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Editorial: FTP: India Losing Comparative Advantage

Port Wings, 20 December 2017

Bowing to the increasing pressure from the trade community, the government has announced liberal incentives of Rs 8,450 crore ($1.3 billion) in its mid-term review of the five-year foreign trade policy (FTP) that was rolled out in 2015 and aimed at increasing the export of goods and services to $900 billion by 2020.

Though it has been termed as a massive relief to Indian exporters, there are some pitfalls to the midterm review which could put the trade in dangerous path of growth.

Exports, meanwhile, declined from $468 billion to $437 billion between 2014-15 and 2016-17. In fact, India’s external trade performance has grown to be so acute that the current account deficit in the first quarter of the current fiscal year reached a four-year high of 2.6 percent.

What is more worrisome is that this trend is continuing despite favourable trade conditions in the global markets. Only domestic factors can explain the widening trade deficit.

Clearly, the uncertainty surrounding the implementation of the Goods and Services tax (GST) has had a major role to play. Data due this month will show whether the situation has improved in the second quarter.

However, the chances of any significant improvement remain bleak as issues in processing of refunds to exporters under GST has been affecting trading activities. Therefore, the sops given in the mid-term review should help in pumping up exports to an extent.

Basically, labour-intensive sectors under the Merchandise Exports from India Scheme and Services Export from India Scheme, which were introduced in the FTP, were given an incentive raise of two percent each. Under the scheme, exporters are granted credit scrips based on the said percentage of the total value of their exports. These scrips can be used for payment of duties on procurement of further inputs. Additional incentives of two percent are expected to boost the subdued export activity of the last few quarters.

However, even though such an incentive was crucial in the short run given the circumstances, it always remains pertinent to ask if we are doing enough. It is quite disconcerting to realise that India’s comparative advantage in all of these sectors is nowhere close to that at the turn of the century. Moreover, all of these sectors are highly labour-intensive and losing comparative advantage in them is quite inimical to the economy’s employment-generating capacity.

Indian policymakers need to recognise that the trade challenge for India is structural in nature and cannot be done away with quick-fix solutions. Cost incentives are an acceptable approach to deal with immediate challenges like the impact of GST, but they need to be supplemented with more long-term solutions. An effective measure could be to identify sectors where India has a comparative advantage and work towards making it competitive.

The government should now delve into these structural aspects of trade policy before India loses any more of its comparative advantage to world markets. Now that China is slowly losing its status as the world’s manufacturing hub, the time has never been so ripe.

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