Trade Sector Updates – Falling Exports, TIES, MEIS, Foreign Trade Policy, etc.

Trade Sector Updates – Falling Exports, TIES, MEIS, Foreign Trade Policy, etc.

Impacts of the Oil Price Warop-ed of the day

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Pricing mechanism of fuels in India.

Mains level : Paper 3- Implications of oil-price war for India.


Context

A “pass-through effect” of low crude prices is improbable given the constrained fiscal space.

The backdrop to the oil price war

  • Against the backdrop of the covid-19 pandemic and the economic slowdown, Saudi Arabia-led oil cartel OPEC (Organization of the Petroleum Exporting Countries) wanted to curtail oil production by 1.5 million barrels per day.
  • However, as Russia has not agreed to this proposal, Saudi Arabia has declared a price war by reducing the Brent crude oil price from $65 per barrel in end-December 2019 to $33 now.
  • The race to the bottom to this extent by Brent is the first time ever since the 1991 Gulf crisis.

Would it impact India by providing a fiscal dividend?

  • A $20 reduction in Brent oil prices can reduce India’s current account deficit.
  • However, the instability in oil prices is a short-run phenomenon, and India cannot anticipate a prolonged fiscal dividend.
  • Quite contrary to the expectations about a “pass-through effect” of low crude oil prices on consumers, the Government of India (GoI) raised the excise duty on petrol and diesel by `3 per litre.
  • The special excise duty on petrol was hiked by 2 to 8 per litre in the case of petrol and to 4 in the case of diesel.

Fuel price determination in India

  • There has been no “pass-through effect” primarily because the price determination of petrol and diesel in India is not linked to crude oil prices in the international market.
  • Price determination is done through dynamic pricing, termed as “trade parity pricing,” based on the international prices of petrol and diesel (finished products) prevailing in the international markets, and not on crude oil per se.
  • An obvious question here is whether the crude oil prices and the petrol-diesel prices move in tandem in the international market. Not always.
  • Globally, the market mechanism of ad hoc configurations of demand and supply of crude oil is different from the demand-supply dynamics of petrol and diesel, and, in turn, their pricing behaviour will also be distinctly different.
  • The goi fixes the price of petrol and diesel based on dynamic pricing and trade parity pricing by converting the price from dollars to Indian rupees.

Factors affecting fuel prices in India

  • The rupee-dollar exchange rate mechanism also affects the pricing of petrol and diesel.
  • This can offset the benefits India can reap from comparatively lower prices of crude oil in the international market, quoted in dollars.
  • The other components of this pricing formula are: 1.The cost of inland freight marketing costs. 2. Taxes levied by the centre and the state governments. 3. The margins (charged by the oil companies) and (the dealer) commissions.
  • It is, therefore, obvious that low international prices per se do not translate into lower prices for petrol and diesel in India as long as the centre and states levy exorbitant taxes on these products.
  • The interstate variation in the prices of petrol and diesel is also significantly explained by the differentials in taxes imposed.
  • Yet another factor to be borne in our minds is that the effect of international prices on the in-house pricing of petrol and diesel in India is not instantaneous or spontaneous.
  • There is a time lag involved in the pricing process.
  • Even though the goi uses the daily pricing mechanism in the dynamic pricing formula of petrol and diesel, the international prices component enters into the pricing equation as an international “benchmark price” of petrol and diesel.
  • Today’s price in India reflects the average international prices of petrol and diesel of the previous fortnight.
  • However, the fuel prices will not come down in a fortnight’s time.
  • This is because, in the price equation, the international price component is just one among many components, whereas the tax component constitutes a dominant part in the equation.

The Covid-19 factor

  • The covid-19 outbreak has started striking the financial markets and the real sector, and especially investment in the energy sector.
  • So, the lowering of the oil price by Brent cannot help the global economy from recession.
  • Overall, the oil price war can negatively affect the investment decisions in the energy sector and can be a drag on global growth.
  • Due to the covid-19 outbreak, there could be reduced oil-drilling activities in the energy sector, and there will be some cutbacks in demand and, in turn, in the capex energy infrastructure.
  • Analysts have revealed that every $10 fall in oil prices transfers around 0.3% of the global gross domestic product from oil-producing nations to oil-consuming nations.
  • The interest rate strategists are also concerned as the Russian 10-year bond yields reached a record low of 2.56%, and Saudi Arabian government bonds maturing in April 2030 are currently at 2.38%.

Microeconomic policy to tackle oil price war?

  • The US Federal Reserve has lowered the federal funds’ interest rate by 50 basis points (one-half of a percentage point) to 1.25%.
  • The Bank of Canada also reduced the bank rate by 50 basis points to the US level. The stock market indexes fell to the levels of  2008.
  • The 1.25% federal funds rate now is below the 2.5% US inflation rate. However, monetary policy has failed to trigger the economy.
  • As mentioned by the European Central Bank, “targeting” rather than generalised public policy needs to be done.

Conclusion

  • The Reserve Bank of India policy tools may be ineffective now to tackle the slowdown, especially against the backdrop of the worsening of the economy from the effects of covid-19. The re-dominance of fiscal policy by the North Block is what is keenly awaited, for an economic turnaround.
Trade Sector Updates – Falling Exports, TIES, MEIS, Foreign Trade Policy, etc.

Welcome Policy On APIs, Devicesop-ed of the day

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Not much.

Mains level : Paper 3- Incentive package to promote the API production in India.


Context

It is most welcome that the Centre has announced a `14,000-crore incentive package to boost the manufacture of drugs, especially active pharmaceutical ingredients (API).

What should be the immediate policy focus?

  • Focus on protective gear: The immediate policy focus must be to swiftly overcome shortages of critical protective gear like gowns and face masks, diverting production lines if required.
  • We also need to anticipate and step-up production of vital devices like ventilators.
  •  Provisions in the package: What is proposed now are industrial parks for bulk drugs and APIs, together with a policy for multi-year fiscal benefits. And ditto for parks for the manufacture of medical devices and attendant fiscal incentives.
  • The state governments need to identify 1,000 acres for the parks that are well-integrated with knowledge centres and nationally accredited labs.

What additions need to be made in the package?

  • Public-private partnership: In tandem, the pharmaceuticals package issued on Saturday needs to be followed through, with a forward-looking public-private partnership, to avoid import-dependency in this critical sector.
  • What is envisaged is a set of schemes to reap economies of scale and ready availability of inputs in the production of APIs and medical devices via the cluster approach.

How India became uncompetitive in API?

  • Policy rigidities and price controls: APIs are, of course, bulk drugs that provide medicines with their therapeutic value, and it is unfortunate that since circa 1995, India has become steadily uncompetitive in API production, thanks to a panoply of policy rigidities such as onerous price controls.
  • Export competition from China: Opaque export competition from China has been game-changing indeed: APIs for most medicines are mostly imported.
  • This needs to change, fast. We do need to competitively and efficiently boost output of pharmaceuticals right across the value chain.

Conclusion

The government must understand that manufacture by itself is not enough. The policy must ensure competition and quality, keep prices down.

Trade Sector Updates – Falling Exports, TIES, MEIS, Foreign Trade Policy, etc.

Corona, crude and creditop-ed snap

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Not much.

Mains level : Paper 3- How should India use the windfall from the fall in oil.


Context

Amid the gathering global crisis, its time India minds its own house.

Panic and dislocation in Global markets

  • Panic at the level of the 2008 crisis: Global markets haven’t witnessed such panic and dislocation since the global financial crisis of 2008.
    • Global equity markets have collapsed, the US’s 10-year bond is at its lowest level ever, and crude prices underwent their largest single-day fall in 30 years.
  • Interaction of three global shocks: The market mayhem is the upshot of three global shocks interacting with each other.

What are the three global shocks?

  • Negative demand shock due to Coronavirus: A negative demand shock around the world. As the coronavirus proliferates globally, households and businesses are understandably becoming risk-averse, and the consequent “social distancing” is expected to exert significant demand destruction around the world.
  • Negative supply shock emanating from China: The widespread industrial closures in China on the back of the COVID-19 outbreak will impact imports and supply chains in other countries, and thereby constitute an adverse supply shock for the rest of the world.
    • The magnitude of the shock: The 20-point drop in manufacturing output in the February PMI and the 17 per cent contraction in Chinese exports across January and February, suggests that the shock was large and immediate.
    • Supply shock likely to fade: That said, with the virus, gradually being contained in China, this supply shock is likely to fade even as the demand shock in the rest of the world widens and deepens.
  • Positive oil supply shock: The failure of oil producers to agree on production cuts has led to a price war with production increases on the anvil.
    • Cumulatively, crude pieces are down almost 50 per cent — about $30/barrel — since January.
    • A positive supply shock, which even adjusting for the concentrated stress in the oil sector, is growth-additive for the world and particularly for India.
  • India specific shock: There is a fourth India-specific force at play. The resolution and reconstruction of YES Bank was inevitable, but, at least temporarily, it is likely to result in a “flight to quality” in India’s financial sector, with resources moving from the financial periphery to the core.
    • Banks and NBFC may face difficulty in mobilising resources: To the extent that the periphery — smaller private banks and non-bank financial companies — will find it harder to mobilise resources, financial sector risk aversion could rise again.

