Today, the world is more globalized, interconnected, and closer in many ways. It is evident that the economies of distinct nations are correlated in ways that were not a few decades back. One key factor enhancing this interconnection or rather interdependence is trade. Whether trade occurs on the grounds of comparative advantage or resource availability and discoveries or quality differentials or variety differentials, international trade heavily influences macroeconomics, social and cultural aspects, income distribution, and even living standards by an enormous magnitude. It also aids nations in harnessing their soft power. Export and import credentials of a nation, are key indicators of economic prowess and success, today. However, international trade can be double-edged. The COVID-19 pandemic exposed deep fault lines in the trade setups, stressing the domestic sector and self-reliance, or atmanirbharta did follow. Countries need a robust trade policy addressing aspects ranging from regulation and facilitation to income distribution and growth.  

Foreign Trade Policy can be defined as government actions, plans, rules & regulations that are in place to influence and oversee international trade and the economics associated with it. The pinnacle inception of India’s trade policy can be marked in the Year 1991 when the government executed a significant program of liberalization to encourage domestic and export-oriented growth, capital goods for industries, and so on. These reforms had a significant positive impact on the Indian economy and the balance of payments for the subsequent years. The departure from protectionism was sharp in the 90s. Foreign trade is regulated by the Directorate General of Foreign Trade (DGFT), in India. This authority was formed in the Year 1991 as well, following liberalization. Today, it is under the  Ministry of Commerce and Industry.  Over the years, the role of the DGFT has shifted from “regulator” to “facilitator”. This shift meant a move from prohibiting exports & imports to facilitating exports and imports. Foreign trade is also regulated by the Foreign Trade (Development and Regulation) Act 1992. 

There are two key foundational pathways a country can approach its trade policy. Regulate and/or facilitate. In essence, a liberalization or a “laissez-faire” approach or protectionism is a “cushioning” approach. In the former, the government has minimal intervention in international trade. In contrast, in the latter, the government uses various trade policy tools and protectionist measures to support local industries from foreign competition. The question that market forces should be allowed to function freely or if the government must intervene is much debated and well-balanced in economic literature. 

India’s trade pattern

As of FY22, India primarily exports gems and jewelry, mineral fuels, oil and waxes, vehicle parts, accessories, nuclear reactors, boilers, pharma products, machinery, and organic chemicals. The top export partners are the US, UAE, Netherlands, China, Bangladesh, Singapore, Brazil, Saudi Arabia, Indonesia, Germany, and so on. India is set to hit a record high export of USD 770 billion by the end of FY22-23. Exports can broadly be categorized into two types- Merchandise exports and service exports. The focus of the government is usually higher on merchandise exports. Indian economy needs to grow on manufacturing since this is where more jobs are created and economic growth is registered. Schemes like Make in India, PM GatiShakti, PLI Scheme, and so on are in contributing towards boosting the manufacturing prowess of India.  

Foreign Trade Policy 2023

The new trade policy was announced by the government (DGFT) on March 31, 2023. The policy is placed in vision with India’s 2030 export target of USD 2 trillion (export of goods and services).

Some but not all, Key elements of FTP 2023 are:

• No end date or time frame for the FTP. It will be revised and updated as and when required. 
• Shift from incentives to a remissions and entitlement-based regime.
• International trade settlement in INR. 
• Increased digitization and bolstering e-commerce trade.
• Extension of FTP benefits to e-commerce exports.
• Export hubs initiative.
• Automation of trade approvals 
• Introduction of the Amnesty scheme 
• Towns of Export Excellence (TEES)

In a nutshell, the provisions of the FTP can be bracketed as; E-commerce facilitation, the Creation of export hubs, improving ease of doing business, and strengthening value chains. The new policy aims to reduce frictions like approval wait times, bureaucracy, reduction in application costs and processes, and so on. FTP 2023 has been chiefly viewed in a positive light. It aligns well with India’s emerging and economically advancing position. The policy would appeal well to small and local businesses, by delivering them export potential and accessibility to foreign markets. While exports may slump slightly due to weaker foreign demand conditions and recession in large economies, there is enough positive hope since the US looks forward to restructuring its supply chains away from China to India. Furthermore, FTAs, like the ones with Australia and UAE assure resilience for Indian exports.

