May 2022 saw the coming into force of the India-UAE Comprehensive Economic Partnership Agreement (CEPA). This was an agreement entered into after a long gap — the last being the India- Malaysia Comprehensive Economic Cooperation Agreement in 2011. The interregnum saw India abandoning its proposed entry into the Regional Comprehensive Economic Partnership (RCEP). The long drawn RCEP discussions did however give India valuable lessons about the need for balancing domestic concerns with expansion of its export footprint.
And it is obvious that we do believe that FTAs are the way forward. Udyog Bhavan has been seeing a flurry of activity. Free trade agreements with multiple countries — EU, UK, Canada, Australia, New Zealand are in advanced stages of finalization. This is apart from discussions with various other countries, either for expanding existing agreements or for new agreements.
The underlying belief driving this urge to enter into FTA’s is that these are essential for participating in the global value chains (GVC). However, the role of FTAs in building GVC’s is largely exaggerated.
GVC is determined by factors such as market size and institutional quality. And India does not lack in either. In the context of FTA’s, GVC would mean investments in the country, leading to goods entering the country at preferential rates for value addition and export.
Having said that, there are provisions in the Customs Act with corresponding enabling duty exemptions. Provisions which permit import of goods at nil rates when meant for value addition and export. So, when we are entering into an FTA, we are looking at more than just promoting our exports. We are looking at a comprehensive economic partnership.
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Exports have been doing well. FY 2021-22 witnessed an all-time high annual merchandise export figure of USD 417.81 billion. Services exports also set a new record of USD 213.2 billion.
It is a moot point as to how much of a fillip FTAs have given to exports. On the contrary it is a known fact that very many of our export destinations are countries other than partner FTA countries. In fact, much of our exports even with our FTA partners are outside the preferential route (incidentally this is true also for imports).
How then do we make our exporters take advantage of FTAs? One can do no better than invite the attention of policy makers to the report of the Surjit S. Bhalla-headed High Level Advisory Group. The Report emphasizes that while selecting trade partners, long term economic interest should be the only driver.
Industry should be made close associates in the entire process. Minister Piyush Goyal’s recent confabulations at Mumbai with the industry as part of India’s FTA negotiations with UK, EU and Canada is a welcome step. Industry should be empowered to speak their concerns and expectations.
Market access is more than reduction in tariff. Tariff barriers are already low with countries such as UK and the EU. We will be giving in much more. It is the non-tariff barriers which are major detriments. These need to be clearly identified — our negotiations should ensure that these barriers do not act as impediments in free trade.
Services related access should be much more than merely movement of persons. It should include relaxation of investment norms. We have enough major players with the capability and interest in investing in these countries.
Exporters need to be educated to take advantage of such agreements. Ministry of Commerce and FIEO have a crucial role to play in this regard. Which brings us to the role of the Export Inspection Council (EIC) and the Export Promotion Councils (EPC).
EIC is the official export certification body with the mandate to ensure quality and safety of products exported from India. Set up under the Export (Quality Control & Inspection) Act, its importance has never been appreciated. EIC should not be reduced to playing a largely bureaucratic role; as yet another agency from whom permission is required.
Exporters need to be educated about the importance of maintaining rigorous quality control. A good product will always find a market-a bad product will hurt the image of the country and put at risk all other products.
Exporters need to be sensitized about maintaining delivery timelines. The importance of Brand India has to be keenly imbibed by the exporting community. EPC’s have to drive this.
The Indian exporter needs to be encouraged to build relationships with the foreign buyer. There needs to be an effective redressal system — both for the foreign buyer and the Indian exporter. Indian missions abroad have to act as facilitators in resolving these issues.
Export incentives have been a key driver of exports. As per the Receipts Budget 2022, an amount of Rs 46,894 crore was the revenue impact in 2020-21 on account of input tax neutralization or exemption schemes linked to promotion of exports. Another Rs 32,894 crore was the revenue impact because of export-linked incentive schemes.
This is money well spent. However, it should not make exporters too dependent on governmental support. Exporters should instead demand and expect government support in building the necessary infrastructure and environment for manufacture and export.
With the increase in FTAs, the role of the agencies issuing the certificates of origin cannot be overemphasized. Integrity is the key. The agencies should conduct themselves in a transparent manner — in effect in the same manner like we expect the foreign certificate issuing authorities to conduct themselves.
All these steps are essential if we are keen to not just exploit FTAs, but also exports to non-FTA countries. And if we are to meet the ambitious target of $2 trillion by 2027.
The author is the former chairman of the Central Board of Indirect Taxes and Customs. Read his other pieces here.
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