Implications for India’s macroeconomic stability

  • Significant negative impact due to export: India is a much more open economy than is widely believed with exports constituting almost 20 per cent of GDP. Therefore, the impact of the demand destruction around the world will not be trivial.
    • 40 bps decrease in the growth: If global growth is marked down by 100 basis points in 2020, which increasingly appears to be the case, we estimate that this would shave off about 40 bps from India’s growth through the export channel alone.
    • The cumulative drag to growth from exports and tourism would be a meaningful 60-70 bps.
  • Positive impact due to oil price shock: The near $30/barrel decline since January constitutes a large positive terms of trade shock for India — equivalent to about 1.3 per cent of GDP even accounting for reduced remittances from the Middle East.
    • Meaningful mitigant: If oil prices remain at this level for long, it would constitute a meaningful mitigant to India’s macro headwinds, boosting activity, dampening prices, creating fiscal space and reducing external imbalances.
  • Offsetting the negative impact of trade and tourism: Every $10 reduction in crude prices, boosts growths by about 20-25 bps.
    • Therefore, the $30 decline in crude, if it holds, should boost growth by about 60-70 bps, thereby largely offsetting the negative hit to growth from external trade and tourism.
  • Space for monetary easing: Furthermore, crude at $35-40, along with the global demand destruction is expected to generate large disinflationary forces, opening up space for monetary easing.
  • CAD would disappear: Finally, India’s current account deficit would virtually disappear, for the first time since 2003-04.

The growth offset conditioned on coronavirus spread

  • The assumption in the offset: The above-mentioned growth offset, however, assumes that the coronavirus does not spread within India.
    • If India witnessed a rapid domestic proliferation, heightened risk aversion by economic agents could meaningfully hurt domestic demand.
  • A thought experiment on the impact on the economy: Discretionary services constitute about 35 per cent of GDP and have been growing at 8 per cent a year.
    • If that growth rate were to halve, that alone would deduct 140 bps from growth, and swamp any growth tailwinds from lower oil prices.
    • Furthermore, a “sudden stop” of demand to certain sectors may necessitate fiscal/liquidity support to ensure these don’t magnify into more disruptive credit events for the financial sector.
  • The best antidote to prolonged growth hit: The best antidote would be to aggressively contain the virus domestically, as authorities appear to be doing.
    • The experience from other countries suggests aggressive containment early in the process (isolation, quarantines, contract tracings, cancelled gatherings) reduces the growth rate of the virus from exponential to linear.
  • Macroeconomic outlook: The key to India’s macro outlook is whether the crude price decline can sustain and whether India can avoid a sharp domestic proliferation of COVID-19.

Way forward

  • Pass the oil windfall to the public: Given current fiscal pressures, it’s tempting to advocate that the public sector appropriate much of the windfall. But with consumption under such pressure, there’s a strong case to pass this on to households.
    • A sharp cut in domestic fuel prices will boost household purchasing power and aggregate demand thereby creating contemporaneous counter-cyclical pressures.
  • Stick to the asset sale plan: While the turbulence in equity markets could understandably delay the government’s asset sale programme, it should not be allowed to derail it, given the criticality of asset sales to this year’s fiscal math.
    • Absorbing all the oil windfall through higher taxes as a substitute for asset sales would be a suboptimal mix.
  • Continue with the reforms: The salutary effects of falling crude prices — which would boost India’s macros relative to other emerging markets — should not mask the imperative to continue with reforms, particularly recognising and resolving any further financial sector stress proactively.

Conclusion

Global markets are witnessing their most acute volatility since 2008. All we can do is mind our own house amidst the gathering global storm.

 

Trade Sector Updates – Falling Exports, TIES, MEIS, Foreign Trade Policy, etc.

Medicine and frontiersop-ed snap

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Not much.

Mains level : Paper 3- Dominance of China in international trade and its implications for national security.


Context

Although the slowdown in Chinese manufacturing has disrupted the supply chains of many goods, the impact on the drug industry has helped highlight the national security implications of China’s dominance over the pharmaceutical industry.

Implications of the coronavirus disruption in China

  • Global dependence on China in focus: As the coronavirus spreads far and wide, the global dependence on China for drugs and medical supplies has come into sharp focus.
  • The argument for domestic production of medicine: In both the US and Europe, the shortage of essential drugs to treat the victims of the virus is strengthening the arguments for restoring some domestic production of pharmaceuticals.
  • National security implications: Although the slowdown in Chinese manufacturing has disrupted the supply chains of many goods, the impact on the drug industry has helped highlight the national security implications of China’s dominance over the pharmaceutical industry.

China’s dominance in pharmaceutical production

  • Two factors that contributed to China rise:
    • Active state support from Beijing and-
    • Western drug companies eager to shift production to cheaper destinations has facilitated China’s emergence as the most important global source for pharmaceutical products and medical devices.
  • Global dependence on China for drugs: America and Europe are said to import nearly 80 per cent of their antibiotics from China.
    • India’s dependence for API: India is also an important supplier of generic drugs to the Western world, but it is itself dependent on massive imports of active pharmaceutical ingredients (APIs) from China.
    • Impact on India: The reduction in supplies from China after the virus breakout has been accentuated by the recent decision of Government of India to limit the export of common drugs like paracetamol.
  • How the US is responding to dominance? Well before the current crisis, there had been warnings in the US about the national security risks from the massive reliance on external sources for basic medicines.
    • Weaponising the dominance: Late last year, the US-China Security Review Commission, established by the US Congress, pointed to the prospects of China weaponising its dominance over pharmaceutical production and its massive consequences for healthcare in the US.
    • Government support in China: The report also pointed out that the Chinese government promotes and protects the nation’s pharmaceutical companies to the disadvantage of foreign competitors and that leaves other nations little leverage with China.
  • Need to limit the exposure to China in other sectors: While the current international focus is on the supply chains in the pharmaceutical sector, there has been growing recognition of the need to limit the expansive exposure to China in many different sectors.

National security argument of the dominance

  • National security dimension of trade war: Trump’s case for bringing manufacturing back to America — by challenging the traditional framework of international trade — was not just economic.
    • It also had a strong national security argument — that the US cannot rely on China for servicing its national security needs in a range of sectors from digital components and drugs.
  • What supporters of the globalisation said? Supporters of economic globalisation had countered these arguments by saying that tight interdependence will reduce the incentives for taking unilateral advantage by nations.
  • China using trade dominance into leverage: The critics have pointed to the fact that China was turning its role as the “world’s factory” into powerful leverage.
    • Why did the West start regarding China as a challenge? The Chinese decision to stop rare earth exports to Japan during 2010 in relation to a minor political dispute had led many to put up red flags.
    • Since then, China’s greater political assertiveness and challenge to Western dominance in critical areas have strengthened the case in the West to regard China as a challenge if not an outright threat.
  • De-coupling gaining traction: As the bipartisan political consensus in the US and Europe in favour of a strong economic partnership with China began to break down in recent years, the case for de-coupling has gained much traction.

How using economic leverage for strategic gains undergone changes?

  • Use of economic leverage and stockpiling: The history of statecraft suggests that it was quite common for states to use economic leverage for strategic gains.
    • Use of strategy during the cold war: Through the Cold War, both America and Russia sought to corner strategic resources around the world. They also adopted policies for stockpiling special materials for use during conflicts. Sustaining a strategic petroleum reserve, for example, was a major priority for the US during the Cold War.
  • Changes due to globalisation: The importance of hoarding resources at home and denying it to one’s adversaries seemed to diminish amidst great power harmony and economic globalisation that flourished after the Soviet Union collapsed.
    • Recent challenges due to weakening of globalisation: The erosion of that moment in the last few years has set up new tensions between the competing imperatives on Western governments.
  • Capital vs. Security issue: While the logic of security compels the state to limit strategic economic exposure, the logic of capital demands policies that reduce costs of production and increase the margins of profit.
    • This tension has been at the heart of the recent Western debates on the China question.

Conclusion

While the world finds ways to deal with the Chinese dominance in the other sector, meanwhile, in the health sector, large continental entities like the US, Europe and India are likely to insure against over-reliance on a single source for life-saving drugs. They are likely to find ways to shorten the supply chains, expand domestic production and explore coordination among like-minded nations.

Trade Sector Updates – Falling Exports, TIES, MEIS, Foreign Trade Policy, etc.

How countries play the tariff gameop-ed of the day

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Not much.

Mains level : Paper 3- How could higher import tariffs affect the Indian economy?


 Context

It is important to have a stable tariff policy which would help to link effectively to global value chains.

Why countries levy tariff?

  • The tariff is a tax levied on an imported good at the border.
  • Countries use tariffs to-
    • Provide easy market access or restrict them to protect domestic industry.
    • It also serves the purpose of revenue collection and-
    • To achieve some strategic objectives by giving/denying tariff concessions to countries.

Harmonised System in international trade

  • What is it? Goods are classified at 2, 4, 6, 8 digits and some countries have even up to 10 digits, depending upon the level of trade potential of a country.
  • WCO’s system of codes: The classification of these codes is streamlined under an international coding system called ‘Harmonized System’ (HS) under World Customs Organization (WCO) to which 138 countries are contracting parties and about 200 customs authorities are signatories.
  • India’s national tariff lines are about 11,000 at HS 8-digit.

