Boosting India's Foreign Trade Policy (FTP): Navigating Challenges and Adopting Digital Transformation in 2023
On March 31, 2023, India's Foreign Trade Policy (FTP) was updated. It replaces the previous one, which was set to end on March 31, 2020, but was extended due to the emergence of the COVID-19 pandemic. Now, the new FTP is a positive step in the development of a more flexible and digitized trade policy framework in India. It was also anticipated that the country's export promotion schemes would face challenges due to the DSB's ruling that some of these schemes are not in line with the World Trade Organization's guidelines.
The new FTP provides various new features. These include facilitating trade, simplifying the process of obtaining export permits, and promoting cross-border e-commerce. It also encourages the use of the Indian rupee and facilitates merchanting.
Strategic Approach of India's New Foreign Trade Policy (FTP) 2023:
The objective of the new FTP is to help India's services and goods exports grow at a faster rate. It is aimed at achieving a combined export of US$2 trillion by 2030. This is against the backdrop of the country's recent good performance. It is formulated to improve the efficiency of the country's internal processes. However, it also requires the government to step up its administrative coordination and establish a robust merchanting infrastructure. The previous FTP was instrumental in the growth of India's services and goods exports during the 2015-20 period. It increased from $435 billion to $676 billion, and it is expected to grow even further to $760 billion in the next financial year. The flexibility of the new FTP allows the government to revise it according to the needs of the industry and the trade community. It provides a conducive environment for businesses and investors to develop their plans for investing in India. It also gives the government the necessary space to promote its policies.
In FY21/22 (April 2021-March 2022), India's total goods trade surpassed the benchmark of US$1 billion (S$1.3 billion). The trade appears to be on track to surpass the milestone in FY22/23 as well. During the first ten months of FY22/23 (April 2022-January 2023), total goods commerce was anticipated to be US$972 million (S$1292 million), with exports totaling US$372 million (S$494 million) and imports being US$602 million (S$800 million).
The country's merchandise trade has shown steady growth at a rate of 9.3 percent during the financial year 2022-23. The imports have also been increasing at a fast pace as the domestic demand has been growing (22 percent). This shows that the country's consumers and industry are still looking for goods and services from the country.
In contrast to India's trade in goods, which is mainly dominated by imports, the country's services trade has shown a higher growth rate. During the financial year 22/23, India's services exports were worth $267.8 million, while its imports were valued at $149.5 million. The services export growth rate during the period was 29.8 percent, while the imports grew by 25.9 percent.
Besides merchandise trade, the country's services trade has also been growing at a steady rate. During the first 10 months of the financial year, India's services trade had been valued at about US$417 million. This has already surpassed the figure of US$401 million for the previous year.
The new Foreign Trade Policy (FTP) of India indicates the country's confidence that its combined services and goods exports will reach a value of about $750 million in the financial year 2022/23. The combined value of India's goods and services exports during the first 10 months of the financial year 2022/23 are estimated at about US$640 million. While the optimism about the combined export value of goods and services reaching about $750 million are attributed to the belief that both the services and goods exports can maintain their current high growth rates. The vision of the new FTP indicates the government's confidence in the country's services and goods export growth, which is expected to continue at a robust pace. It also aims to achieve a combined export of about US$2 trillion by 2030.
The objective of the new FTP is to create a conducive ecosystem that will help India's services and goods exports grow at a faster pace. Some of the key elements of this ecosystem include facilitating trade facilitation, identifying new growth opportunities, and promoting the use of the Indian rupee. FTP 2023 strategy is claimed to be built on four pillars, including
(a) Shifting from incentives to remission
(b) Export promotion through partnership - Exporters, States, Districts, and Indian Missions
(c) Ease of doing business, transaction cost reduction, and digitalisation; and
(d) Assistance for growing sectors such as E-Commerce, establishing Districts as Export Hubs, and simplifying SCOMET policy.
