operational quickly. State governments need to be made stakeholders in the process of freight corridor development, not just in terms of the infrastructure development aspect, but also in terms of policy reforms. Crossing of state borders by trucks remain a cumbersome procedure mostly due to the poor quality of inspection and poor procedures put in place by state governments who are responsible for the enforcement of a number of central Acts and rules that freight movement in India is subject to. States need to become partners in the development of efficient corridors that link India's hinterland to key air and sea international gates. It is encouraging to see the government prioritise rail freight, long considered a step-child of the highly pampered passenger segment.
Trade and logistics facilitation is a dynamic national challenge. It is also essential that the line ministries are made accountable for speedy implementation. With manufacturing-related wages in China increasing, and other competitors like Vietnam, Thailand, and Indonesia lacking the depth of Indian manufacturing and economies of scale of our domestic market, the time is ripe for India to make a serious bid to become a critical player in global value-chains. But to do so, it would need to ensure minimal transaction costs behind the border, at the border, and across the border.
The Budget has set the tone. Let us quickly complete the unfinished tasks.
The writer was economic adviser in the commerce ministry. These views are his own
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