Historic background of the tariffs

  • Colonial-era: During the colonial era tariffs were heavily used to protect the domestic industry, enjoy unbridled access to the colonized markets and raise tariffs against competitors.
  • Adam Smith’s advocacy of free trade: Adam Smith in 18th Century challenged this idea of regimented trade with his advocacy of free trade that was convincingly brought out in his seminal work ‘Wealth of Nations’.
  • Theory of comparative advantage: Further, in the 19th Century, David Ricardo, building on this concept, propagated the ‘theory of comparative advantage’.
    • The theory proposes that nations should remain focused on their specific areas of competence and allowed to trade freely with other countries.
    • This theory is against import substitution and considers raising tariffs as a drag on economic growth.
  • What proponents of high tariff said? Proponents of high tariffs assert that-
    • Developed countries dominated global markets for decades with high tariffs, developing countries should continue to enjoy differential tariff treatment until they catch up with the rest.

How countries calibrate tariffs?

  • Each country calibrates its tariffs taking into account its-
    • Domestic production.
    • Demand and
    • Sensitivities.
  • Typically, tariff structures of a manufacturing country reveal a pattern:
    • Low tariffs on raw materials and intermediate goods in the range of 0-5%.
    • Slightly higher tariffs for finished goods in the range of 7-10%.
    • Higher tariffs for agriculture products at above 15%, sometimes up to bound rates as allowed under WTO.
    • As agriculture lines are politically sensitive, most countries zealously guard them with high tariffs.

Export-import linkage and effects of high tariffs

  • How tariffs could harm export competitiveness: Availability of cheaper raw materials and intermediate products support making of competitively priced finished goods for export markets.
    • The challenge for an entrepreneur is to find these cheaper inputs.
    • If these inputs are not available domestically at competitive rates, they look to source them from outside.
    • But as high tariffs act as barriers to sourcing cheaper inputs, they undermine export competitiveness of a product.
  • Implications for MSMEs
    • For MSMEs (micro, small and medium enterprises), this dependency linkage is even more critical, without which they might close down their operations under threat of persistent losses or low returns.
    • Impact on jobs and economy: This would have consequential impact on jobs, income and consumer choices in an economy.
  • Inefficiency and corruption at entry points: High tariffs could breed inefficiency and corruption at the entry points as it leaves much scope for discretion at the hands of officials, circumvention through under/over-invoicing and violation of rules of origin.
  • Impairing demand: Overtime, high tariffs run the risks of impairing demand and paralyzing domestic manufacturing.
  • Maintaining judicious balance: Leveraging tariffs for benchmarking domestic prices is not an uncommon practice in any country.
    • But maintaining a judicious balance between the interests of primary producers and user industries is imperative, given that there exists an intimate link between imports and exports.

India and Global Value Chain (GVC)

  • 80% trade through More than 80% of the global trade runs through Global Value Chains (GVCs) which have evolved extensively in various regions of the world.
    • Low tariffs help GVCs to thrive, essentially for the purpose of sourcing and accessing foreign markets.
  • Why stable tariff policy is important for India?
    • For India to emerge as a global hub for “networked products” and make every district an ‘export hub’ for a specific item, as envisaged in this year’s Budget, it is important to have a stable and predictable tariff policy which would help to link effectively to GVCs.
    • For investors: From an investor’s point of view a stable tariff policy is a huge motivation.

Free-trade agreements and hope of getting market access

  • Market access: The assumption that tariff concessions under bilateral free trade agreements (FTAs) would help get market access is misplaced.
    • Why the assumption is misplaced? In reality, this may not happen as same concessions can be offered by a country to other trading partners in a trade arrangement or throw open to all countries on an MFN (most favoured nation) basis.
    • Inverted duties situation: Gradual tariff liberalization is a natural progression and failing to do so could result in a situation of inverted duties where finished products end up being cheaper than raw materials and intermediate goods
    • Thus, calling for tariff correction in course of time.

Revenue Generation through tariffs

  • Why it is not a good idea? The domestic consumers ultimately end up absorbing import duties as they get passed onto products they consume.
  • Taxing own people: This is akin to taxing one’s own people in an indirect way by making them pay more for a product than in other markets.
  • Revenue generation from enhanced activities: For these reasons, the idea of revenue collection from import duties is losing steam, and instead, revenue generation from enhanced economic activity is gaining wider acceptance as a dynamic process.

Conclusion

Increasing tariffs on the import can end up hurting the economy than benefitting it in the long run, so the government must reconsider the policy of tariff increase.

 

Trade Sector Updates – Falling Exports, TIES, MEIS, Foreign Trade Policy, etc.

India’s rerun of its protectionist folly mars the liberalization eraop-ed of the day

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Not much

Mains level : Paper 3- India's changing stance towards liberalisation.


Context

The latest budget’s import tariff hikes signal that a three-decade commitment to trade openness has been all but abandoned.

Detrimental effects of protectionism

  • In brief, both economic theory and a vast weight of evidence point to the detrimental effects of protectionism. These are-
    • Fostering inefficiency: Far from jump-starting the domestic industry, tariffs, quotas and other trade restrictions foster inefficiency among domestic firms that survive only because of
    • And do not become more productive under it, as the government’s threat to withdraw the protection is never credible.
    • The consumer is the ultimate loser: Meanwhile, upstream industries suffer higher than necessary input costs.
    • Consumers of final goods end up footing the bill.
    • Governments earn some tariff revenue, but never enough to warrant the distortion costs to the economy.
  • Tariff inversion: The tariff “spikes” cause greater distortion than a revenue-equivalent uniform tariff, and may lead to the problem of tariff “inversion”.
    • What is tariff inversion? A situation in which intermediate goods are taxed more heavily than final goods, thus paradoxically further disadvantaging, rather than aiding, domestic producers of final goods.
  • Rent-seeking by domestic industries: Tariffs worsens rent-seeking by domestic industries-
    • Protectionism increases lobbying: A force which would be muted in a world where tariffs are locked at a uniform level by statute, and, as a result, industries individually have less of an incentive to lobby for tariffs that are to be applied economy-wide rather than only for their own benefit.
    • Economists Arvind Panagariya and Dani Rodrik had formalized this intuition many years ago, and it matches both common sense and observation.
    • The apparently random list of sectors that would benefit from tariff increases in the recent budget-strongly suggests the possibility of rent-seeking behaviour.

Conclusion

Ample experience of import substitution in economies across the emerging world and over many decades, including in India until 1991, attest to the fact that protectionism, especially abetted by rent-seeking behaviour, is like a rabbit-hole: once inside, one keeps going deeper and deeper, and egress is difficult at best.

Trade Sector Updates – Falling Exports, TIES, MEIS, Foreign Trade Policy, etc.

The high cost of raising trade wallsop-ed of the day

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Various Free Trade Agreements.

Mains level : Paper 3- Should India prefer bilateral trade agreements over multilateral agreements and what are the issues involved in this approach.


Context

India’s international trade posture appeared to turn protectionist in the past week, with two indicators the government sent out.

What were the two indicators?

  • The first-Signal sent out in the Budget: The first indicator, which played out live on television was contained in the Union Budget.
    • Laying out the Budget for the year, the finance minister made several references to the problems with free trade and preferential trade agreements (FTAs and PTAs).
    • Raise in tariffs, changes in the act: The Budget raised tariffs on the import of more than 50 items and changed the Customs Act provisions substantially to penalise imports suspected to originate from third countries.
  • The second- India declined negotiations: The other indicator was that India declined to attend a meeting of trade negotiators in Bali that was discussing the next step in the Association of Southeast Asian Nations (ASEAN)-led Regional Comprehensive Economic Partnership (RCEP) trade agreement.

Issues with the Free Trade Agreement

  • What the FM told Parliament: It has been observed that imports under Free Trade Agreements (FTAs) are on the rise.
    • Undue claims of FTA benefits have posed a threat to the domestic industry.
    • Such imports require stringent checks, adding that the government will ensure that all FTAs are aligned to the conscious direction of our policy.
  • What could be the consequences of the Govt. policy?
    • Discouragement to imports: While the Govt. motive may be to protect Indian markets from dumping-primarily by Chinese goods-
    • The consequence of the changes will be to put Indian importers on notice and discourage imports in general.
    • Even as the government reserves the right to modify or cancel preferential tariffs and ban the import or export of any goods that it deems fit.

The rise in the trade deficit and decision to walk out of FTA

  • The trade deficit with FTA partners: The government’s problem with FTAs was a key theme in its decision to walk out of the RCEP negotiations (of 16 countries) the rise in trade deficits with FTA partners.
  • Review of all agreements: The government says it will now review all those agreements and wants to “correct asymmetry” in negotiations with new partners. The agreement that would be reviewed includes-
    • TAs signed with the 10-nation ASEAN grouping (FTA).
    • Japan (Comprehensive Economic Partnership Agreement, or CEPA).
    • And South Korea (CEPA).

Why it would not be easy to negotiate bilateral treaties

  • The bilateral agreement would not be a priority for other countries: If India makes a complete break with RCEP, negotiating the bilateral trade agreements (TAs) will not be a priority for the other countries until RCEP is done.
    • The process of legal scrubbing is likely to take most of the year, and any talks with India will probably only follow that.
    • Difficulty in getting better deal: It is also hard to see any of them being able to offer India a better deal bilaterally once they are bound into the multilateral RCEP agreement.

