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Explained | Why has the government again extended its foreign trade policy ?

India has again postponed a new Foreign Trade Policy (FTP) announcement, choosing to extend the old one until March 31, 2022. The FTP, set to run from 2015 until 2020, targeted $900 billion of exports by 2020. The target had to be scaled down first because of a slowdown in global trade beginning at the end of 2018 and then the onset of the Covid-19 pandemic. Moneycontrol takes a deep dive into why India quickly needs a new FTP, why there has been a hold-up in announcing one, and what the implications are of persisting with a policy that was supposed to end in 2020.

September 29, 2021 / 03:56 PM IST
Representative image

Representative image

What is the FTP?

The FTP is a set of guidelines established by the Directorate General of Foreign Trade (DGFT) governing matters related to the import and export of goods by India. It is the government's seminal document on trade matters that is expected to guide economic relations with other nations and help develop domestic industry.

The Ministry of Commerce and Industry used to announce it every five years and the DGFT implement it. The commerce ministry also updates India's official Export Import Policy every year on March 31. As a result, modifications and improvements in existing schemes and newly announced initiatives become effective from April 1. The government also brings out separate export policies for agriculture, capital goods, services, e-commerce and other sectors.

The FTP is required to enjoy a broad consensus within the government, and take into account global demand as well as the needs of Indian industry. It ensures government initiatives in trade matters stay in step with overall goals.

Why does it need to be updated periodically?

Close

International trade is dictated by an enormous number of continuously moving factors such as global trade rules, financial markets, foreign policy, trade alliances, industrial performance, consumer behaviour and currency flows. A stagnant policy is unable to be of any real help to the economy if it can't adapt to these dynamics.

The DGFT crafts the FTP keeping in mind three primary objectives: developing export capability; ensuring balance of payments stability; enhancing export performance and encouraging foreign trade. On these issues, the DGFT invited suggestions from industry to decide on the goals of the FTP for the period between 2021 and 2026 through a notice dated July 18, 2021.

The suggestions were to be then vetted by dozens of government departments who add their own ideas. The Prime Minister’s Office and the Niti Aayog policy think tank are then expected to take a final call, identifying the broad and micro initiatives in the FTP.

What are the technical reasons it has been postponed now?

The government recently finalized tax refund rates for exports under the new Remission of Duties and Taxes on Exported Products (RoDTEP) scheme, pending work on which had caused the last postponement of the new FTP in March, 2021. The RoDTEP is currently India's premier export incentive programme; the new rates have been panned by industry as being too little, too late.

Given that the commerce department had worked with a smaller-than-earlier announced budget for the scheme, the RoDTEP rates had been admittedly lower than expected. Exporters across sectors complained that many products have been left outside the ambit of the scheme.

Officials say more work on RoDTEP is underway as a result, which has also held up the new FTP. The lack of a clear consensus on whether to continue with export incentives for services exporters has also contributed to the latest decision.

What are some of the trade policy level reasons ?

The government is also yet to pinpoint its ultimate aim on a long list of trade policy issues. There has long been a consensus within the commerce department that the FTP should not focus solely on export promotion but look at trade as a whole.

This includes securing a firm foothold in global value chains, making India a springboard for exports into South East Asia and East Africa, popularizing trade based in the rupee instead of the dollar and replacing India's predominantly commodity=based export basket with one which has a larger number of manufactured goods.

On all these fronts, the government is yet to shape its final policy. Officials say talks are on between various ministries to paper over differences in regulations, administrative authority and priority sectors when it comes to such a broad policy focus.

Similarly, although the government is keen to secure more foreign direct investment, it is yet to decide on what to include in the FTP that allows more inflows.

Will the new policy be extended once again ?

Government officials clarify that work on the new FTP continues to progress at a slower than usual pace given that the government's primary focus has until now been to battle the Covid-19 pandemic and stabilize trade flows, contain inflation and ensure businesses have working capital.

To be sure, discussions on the FTP had been slow even before the pandemic. Back in 2017, the government had to postpone the mid-term review of the FTP because of issues with the then- new goods and services tax (GST) regime.
Subhayan Chakraborty has been regularly reporting on international trade, diplomacy and foreign policy, for the past 6 years. He has also extensively covered evolving industry and government issues. He was earlier with Business Standard newspaper.
first published: Sep 29, 2021 03:56 pm

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