In the new strategy, it seems to provide a boost to the export of services and goods by extending the benefits of the self-reinstatement scheme. It plans to reduce the application fees for the various advance authorization schemes. One of the key features of the new FTP is the establishment of an online approval system for export transactions. This will help reduce the processing time by allowing companies to get approval without the need for physical presence. Another important feature of the new system is the enhancement of the e-Certificate of Origin platform to allow exporters to self-certify their documents. The new FTP 2023 has also taken a significant step in expanding the use of the Indian rupee by enabling international trade settlement in the currency. It allows exporters to receive payments in the country in special Vostro accounts.
Prominent Features of FTP 2023:
· The new FTP 2023 establishes a framework that will allow India to become a merchant trade hub. It allows the country's merchant trade to be carried out without touching Indian ports. It is also subject to the Reserve Bank of India's (RBI) guidelines. This will allow various locations in the country, such as the GIFT city, to become important hubs for merchant trade.
· It will also help boost the manufacturing industry in the country. While, one of the new initiatives that will benefit the textile and apparel sectors is the PM MITRA scheme, which provides a comprehensive package of services and facilities to help companies establish and operate in the country.
· FTP 2023 will be able to provide a break from the current average export obligation for dairy products. This will allow the sector to maintain its profitability. It will give a boost to the export of green technology products by reducing the export obligation for various types of equipment and technologies. These include battery electric vehicles, water treatment equipment, and rainwater harvesting systems.
· The One-Time Amnesty Scheme is a significant relief to exporters who are not able to fulfill their obligations under the various advance authorizations and export contracts. It is expected that the authorities will allow these companies to regularize the status of their export obligations. Moreover, the interest on the special additional customs duty and additional customs duty will not be payable. This scheme will be available from September 30, 2023, for a limited period. Details of the program will be announced by the Directorate General of Foreign Trade (DGFT). It is expected that this announcement will help reduce the number of pending litigation cases related to export contracts and advance authorizations. A detailed evaluation of the procedures and policies related to the amnesty scheme should also be carried out to ensure that the benefits are well-received by the businesses.
Trade facilitation and digitalisation:
Trade facilitation is a primary purpose of the FTP, with particular objectives. The latter involves providing online approvals within a day for a variety of exporter permissions; lowering application fees for medium, small, and micro-enterprise (MSME) exporters for the advance authorisation (AA) and promotion of exports of capital goods (EPCG) schemes; revamping e-Certificate of Origin (COO); and paperless filing of export obligation discharge applications.
The theme behind the stated trade facilitation aims has been to become digital. The advantages of transitioning to digital systems for speedier on-border clearance of products are undeniable. India has signed the international Trade Facilitation Agreement of the World Trade Organization. It has spent the last several years focused on enhancing customs clearances and logistics efficiency in order to reduce border red tape and associated expenses for exporters. The primary facilitator in this respect has been the digitization of procedures, notably for documentation and invoicing.
FTP 2023 is designed to make digitalisation even more prevalent. By providing online approvals for various permissions, including the issuance of Advance Authorisation (AA) and Export Promotion Capital Goods (EPCG), as well as extending export obligations, it can significantly cut down on time for getting approvals. The various cuts in the export obligation period can be carried out in a range of three to seven days. These can help boost the efficiency of the process and enable exporters to get more time to meet their obligations. Another benefit of implementing a COO is that it allows them to secure better tariff treatment from other countries.
In order to boost overall exports, India has been identifying the potential export opportunities from its districts. The country's goods exports have shown a sharp increase during the past two years. Moreover FTP 2023 is also designed to make districts more export-friendly. This can be done through the establishment of export hubs and preparation of action plans. The Directorate General of Foreign Trade (DGFT) will work with districts to achieve this.
E-commerce, merchanting, and increased use of the Indian rupee
One of the new features of the FTP is merchanting. It allows Indian intermediaries to handle the shipment of goods from one country to another without leaving Indian ports. The regulations of the Reserve Bank of India (RBI) apply to this type of trade.
The stated goal of fostering merchanting is to promote India as an intermediary commerce center. The strategy will assist large dealers, sometimes known as merchant exporters, as opposed to manufacturing exporters who create locally and export. They would gain most from dealing in commodities that are barred as Indian exports.[9] If significant global traders put up trading facilities for merchanting, locations such as the Gujarat International Finance Tec-City stand to gain from the news.