India’s pending talks on bilateral treaties

  • Negotiations of CECA with Australia: The case of the Comprehensive Economic Cooperation Agreement (CECA) being negotiated with Australia, will be a difficult task, not the least due to its history.
    • India and Australia began CECA talks in 2011.
    • However, talks hit a dead-end in September 2015. With the focus on RCEP, no progress has been made since then.
  • Negotiations of FTA with the UK: A similar scenario awaits the announcement of the India-United Kingdom FTA talks.
    • It is unlikely that the U.K. will actually be able to talk until next year after terms for the K.’s full withdrawal from the European Union (EU) are completed.
  • Negotiation of BTIA with the EU: Bilateral Trade and Investment Agreement (BTIA) negotiation are also unlikely to make headway until the UK’s complete withdrawal from the EU.
    • Both sides will have to decide how to revive from where they left off in 2013.
    • Why the negotiations are pending? Making the negotiations harder is the government’s decision to scrap all bilateral investment treaties with 57 countries including EU nations, and bringing in a new Bilateral Investment treaty (BIT) model in 2015.
    • Only Kyrgyzstan, Belarus and most recently Brazil have agreed to sign a new investment treaty based on that model.
  • The US-India trade issue: Finally, there is the much-anticipated resolution of U.S.-India trade issues ahead of the visit of U.S. President.
    • The talks in that visit could also include talks on an FTA.
    • At present, there have only been some non-paper talks on the issue.
    • And given that the U.S. has expressed deep misgivings about India’s BIT model, these talks will also take several years to come to fruition.

Why India should rethink its stand on FTA

  • First-Prospect of no dispute settlement mechanism: The decline of multilateralism, accelerated by the retrenchment of the U.S. and China’s intransigence have all meant the World Trade Organization (WTO) has lost steam as a world arbiter.
    • This leaves states that are not part of arrangements without a safety net on dispute settlement mechanisms.
  • The second-trade deficit of other countries with India: The government has invoked the massive $57-billion trade deficit with China to explain protectionist measures, but it forgets its own trade surpluses with smaller economies.
    • Particularly in the neighbourhood, where Indian exports form more than 80% of total trade with Nepal, Bangladesh, Bhutan and Sri Lanka, respectively.
  • Third- The rise of regional agreements: It is clear that most of the world is now divided into regional FTAs, for example-
    • The North American Free Trade Agreement (NAFTA) for North America.
    • The Southern Common Market (MERCOSUR for its Spanish initials) for South America.
    • The EU, the Eurasian Economic Union (Russia and neighbours).
    • The African Continental Free Trade Agreement (AfCFTA).
    • The Gulf Cooperation Council (GCC) FTA in West Asia.
    • And now the biggest of them all, RCEP, which minus India, represents a third of the world’s population and just under a third of its GDP.
  • Fourth- Finally, the trend across the world does not favour trade in services the way it does in goods.
    • India’s strength in the services sector and its demand for more mobility for Indian employees, is thus becoming another sticky point in FTA negotiations.

Conclusion

India’s demographic might is certainly attractive for international investors, but only if that vast market has purchasing power and is not riven by social unrest and instability. India’s demographic might is certainly attractive for international investors, but only if that vast market has purchasing power and is not riven by social unrest and instability.

 

Trade Sector Updates – Falling Exports, TIES, MEIS, Foreign Trade Policy, etc.

[op-ed snap] A road map for robust trade tiesop-ed snap

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Not much.

Mains level : Paper 3- Bilateral trade opportunity with Australia and area of cooperation in Technology and innovation


Context

The challenge for India and Australia is to transform people-to-people ties into a trade relationship.

People-to-people the two countries

  • Soft power: Soft power rather than hard economics has traditionally been the driving force behind India-Australia relations.
    • Cricket is a dominant theme that connects the two countries.
    • The Indian diaspora in Australia is a vibrant community that plays a robust role in connecting their country of adoption with their country of origin.

Trade relationship scenario

  • $31 bn bilateral trade: The trade between the two countries has been at a modest $31 billion, largely composed of resources like coal and other minerals.
  • No progress on FTA: Negotiations on a Free Trade Agreement, which began in 2011, have not moved forward significantly.
  • No progress on coal mining projects in Australia: The problems faced by the Adani Group to begin work on a coal mining project in Queensland did not go down too well with investors from India.
  • India Economic Strategy 2035 by Australia: One of the most widely commended initiatives has been the Australian government’s release of an India Economic Strategy 2035 Report.
    • It observes that no single market over the next 20 years will offer more growth opportunities for Australia than India.
    • It lays down a comprehensive road map for strengthening Australia’s trade engagement with India.

Development in digital technology and the role of youth

  • Development of new architecture: Meanwhile India-Australia trade has been steadily evolving into a new architecture underpinned by developments in digital technology.
    • There is a rise of a younger generation of entrepreneurs and a noticeable shift in the trade basket from resources to services.
    • Technology and young entrepreneurship make a formidable combination and should set the agenda for the future of bilateral trade relations.
    • About 80% of the Australian small and medium-sized enterprises are managed by young professionals.
    • The young can see issues like immigration and outsourcing with far more equanimity than the older generation.
    • An important role of young Australians: Young Australians are thus emerging as great champions of India-Australia trade relations.

Scope for engagement in innovation and trade relations

  • Tech. expertise of  Australia: There is also recognition that Australia is a laboratory of ideas, innovation, technology-led growth and university-industry partnerships.
  • Scope for India in innovation and trade: India is a large and demographically young market with a love for innovation and an appetite for new products and services.
    • These synergies should add momentum to a growing engagement in trade relations.

India’s weakness and Way forward

  • Weakest link and way forward: The weakest link in India’s exports to Australia is in merchandise. India needs to look at three broad areas.
  • First-Focus on Market Research:  Despite globalisation, markets are country-specific and culturally sensitive.
    • Indian companies will need to invest a little more in market research on Australian consumer expectations and lifestyles.
  • Second-Brand creation: Australia is a brand-conscious market while India has not created a single consumer brand of international acceptance.
    • Only when products are visible across the world’s shopping malls and supermarkets displaying their own brands that India will be recognised as a major player in the global markets.
  • Third-Innovation: Innovation is emerging as the single-most-important factor for sustained success in every sphere. Global trade cannot be different.

 

 

Trade Sector Updates – Falling Exports, TIES, MEIS, Foreign Trade Policy, etc.

 India’s imports of palm oil — dynamics of the trade with MalaysiaPriority 1

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Types of palm oil, its uses

Mains level : Impact of import restrictions of palm oil


 

India has cut import duty on crude palm oil (CPO) and refined, bleached and deodorized (RBD) palm oil, and also moved RBD oil from the “free” to the “restricted” list of imports.

A move against outspoken Malaysia

  • Curbing palm oil imports has been construed as retaliation against Malaysia’s PM Mahathir Mohamad, who has criticised India’s internal policy decisions such as the revocation of the special status for J&K and CAA.
  • Malaysia has also been sheltering since 2017 the Islamic preacher Zakir Naik who is wanted by India on charges of money laundering, hate speech, and links to terror.

Has India banned import of Malaysian palm oil because of political reasons?

  • Not really. The import of RBD palm oil has been restricted, not banned — and this is from all countries, not just Malaysia. Also, CPO can still be imported freely.
  • Under the trade classification system that India follows, except for goods that can be imported only by state trading enterprises all goods whose import is not restricted or prohibited are traded freely.
  • Normally, a special licence is required to import a restricted good. The government has neither specified what the restrictions entail nor issued any licences.
  • However, it has been reported that vessels carrying RBD palm oil are stuck at several ports because buyers have been asked to shun the product.

How much palm oil does India import?

  • India imported 64.15 lakh metric tonnes (MT) of CPO and 23.9 lakh MT of RBD in 2018-19, the bulk of which was from Indonesia.
  • India imported $10 billion worth of vegetable oil in 2019-20, making it the country’s fifth most valuable import after mineral oil ($141 bn), gold ($32 bn), coal ($26 bn), and telecom instruments such as cell phones ($17 bn).

Why does India need so much palm oil?

  • It is the cheapest edible oil available naturally.
  • Its inert taste makes it suitable for use in foods ranging from baked goods to fried snacks.
  • It stays relatively stable at high temperatures, and is therefore suitable for reuse and deep frying. It is the main ingredient in vanaspati (hydrogenated vegetable oil).
  • However, palm oil is not used in Indian homes.
  • That, and the fact that CPO continues to be imported, makes it unlikely that the decision to restrict refined palm oil imports will impact food inflation immediately.

Who will be impacted by the decision?

  • Indonesia and Malaysia together produce 85% of the world’s palm oil, and India is among the biggest buyers.
  • Both Indonesia and Malaysia produce refined palm oil; however, Malaysia’s refining capacity equals its production capacity — this is why Malaysia is keen on exporting refined oil.
  • Indonesia, on the other hand, can supply CPO, which would allow India to utilise its full refining capacity.

Why import Crude Palm Oil?

  • The CPO that India imports contains fatty acids, gums and wax-like substances. Refining neutralises the acids and filters out the other substances.
  • The filtrate is bleached so that the oil does not change colour after repeated use. Substances that may cause the oil to smell are removed physically or chemically.
  • This entire process increases the value of a barrel of crude oil by about 4%.
  • Additionally, there are costs to transporting the crude, which makes it more cost-effective to import the refined oil.
  • But the refining industry has been demanding that the import duty on refined oil be increased, which would make importing crude oil cheaper than importing refined oil.
  • The decision to restrict imports of refined oil will benefit refiners, which include big-ticket names like the Adani Wilmar group.