The New Exports Hub initiative 

This motive of the FTP aims in connecting medium and small enterprises at the district level for exports. This initiative will identify export products and services and will build on the institutional and support mechanisms required for the same. This will increase India’s export potential for indigenous commodities. Artisans, Farmers, Handicrafts, Handloom, Cottage industry, and tourism will benefit from this provision. This will motivate small businesses and entrepreneurs to further improvise, innovate and contribute to India’s economic growth. As part of the decentralized exports hub initiative, the following strategies have been proposed(Deepali Sharma, InvestIndia):

• Creating an institutional framework
• Identifying potential export products
• Capacity building for new exporters
• Conducting export promotion outreach programs
• Addressing infrastructure and logistical bottlenecks 
• Converging current government schemes for supporting these initiatives 

De-Dollarization: Trade settlement in INR

The Indian central bank, RBI, a few months back announced the provision to settle international trade in rupees, moving away from the US dollar. By allowing trade in rupees, there would be downward pressure on the dollar as demand moves away from the dollar to rupees. India runs a trade deficit, by settling payments in rupees, dollar reserves can be held. These impacts are, however, to be seen in the long run. Along with time as more FTAs materialize and come into practice, phenomena like imported inflation can be averted as well due to appreciative pressure on INR. India will have to spend less in maintaining dollar reserves. 

FTP 2023 posits that all export contracts and invoices can be denominated in the Indian rupee. Trade settlement in INR is the right move toward India’s 2030 trade ambitions, insulation from global headwinds, and most importantly, a departure from the dollar hegemony. 

Can FTP 2023  foster India’s GVC participation?

Global Value Chains or GVCs are production activities split across different countries, in essence, the division of labor across borders. Higher GVC participation would lead to an increase in economic growth, domestic productivity levels, better income distribution, and realization of productive and comparative potential, making specialization adamant. A country can take part in GVC by forward linkages or backward linkages. India is on a very favorable path in terms of export magnitude, geopolitics and international linkages, domestic capacities, and investment alongside sound economic credentials- it can have a very significant positioning in GVCs. 

Currently, India’s participation index in GVCs is abysmal. Unlike its Asian neighbors, India has not been on the right track when it comes to GVCs. Data has suggested that India mainly links in with the GVCs through forward integration. The 6 sectors accounting for 60% of India’s GVC exports are petroleum products, renting machinery, chemicals, metals, and transport materials; categories are reflected in India’s trade patterns as well. 

Banga 2021, puts forward that India did not harness or promote labor-intensive industries, unlike its Asian neighbors during industrialization. Even though there’s a comparative advantage in unskilled labor-intensive manufacturing in India, the export patterns do not reflect that as most of the export involves capital and skill-intensive products. Labour-intensive sectors like textiles, have not been doing well. This mismatch in comparative advantage and resultant trade pattern is the leading cause of why India’s GVC participation is poor and adverse in relative terms. Extensive research work has been carried out to examine the reasons behind the weakness of labor-intensive production, some give the following reasoning:

• Labor market rigidities
• Old labor laws
• Stringent labor market regulations
• Labor intensive chains 
• Mismatch in domestic and foreign quality standards 
• Low FDI in the manufacturing sector

To overcome the above issues, it is essential that labor markets be made efficient, and quality standards and infrastructure be improved alongside streamlining the entire process. FTP 2023, posits these corrections. Empowering MSMEs and driving exports from them, identification and bolstering TEES are a few steps in the right direction for India to increase GVC participation. Many papers also call for restructuring India’s trade pattern for more labor-intensive industries. The provisions of FTP 2023, align correctly for increasing India’s GVC participation. Automation, decentralization of export hubs. However, other aspects that need to be addressed for increasing GVC participation are; infrastructure, mobility issues, inland factory operation costs, etc. 

Challenges and shortfalls

While FTP 2023 looks very promising and bold, there are some issues that are yet to be addressed. Trade today is defined by differences in technologies, innovative product designs, and cutting-edge competition, rather than just comparative advantage credentials. The policy does not address these grounds and instead sheds more light along the lines of just increasing exports. The product and market mechanics are missing or have not been given due consideration. Another main challenge India’s facing today is infrastructure, the other reason why GVC participation by India is low. There is not much in this space as well in FTP 2023. A forward-looking policy should possibly focus on and reiterate the importance of GVC, as they are a departure from conventions. While export promotion schemes seem optimal, they are double-edged. For instance, in 2019 merchandise export subsidies were found to be in violation of WTO rules. 

FTP 2023, is tuned correctly with India’s export and economic ambitions and certainly would lead to increased efficiency and growth. It is a perfect supplement to FTAs and prospective FTAs, global supply chain restructuring. However, the missing elements need to be addressed as well, which could be realized with time. It must again, be noted that there is no tenure for this policy, and it can be amended and updated as and when required, and hence provides room for these other elements to be addressed in contribution towards the 2030 USD 2 trillion objective.