The promotion of e-commerce through the FTP signals the government's commitment to India's export growth. The outbreak of COVID-19 has accelerated the country's digital trade with other nations. Several micro, small and medium-sized enterprises (MSMEs) have become major producers of products for online retailers such as Amazon, Flipkart, Nykaa, and Snapdeal. To help boost the export potential of small and medium-sized enterprises (SMEs), the government has launched various initiatives such as establishing e-commerce export clusters and providing high-quality warehousing facilities.
The provision for the payment and settlement of invoices and imports in Indian rupees is also added to FTP 2023. Through a special rupee vostro account maintained by importers and exporters, they can carry out these transactions. According to the guidelines issued by the RBI, these transactions will be handled through Indian banks and their partners in other countries. One of the main advantages of settling trade in Indian rupees is that it eliminates the need for foreign exchange conversion. This will benefit both Indian and Malaysian traders. As a result, they will no longer have to convert their local currencies into US dollars when they trade in Indian rupees.
The special vostro account for India-Malaysia transactions will be maintained by a partnership between the Union Bank and its partner bank, India International Bank. Besides being able to avoid the costs of converting US dollars, the increasing number of invoices and imports being carried out in Indian rupees will help push the country's currency into becoming a more global standard for trade.
Conclusion:
Trade facilitation is an essential component of any country's attempts to increase efficiency and leverage its numerous free trade agreements (FTAs). This is demonstrated by India's continuous participation in the Pacific Economic Cooperation (PEC) framework. Various measures are being implemented by the government to increase the efficiency of its trade processes. Border digitalization should be followed by similar measures to improve trade facilitation. This will reduce the time it takes exporters to complete their deals. Despite the fact that the Foreign Trade Policy (FTP) has resulted in decreased border clearance costs, the complexity of the processes and the time required to complete them remain considerable. This is due to the fact that the multiple stages needed in establishing and administering a cross-border firm has yet to be simplified.
Furthermore, the construction of export hubs is one of the most essential things that India's authorities may consider when it comes to encouraging exports. This will assist local producers in understanding the benefits of exporting their products. However, this can only be accomplished by raising knowledge about the numerous benefits of exporting. Despite the significance of trade facilitation, there is still a dearth of understanding about the many operations that the DGFT may do to boost the country's export competitiveness.
The proposed Foreign Trade Policy (FTP) modifications would empower the DGFT to collaborate closely with state and local governments to create awareness about the capabilities required to sell products in global markets. Global traders will no longer have to rely on India's local suppliers for their commodities as a result of the PEC deal. This will enable them to carry out their duties more effectively. The provision of the required facilities for individual merchants to use the policy will be critical to the success of merchanting. This will allow them to carry items that are not permitted for export due to various limitations. One of the FTP's new aspects is the provision of merchanting, which will assist India in entering global supply networks. This will help the government to transfer commodities more effectively from one location to another. Despite the fact that this is an intermediate business, no Indian producers are involved. South Asian nations such as Bangladesh and Sri Lanka are likely to participate in this process as possible partners.
Despite the Reserve Bank of India's (RBI) suggestion that greater commerce in Indian rupees (INR) has failed to yield big quantities, more nations are now examining it as a trade transaction alternative. In the near future, the amount of trading in INR is expected to be limited to those partners that are facing a foreign exchange shortage.
The aim of generating a combined export of US$2 trillion by 2030 is a lofty one, but it is heartening that the government recognizes the importance of digital commerce. This is also demonstrated by the fact that implementing on-border trade facilitation is a critical component of reaching this goal. The decrease of the time it takes to deliver items is one of the most essential elements that e-commerce may consider when it comes to expanding its operations.
Albeit, the multiple steps that the government has implemented to increase the efficiency of India's trade processes, the country's services exports have made astonishing development. As stated in the last study, development in these industries was rapid. Over the last year, services export has grown at a rate of more than 70%, surpassing goods export to become the country's second largest trade contributor. Unfortunately, the government has been unable to offer significant assistance to the services export industry, which is critical to the country's aim of generating a combined export of almost US$2 trillion by 2030.
Pic Courtsey-Surya Prakash at unsplash.com
(The views expressed are those of the author and do not represent views of CESCUBE.)