Will restricting imports of RBD palm oil help farmers?

  • Restricting refined oil imports will not help farmers directly, as they are not involved in the process of refining.
  • However, the restrictions have caused refined palm oil prices to increase. If prices continue to hold, farmers will get a better realization for their crop.
  • But the timeframe over which the changes in import policy will have an effect on domestic crop realization is fairly long, given that palm trees take over four years to provide a yield.
  • Also, if the demand is met entirely by importing and refining CPO, farmers will be left out of the picture.

How will Malaysia be affected?

  • Malaysia has said that it cannot retaliate against India because it is “too small”.
  • With imports to its largest market restricted (India bought over 23% of all CPO produced by Malaysia in 2019), Malaysian palm oil futures fell by almost 10% in January, although it has recovered since then.
  • India and Malaysia signed a free trade agreement — Malaysia-India Comprehensive Economic Cooperation Agreement — in February 2011.
  • In 2018, Malaysia exported 25.8% of its palm oil to India.
  • If India does not issue licenses for importing refined oil, Malaysia will have to find new buyers for its product.
Trade Sector Updates – Falling Exports, TIES, MEIS, Foreign Trade Policy, etc.

Forex Reserves of IndiaPriority 1

Note4Students

From UPSC perspective, the following things are important :

Prelims level : India's Forex reserves, SDR, Reserve tranche

Mains level : Forex Reserves and its significance


India’s foreign exchange reserves rose by $943 million to touch a lifetime high of $462.16 billion according to the latest data from the RBI.

Forex reserves of India

  • They are holdings of cash, bank deposits, bonds, and other financial assets denominated in currencies other than Indian rupee.
  • The reserves are managed by the Reserve Bank of India for the Indian government and the main component is foreign currency assets.
  • They act as the first line of defense for India in case of economic slowdown, but acquisition of reserves has its own costs.
  • They facilitate external trade and payment and promote orderly development and maintenance of foreign exchange market in India.
  • They act as a cushion against rupee volatility once global interest rates start rising.

Composition of Forex

  • Reserve Bank of India Act and the Foreign Exchange Management Act, 1999 set the legal provisions for governing the foreign exchange reserves.
  • RBI accumulates foreign currency reserves by purchasing from authorized dealers in open market operations.
  • The Forex reserves of India consist of below four categories:
  1. Foreign Currency Assets
  2. Gold
  3. Special Drawing Rights (SDRs)
  4. Reserve Tranche Position

What is Reserve tranche?

  • Reserve tranche is a portion of the required quota of currency each member country must provide to the International Monetary Fund (IMF) that can be utilized for its own purposes.

What are Special Drawing Rights?

  • The SDR is an international reserve asset, created by the IMF in 1969 to supplement its member countries’ official reserves
  • The SDR is neither a currency nor a claim on the IMF.
  • Initially SDR was defined as equivalent to 0.888671 grams of fine gold, which at the time, was also equivalent to one U.S. dollar.
  • After the collapse of the Bretton Woods system, the SDR was redefined as a basket of currencies.
  • This basket Includes five currencies—the U.S. dollar, the euro, the Chinese renminbi, the Japanese yen, and the British pound sterling.
Trade Sector Updates – Falling Exports, TIES, MEIS, Foreign Trade Policy, etc.

[pib] HSN CodePIB

Note4Students

From UPSC perspective, the following things are important :

Prelims level : HSN Code

Mains level : India's Import regulation


 

No imports will be allowed without HSN code into the country clarified the Union Minister of Commerce & Industry.

What is HSN Code?

  • HSN code stands for “Harmonized System of Nomenclature”.
  • This system has been introduced for the systematic classification of goods all over the world.
  • HSN code is a 6-digit uniform code that classifies 5000+ products and is accepted worldwide.
  • It was developed by the World Customs Organization (WCO) and it came into effect from 1988.
  • The main purpose of HSN is to classify goods from all over the World in a systematic and logical manner. This brings in a uniform classification of goods and facilitates international trade.
Trade Sector Updates – Falling Exports, TIES, MEIS, Foreign Trade Policy, etc.

[pib] Duty-Free Import Authorisation (DFIA) schemePIBPrelims Only

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Duty-Free Import Authorisation (DFIA)

Mains level : Not Much


The Union Minister of Commerce and Industry has informed about the scheme.

Duty-Free Import Authorisation (DFIA)

  • DFIA is issued to allow duty free import of inputs, fuel, oil, energy sources, a catalyst which are required for production of export product.
  • The Directorate General of Foreign Trade, an agency under the Ministry of Commerce and Industry, by means of Public Notice, may exclude any product(s) from purview of DFIA.
  • Under the scheme, authorization is issued to allow duty free import of inputs.
Trade Sector Updates – Falling Exports, TIES, MEIS, Foreign Trade Policy, etc.

[oped of the day] The myths around free trade agreementsop-ed snap

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Trade openness ratio

Mains level : RCEP and FTAs - effectiveness


Context

India decided not to join the Regional Comprehensive Economic Partnership (RCEP). This decision can be seen in the lens of experiences countries have had with free trade agreements (FTAs).

Impact on exports

    • Some have argued that by not signing the RCEP, Indian exporters would miss on exporting to RCEP countries. 
    • FTAs – India has FTAs with the ASEAN, Japan, South Korea. Three-fourths of the bilateral trade already happens zero duty.
    • PTA – India also has a small preferential trade agreement with China.
    • FTA not enough – The mere signing of an FTA does not guarantee an increase in exports. If import duty in the partner country is high, there is a likelihood of an increase in exports by 10% when this duty becomes zero. But the chances of exports increasing are low if the import duty of the partner country is low at 1-3%. 
    • Zero duties – FTAs are of no use for exporting to Singapore, Hong Kong as regular import duties are zero.
    • Few products benefit – FTAs with Malaysia, Japan, Australia, New Zealand, Brunei, etc. benefit few product groups only as more than 60% of imports into these countries happen at zero duty for all countries.
    • Even zero duty no guarantee – even the high import duties coming down to zero through the FTAs do not guarantee exports. Japan reduced duty from 10% to zero for Indian apparels through an FTA in 2011. But India’s apparel exports to Japan have nosedived from $255 million in 2010 to $152 million in 2018.
    • Non Tariff Barriers –non-tariff barriers to trade (NTBs) such as special sourcing requirements are generally not negotiated in FTAs. Countries have to resolve these bilaterally.

Investment flow

    • Many argue that a lower import duty regime help in getting significant investments.
    • A case – Australia, in 1987, produced 89% of the cars it used. It protected the car industry through a high 45% import duty. But the share of locally produced vehicles came down as the duties were reduced.
    • Today, Australia imports nearly all cars as tariffs came further down to a 5% level. Most manufacturers such as Nissan, Ford, General Motors, Toyota, Mitsubishi, etc. which produced cars in Australia shut shop.
    • Higher duties – investment – India could attract significant investments in the car sector on account of high import duties. This resulted in the development of an indigenous car and auto component industry. 
    • India can think of lowering import duties to promote competition.
    • Other reasons for investments – Most investments are a result of the package, such as tax cuts, cheap land, power, etc. offered by the host country.
    • Need for an import wall – If a country is not the most efficient economy, some level of an import wall helps in getting external investments. Without an import wall, many firms may shift production to the more efficient FTA partner countries for exporting back to the home market.
    • Need for efficiency – the quality of investments increases as a country moves towards becoming a more efficient economy. Such countries are in an ideal position to become a manufacturing and services hub.

Entry into Global Value Chains(GVCs)

    • Reforms – A country cannot become a significant part of such value chains unless it has efficient ports, customs, shipping, roads, and regulatory compliance infrastructure.
    • Standards – GVC production also requires harmonization of product and quality standards.
    • GVCs will be disrupted if a shipment is delayed or is of non-standard quality. 
    • ASEAN, Japan, and Korea constitute the core of the Asian regional value chain. Despite FTAs with these countries, India has a weak presence in the electronics, machinery or apparel value chains.

Indian industry protectionism

    • Cheaper imports may replace products from domestic industries.
    • If the duty on a product is low, say, at 3%, the local industry may not care much about the duty elimination through any FTA.
    • Countries that have reached this stage are comfortable doing FTAs with fewer worries.
    • Trade openness – India ranks higher than the U.S., Japan, and China in the trade openness ratio. The ratio is the sum of all imports and exports as % of GDP — India (43) is more open than the United States (27), Japan (35), and China (38).

Steps to have an effect

    • The FTAs can ensure market access to only the right quality products at competitive prices. 
    • Competitiveness – Improvement in firm-level competitiveness is a must. 
    • Duties – The government can lower duties on raw materials and intermediates than on the concerned finished products.
    • Standards –  It can set up an elaborate quality and standards infrastructure for essential products.

Back2Basics

Trade openness ratio

The ratio is the sum of all imports and exports as % of GDP

Trade Sector Updates – Falling Exports, TIES, MEIS, Foreign Trade Policy, etc.

[op-ed snap] India’s export woesop-ed snap

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Nothing much

Mains level : Falling Indian exports


Context

India’s October trade figures deepen concerns about the health of our export sector. 

Figures

    • Merchandise exports fell 1.1% from a year earlier to $26.4 billion last month. 
    • Though it is smaller than September’s 6.6% decline, it’s still bad news. 
    • Exports have been stuck in negative territory for three months in a row. 
    • The good news is the sharp decline in the trade deficit to $11 billion in October from $18 billion a year earlier. 
    • This was due to a 16.3% decline in imports, to $37.4 billion.

Reasons for poor export growth

    • GST – Exporters had to suffer inordinate delays in the refunds due to them under the goods and services tax regime. 
    • RCEP – India’s decision to walk out of the RCEP, which will make access to a vast, rapidly-growing market difficult for them. 
    • Bilateral trade – bilateral trade deals are far not encouraging. India’s trade differences with the US are making matters worse. 

To revive exports

    • Policy – India has to reshape its policy mix in various ways. 
    • Manufacturing – Local manufacturers need to be competitive globally. 
    • Tax – recent reduction in corporate tax is a good move on the financial front. 
    • Tariff reduction – exposure to foreign competition requires lowering import tariffs, not raising them. 
    • Export-oriented reforms – needs to be undertaken.

Conclusion

But for these steps, India risks missing the opportunity to grab the global value chains disrupted by the US-China trade war.

Trade Sector Updates – Falling Exports, TIES, MEIS, Foreign Trade Policy, etc.

Explained: Balance of Trade and its significanceExplained

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Trade Deficit

Mains level : Balance of Trade issue in India


  • A key reason that India forwarded for declining to sign on was the existence of trade deficits with many of the constituents of the RCEP.

What concerned India?

  • India was concerned that joining the RCEP trade pact could lead to Chinese goods flooding the Indian markets, and India’s trade deficit ballooning against most of the RCEP members.
  • This, India argued, would have led to several sectoral producers such as those in the dairy and steel sector being dominated by foreign competition.

India’s trade deficit

  • For instance, against the 10 member ASEAN, India’s trade deficit was nearly $22 billion in 2018.
  • Against South Korea it was $12 billion, against Australia $9.6 billion, against Japan almost $8 billion.
  • Worst of all is the trade deficit with China – $53.6 billion.

What is Trade Deficit?

  • Simply put, the trade “balance” of a country shows the difference between what it earns from its exports and what it pays for its imports.
  • If this number is in negative – that is, the total value of goods imported by a country is more than the total value of goods exported by that country – then it is referred to as a “trade deficit”.
  • If India has a trade deficit with China then China would necessarily have a “trade surplus” with India.

What does it mean?

  • A trade deficit broadly can mean two things. One, that the demand in the domestic economy is not being met by the domestic producers.
  • For instance, India may be producing a lot of milk but still not enough for the total milk demand in the country. As such, India may choose to import milk.
  • Two, many a time a deficit signifies the lack of competitiveness of the domestic industry.
  • For instance, Indian car manufacturers could import steel from China instead of procuring it from the domestic producers if the Chinese steel was decidedly cheaper, for the same quality.
  • More often than not, the trade deficit of a country is due to a combination of both these main factors.

Is a trade deficit a bad thing?

  • No trade is ever balanced. That’s because all countries have different strengths and weaknesses.
  • India may have a trade deficit with China but a surplus with Sri Lanka and Bangladesh. It all depends on whether a country is playing to its strength or not.
  • Trade typically enhances wellbeing all across the world by forcing countries to do what they can do most efficiently and procure (import) from the rest of the world what they cannot produce efficiently.

Do higher tariffs help in bringing down trade deficits?

  • Of course, they do. For instance, if cheaper milk and steel from New Zealand and China, respectively, was held off by India levying higher.
  • Then the people most hurt would be Indian consumers of milk and steel – a number far in excess of the number of Indian producers of milk and steel.
  • The consumers would have to either pay a higher cost for imported steel or use equally costly or poorer quality domestic steel or indeed, go without milk (at least the poorer consumers).

Conclusion

  • That is not to say that trade doesn’t have elements that compromise a country’s strategic interests and that is why there are some commodities in which every country wants to maintain self-sufficiency.
  • But merely levying higher tariffs or not choosing to trade do not bring about self-sufficiency.
  • For attaining self-reliance, a country’s domestic industry has to improve and the best of this happening is when one learns from the competition.
Trade Sector Updates – Falling Exports, TIES, MEIS, Foreign Trade Policy, etc.

[op-ed snap] Unchecked declineop-ed snap

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Nothing much

Mains level : Trade sector update - fall in exports


Context

India’s merchandise exports continued their subdued performance, contracting by 6.57% in September this year. Over the first half of this financial year, exports have contracted by 2.39%.

Cause for worry

    • This indicates that GDP growth is unlikely to have received a fillip from the external sector in the second quarter as well. 
    • Non-oil non-gold imports, an indicator of domestic demand, contracted for the 11th straight month. This indicates continued weakness in domestic demand. 
    • Exports of major labor-intensive segments such as gems and jewelry, garment and leather products, continue to decline
    • All these are coupled with sluggish investment activity. These numbers point towards a subdued economic outlook in the near term. 
    • The IMF has lowered its forecast for economic growth to 6.1% this year, down from its earlier estimate of 7%.

Reasons behind the decline

    • The decline in exports can be traced to a fall in petroleum exports. 
    • It can also be attributed to a synchronised global slowdown. The exports of other nations have also been weak during this period. 
    • The IMF has also lowered its forecast for global GDP growth to 3%. 
    • There are also issues of competitiveness that afflict exports. An overvalued exchange rate and a complicated GST process exacerbate matters. 
    • The collapse in imports is equally worrying. Imports have contracted by 13.85% in September, and by 7% over the first half of this year. This signals weak consumer and industrial demand. 
    • It is exacerbated by inventory destocking, along with risk aversion by banks, could explain the collapse in credit flow to the commercial sector during this period.

Way ahead

    • The government has announced several steps to boost exports. But these are not enough. 
    • The government must push through reforms that address the deeper structural issues plaguing the economy. 
    • In the current economic environment of subdued domestic demand and investment, exports could provide the much-needed boost to growth.

A fact to note:

    • India accounts for around 2% of global trade.
Trade Sector Updates – Falling Exports, TIES, MEIS, Foreign Trade Policy, etc.

Nirvik SchemeGovt. Schemes

Note4Students

From UPSC perspective, the following things are important :

Prelims level : About the scheme

Mains level : Export promotion


  • To enhance the loan availability of exporters, and the MSME sector the Export Guarantee Corporation of India (ECGC) has launched a new scheme called ‘Nirvik’.
  • To revive the export sector, Commerce Ministry also launched the common digital platform for the issuance of certificates of origin

Nirvik Scheme

  • If there is any loss, then ECGC provided credit guarantee of up to 60% loss approximately.
  • Now under new scheme Nirvik consumers and exporters will covered up to 90% and if there is any loss then in that case ECGC will refund 90% to the banks including principal and interest.
  • Both pre and post shipment credit will also be covered under the new scheme.
  • Banks will get up to 50 % within 30 days of complain lodge.
  • Enhanced cover will ensure that Foreign and Rupee export credit interest rates will be below 4% and 8% respectively for exporters.
  • The scheme envisages simplified procedure for settlement of claim and for provisional payment up to 50% within 30 days on production of proof of end-use of the advances in default by the Insured Bank.

Electronic Certificates of Origin (CoO)

  • This platform will be a single access point for all exporters, for all Free Trade Agreements (FTAs)/ Preferential Trade Agreements (PTAs) and for all agencies concerned.
  • As we know, for exports to countries with which India has free trade agreements (FTA), exporters have to show a certificate that the consignment originated in India.
  • With the launch of this platform, these certificates can be obtained online and all the issuing authorities will be on the same portal.
  • Certificate of Origin will be issued electronically which can be in paperless format if agreed to by the partner countries.
  • Authorities of partner countries will be able to verify the authenticity of certificates from the website.
Trade Sector Updates – Falling Exports, TIES, MEIS, Foreign Trade Policy, etc.

[op-ed snap] The true toll of the trade war between the US and Chinaop-ed snap

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Nothing much

Mains level : Global Trade


CONTEXT

The growing trade war between China and the USA does not hold good news for the world.

Background of the multilateral trading system

  • For much of the last century, the US managed and protected the rules-based trading system it created at the end of World War II. 
  • That system required a fundamental break from the pre-war environment of mutual suspicion between competing powers. 
  • The US urged everyone to see that growth and development for one country could benefit all countries through increased trade and investment. 
  • The US served as a benevolent hegemon.
  • The system’s multilateral institutions, especially the IMF, helped countries in dire need of funds.
  • America’s power stemmed from its control over votes in multilateral institutions, both directly and through its influence over countries in the G7. 
  • Most countries trusted the US would not misuse its power to further its national interests, at least not excessively. 
  • The expansion of rules-based trade and investment opened up lucrative new markets for US firms. America granted some countries access to its markets without demanding the same level of access to theirs.
  • If emerging-markets expressed concerns about the potential effects of more open trade on some of their workers, economists were quick to reassure them that any local pain would be outweighed by the long-term gains. 

Impact of trade

  • Trade affected domestic workers unequally, but now moderately educated workers in developed countries bore the brunt of the pain, while higher-skilled workers in urban service-sector industries flourished.
  • Policymakers in advanced economies reacted to the backlash against trade in two ways. 
    • They tried to impose their labor and environmental standards on other countries through trade and financing agreements. 
    • They pushed for far stricter enforcement of intellectual property (IP), much of which is owned by Western corporations.

The case of China

  • This resulted in the rise of China. 
  • Like Japan and the East Asian tigers, China grew on the back of manufacturing exports. But, unlike those countries, it is now threatening to compete directly with the West in both services and frontier technologies.
  • China has adopted labour and environmental standards and expropriated IP according to its own needs. 
  • It is now close enough to the technological frontier in areas like robotics and Artificial Intelligence.
  • China’s burgeoning tech sector is enhancing its military prowess. 
  • Unlike the Soviet Union, China is fully integrated into the world trading system.

Breakdown of world trade order

  • Advanced economies find that higher regulatory structures and standards they adopted during their own development now put them at a competitive disadvantage vis-à a-vis differently regulated emerging-market countries. A
  • These countries resent external attempts to impose standards such as a high minimum wage or ending the use of coal.
  • Emerging economies have delayed opening their domestic markets to the industrial world. Developed country firms are especially eager for unfettered access to the attractive Chinese market.

What does the future hold

  • China can be slowed but cannot be stopped. A powerful China must see value in new rules, even becoming a guardian of these rules. For that, it must have a role in setting them. 
  • One can hope that China and the US will, avoid opening up any new fronts in the trade and technology war.
  • There is a dire need for negotiations.
  • Countries need to negotiate a new world order which accommodates multiple powers or blocs rather than a single hegemon.
Trade Sector Updates – Falling Exports, TIES, MEIS, Foreign Trade Policy, etc.

[pib] India to conduct 1st National Time Release Study (TRS)PIB

Note4Students

From UPSC perspective, the following things are important :

Prelims level : TRS

Mains level : Not Much



  • The Department of Revenue, Ministry of Finance is conducting India’s first national Time Release Study (TRS) this week.

Time Release Study (TRS)

  • The TRS is an internationally recognized tool advocated by World Customs Organization to measure the efficiency and effectiveness of international trade flows.
  • This initiative for accountable governance will measure rule based and procedural bottlenecks (including physical touchpoints) in the clearance of goods, from the time of arrival until the physical release of cargo.
  • The national TRS has taken this a multi-dimensional methodology which measures the regulatory and logistics aspects of the cargo clearance process and establishes the average release time for goods.
  • The initiative is on ground lead by the Central Board of Indirect Tax and Customs.
  • The aim is to identify and address bottlenecks in the trade flow process and take the corresponding policy and operational measures required to improve the effectiveness and efficiency of border procedures.

Benefits of TRS

  • This initiative will help India maintain the upward trajectory on Ease of Doing Business, particularly on the Trading Across Borders indicator which measures the efficiency of the cross border trade ecosystem.
  • Last year India’s ranking on the indicator improved from 146 to 80.
  • Expected beneficiaries of this initiative will be export oriented industries and MSMEs, who will enjoy greater standardization of Indian processes with comparable international standards.
  • Based on the results of the TRS, government agencies associated with cross border trade will be able to diagnose existing and potential bottlenecks which act as barriers to the free flow of trade, and take remedial actions for reducing the cargo release time.
Trade Sector Updates – Falling Exports, TIES, MEIS, Foreign Trade Policy, etc.

India-assisted IT-biotech park inaugurated in Cote d’IvoirePrelims Only

Note4Students

From UPSC perspective, the following things are important :

Prelims level : About the FTZ, Location details of Cote de Ivory

Mains level : India's trade relation with Africa



  • The Mahatma Gandhi IT and Biotechnology Park in Cote d’Ivoire, a dedicated free trade zone built with India’s assistance to build development capacities, has been inaugurated.

Mahatma Gandhi IT and Biotechnology Park (MGIT-BP)

  • MGIT-BP is a dedicated Free Trade Zone (FTZ) for IT and Biotechnology.
  • The inauguration of the project is an important milestone in 150th anniversary celebration of birth anniversary of Mahatma Gandhi.
  • The MGIT-BP is being built with India’s assistance through EXIM Bank Lines of Credit of USD 20 million.
  • The MGIT-BP project consists of two parts firstly, architectural concept and design for the buildings of FTZ and construction of main building to host IT enterprises.
  • It has Computer Assembly Plant, VSAT with Satellite Earth Station, Networking Lab, Human DNA Lab, Data Storage Area Network, an Audio-Visual Lab and a power generator.

What are FTZ?

  • A free-trade zone (FTZ) is a class of special economic zone.
  • It is a geographic area where goods may be landed, stored, handled, manufactured or reconfigured and re-exported under specific customs regulation and generally not subject to customs duty.
  • Free trade zones are generally organized around major seaports, international airports, and national frontiers—areas with many geographic advantages for trade.
  • The World Bank defines free trade zones as “in, duty-free areas, offering warehousing, storage, and distribution facilities for trade, transshipment, and re-export operations.”
Trade Sector Updates – Falling Exports, TIES, MEIS, Foreign Trade Policy, etc.

[pib] Surjit Bhalla Committee on Trade and PolicyPIB

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Elephant Bonds

Mains level : Financial services sector of India


  • High Level Advisory Group (HLAG) headed by Dr. Surjit S. Bhalla has been constituted by the Department of Commerce.

Surjit Bhalla Committee Recommendations

  • The HLAG has made several recommendations for boosting India’s share and importance in global merchandise and services trade.
  • Among other things, the Report identifies tax reforms also to boost export and investment channels for exports.
  • The Committee has recommended “Elephant Bonds” as a specialised security product providing funds towards Long Term Infrastructure.
  • HLAG has also made recommendations for reforms in Financial Services Framework for making India a Preferred Destination for financial services.

About Elephant Bonds

  • Elephant Bonds are the 25-year sovereign bonds in which people declaring undisclosed income will be bound to invest 50 per cent.
  • The fund, made from these bonds, will be utilized only for infrastructure projects.
  • It is like an Amnesty scheme to help State treasury raising tax revenues, adding beneficiaries in tax base who have not declared their assets previously.
Trade Sector Updates – Falling Exports, TIES, MEIS, Foreign Trade Policy, etc.

[pib] Kimberley Process Certification SchemeIOCR

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Kimberley Process, Conflict Diamond

Mains level : KPCS



  • The Intersessional meet of Kimberley Process (KP) will be hosted by India

Kimberley Process Certification Scheme

  • The Kimberley Process is a joint initiative involving Government, international diamond industry and civil society to stem the flow of Conflict Diamonds.
  • Conflict Diamonds means rough diamonds used by rebel movements or their allies to finance conflict aimed at undermining legitimate governments.
  • It is also described in United Nations Security Council (UNSC) Resolutions.

Why need KPCS?

  • In 1998, certain rebel movements in Africa (Sierra Leone, Angola, Democratic Republic of Congo, Liberia) were selling, among other things, illegally obtained diamonds.
  • These were known as Conflict Diamonds – to fund their wars against legitimate governments.
  • With a view to find ways to stop trade in Conflict Diamonds, world’s diamond industry, UN, Governments and leading NGOs came together and in November 2002 at Interlaken, Switzerland.
  • There the final draft of the Kimberley Process measures was ratified by more than fifty countries.
  • The KPCS came into effect from 1st January, 2003 and evolved into an effective mechanism for stopping the trade in Conflict Diamonds.
  • At present, KPCS has 55 members representing 82 countries including EU with 28 members.

India and the KPCS

  • India is one of the founder members of Kimberley Process Certification Scheme.
  • It is the Chair of Kimberley Process for the year 2019 with Russian Federation as Vice Chair.
  • India had earlier chaired KPCS in the year 2008.

Rough diamond trading under the KPCS

  • As per the Scheme, each shipment of rough diamonds being exported and imported by crossing an international border be transported in a tamper proof container and accompanied by a validated Kimberley Process Certificate.
  • The shipment can only be exported to a co-participant country in the KPCS.
  • No uncertified shipments of rough diamonds are permitted to enter a participant country.

Assist this newscard with:

[pib] Kimberley Process

Trade Sector Updates – Falling Exports, TIES, MEIS, Foreign Trade Policy, etc.

Draft Export Policy unveiledPriority 1

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Not Much

Mains level : Draft export policy 2019


  • The Commerce Ministry has come out with a comprehensive draft of the export policy which includes product- specific rules with a view to provide a ready reckoner for exporters.

Draft Export Policy, 2019

  • The draft policy aims at consolidating the export norms for each product as applicable at different government agencies.
  • It is proposed to bring out a comprehensive exports policy for all ITC (HS) tariff codes (including items which are ‘free’ for export and do not currently exist in the policy), covering conditions/restrictions imposed by partner government agencies on exports.
  • ITC-HS Codes are Indian Trade Clarification based on Harmonised System of Coding. It was adopted by India for import-export operations.
  • Every product has been accorded eight digit HS codes.
  • The compendium will help an exporter know all the applicable norms pertaining to a particular product, helping him/her understand policy conditions for that item.

Consolidating norms

  • This exercise is for consolidating the norms and not for making any changes in the existing export policy of the country.
  • It also includes non-tariff regulations imposed by different government agencies.
Trade Sector Updates – Falling Exports, TIES, MEIS, Foreign Trade Policy, etc.

[op-ed snap] External woesMains Onlyop-ed snap

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Trade deficit

Mains level : Falling exports should be a cause of worry for policy makers.


CONTEXT

The estimates for foreign trade showing a sharp slowdown in merchandise export growth in April, to 0.64% from a year earlier, ought to add to concerns about the economy.

Condition of exports

Contraction in exports –

  • If one were to strip away the 31% surge in shipments of petroleum products to overseas markets, India’s export of goods actually contracted by over 3% in dollar terms last month.
  • In contrast, overall merchandise exports had expanded 11% year-on-year in March, with the growth in shipments excluding petroleum products exceeding that pace by about 50 basis points.

Widespread contraction –

The slump in exports was fairly widespread, with 16 of the 30 major product groups listed by the Commerce Ministry reflecting contractions, compared with the 10 categories that had shrunk in March.

Decline in strong sectors  –

Worryingly, shipments of engineering goods declined by over 7% after having expanded by 16.3% in March, while the traditionally strong export sectors — gem and jewellery, leather and leather products, textiles and garments and drugs and pharmaceuticals — all weakened.

Impact of contraction in exports –

  • These are all key providers of jobs and any protracted pain across these industries will impact jobs, wages and consumption demand in the domestic market.
  • While the contraction in gem and jewellery exports widened to 13.4% in April, from 0.4% in March, the slump in the leather segment broadened to 15.3% from 6.4%.
  • And the pace of growth of garment exports decelerated to 4.4% from 15.1% in March.

Coupled with an increase in imports

  • Imports grew by 4.5% to $41.4 billion in April, accelerating from March’s 1.4% pace as purchases of crude oil and gold continued to increase.
  • While the 9.3% jump in the oil import bill, from March’s 5.6%, can partly be explained by the rise in international crude prices (Brent crude futures, for instance, advanced 6.4% in April), India’s insatiable appetite for gold, as reflected in the 54% surge in imports last month, must give policymakers cause for reflection.
  • Excluding oil and gold, however, imports shrank by more than 2% last month, signalling that import demand in the real productive sectors is largely becalmed.
  • As a result of merchandise imports outpacing exports, the trade deficit widened to a five-month high of $15.3 billion.
  • The widening trade shortfall will add pressure on India’s burgeoning current account deficit, which at a provisional $51.9 billion in the first nine months of fiscal 2018-19 had already surpassed the preceding financial year’s 12-month shortfall of $48.7 billion.

Conclusion

  • With stronger headwinds ahead in the form of an escalating trade war between the U.S. and China, and its knock-on impact on global growth, the outlook for export demand is far from reassuring.
  • Add the rising military tensions in West Asia and its potential to further push up oil prices, and the scope to contain the trade and current account deficits seems significantly challenging.
  • Clearly, this would be one more pressing concern for the new government to address.
Trade Sector Updates – Falling Exports, TIES, MEIS, Foreign Trade Policy, etc.

[op-ed snap] A fraught moment: U.S.-China trade warMains Onlyop-ed snap

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Trade War

Mains level : US-China Trade war will impact global Economy harshly.


CONTEXT

The U.S.-China trade war has flared up again after a deceptive lull over the last few months, when both sides were trying to negotiate a deal.

Present Situation

  • Out of nowhere, President Donald Trump tweeted that he would raise the 10% tariff imposed on $200-billion worth of Chinese goods to 25%, starting Friday. That the Trump administration pressed ahead with the increase even as China’s Vice Premier Liu He was still in Washington for a second day of talks with U.S. trade officials only underscores the businessman-turned-President’s ‘take no prisoners’ approach to negotiations.
  • China promptly promised retaliatory action, but was yet to spell out the measures.
  • With Mr. Trump tweeting that “the process has begun to place additional tariffs at 25% on the remaining” Chinese goods worth $325 billion, the U.S. administration unambiguously signalled it was not going to be the first to blink.

Implications for the global economy

  • The increase in tariffs imposed on goods crossing international borders essentially represents a new tax on a global economy already facing a slowdown.
  • Last month, the International Monetary Fund trimmed its projection for global growth in 2019 to 3.3%, from a 3.5% forecast made in January, citing slowing momentum in “70% of the world economy”.
  • IMF Chief Economist Gita Gopinath had at the time projected a pick-up in global growth momentum in the second half, predicated substantially on the “improved” outlook for U.S.-China trade tensions.
  • IMF chief Christine Lagarde and Ms. Gopinath, however, presciently warned that the world economy was poised at “a delicate moment”.
  • Were tensions in trade policy to flare up again, it could result in large disruptions to global supply chains and pose downside risks to global growth, the IMF warned.
  • Barely a month later, the world economy faces the very real risk of an escalation in this trade war where other countries, including India, can largely only wait and watch as the U.S. and China raise the pitch.

implications for American Economy

  • While the U.S. may have genuine concerns about Chinese protectionism, the overall economic logic behind Mr. Trump’s trade policy still remains weak.
  • The cost of these tariffs will, after all, eventually be borne by American consumers and could result in U.S. job losses too as the import of Chinese parts become uneconomical for smaller businesses.

Implications for India

Indian policymakers would do well to closely monitor how the latest escalation in trade tensions pans out for global demand and international energy prices, given that the RBI has flagged oil price volatility as a factor that would have a bearing on India’s inflation outlook.

Trade Sector Updates – Falling Exports, TIES, MEIS, Foreign Trade Policy, etc.

IMO’s new rule on electronic information exchange between ships and ports comes into forceIOCR

Note4Students

From UPSC perspective, the following things are important :

Prelims level : IMO, FAL Convention

Mains level : Easing maritime logistics and its impact


  • A new global rule mandated by the International Maritime Organisation (IMO) for national governments to introduce electronic information exchange between ships and ports has come to effect.

New rules to FAL Convention

  • The FAL Convention contains standards and recommended practices and rules for simplifying formalities, documentary requirements and procedures on ships’ arrival, stay and departure.
  • The requirement, mandatory under IMO’s Convention on Facilitation of International Maritime Traffic (FAL Convention) is part of a package of amendments adopted in 2016.
  • The new FAL Convention requirement for all public authorities to establish systems for the electronic exchange of information related to maritime transport.
  • It marks a significant move in the maritime industry and ports towards a digital maritime world, reducing the administrative burden and increasing the efficiency of maritime trade and transport.

What are new rules in actual practice?

  • The Convention encourages use of a “single window” for data, to enable all the information required by public authorities in connection with the arrival, stay and departure of ships, persons and cargo, to be submitted via a single portal, without duplication.
  • The rules seeks to make cross-border trade simpler and the logistics chain more efficient, for the more than 10 billion tonnes of goods which are traded by sea annually across the globe.

India: On IMO’s footsteps-

PCS 1x

  • India launched a Port Community System — ‘PCS1x’— at ports in December 2018. ‘PCS 1x’ is a cloud-based technology developed by Mumbai-based logistics conglomerate JM Baxi Group.
  • PCS1x offers value-added services such as notification engine, workflow, mobile application, track and trace, better user interface, better security features, improved inclusion by offering dashboard for those with no IT capability.
  • A unique feature of ‘PCS1x’ is that it can latch on to third party software which provides services to the maritime industry thereby enabling the stakeholders to access wide network of services.
  • PCS1x offers a database that acts as a single data point to all transactions.
  • It captures and stores data on its first occurrence thereby reducing manual intervention, the need to enter transaction data at various points and thereby reducing errors in the process.

Back2Basics

International Maritime Organisation (IMO)

  • IMO is the UN specialized agency with responsibility for the safety and security of shipping and the prevention of marine pollution by ships.
  • Its primary purpose is to develop and maintain a comprehensive regulatory framework for shipping and its remit today includes safety, environmental concerns, legal matters, technical co-operation, maritime security and the efficiency of shipping.
  • IMO is governed by an assembly of members and is financially administered by a council of members elected from the assembly.
Trade Sector Updates – Falling Exports, TIES, MEIS, Foreign Trade Policy, etc.

[pib] Indian Advance Pricing AgreementPIB

Note4Students

From UPSC perspective, the following things are important :

Prelims level :  IAPA, BAPA

Mains level : The problem with multilateral agreements and what India needs to do to gain most from them


News

  • The Central Board of Direct Taxes has entered into 18 APAs in the month of March 2019, which includes 03 Bilateral APAs (BAPAs).

What is an APA?

  • The Advance Pricing Agreement (APA) program allows the taxpayer and the tax authority to avoid future transfer pricing disputes by entering into a prospective agreement.
  • An APA is a contract, usually for multiple years, between a taxpayer and at least one tax authority specifying the pricing method that the taxpayer will apply to its related-company transactions.
  • These programmes are designed to help taxpayers voluntarily resolve actual or potential transfer pricing disputes in a proactive, cooperative manner, as an alternative to the traditional examination process.
  • APAs gives certainty to tax-payers, reduces disputes, enhance tax revenues and make the country an attractive destination for foreign investments.
  • These agreements would be binding both on the taxpayer as well as the government. Similarly, they lowers complaints and litigation costs.

The International Transactions covered in all these Agreements, inter alia, include the following, – 

  • contract manufacturing
  • provision of software development services
  • back office engineering support service
  • provision of back office (ITeS) support services
  • provision of marketing support services
  • payment of royalty for use of technology and brand
  • trading
  • payment of interest
Trade Sector Updates – Falling Exports, TIES, MEIS, Foreign Trade Policy, etc.

Red Sanders is now free of export restrictionsPriority 1


Note4students

Mains Paper 3: Environment | Conservation, environmental pollution and degradation, environmental impact assessment

From UPSC perspective, the following things are important:

Prelims level: Red Sanders and its uses

Mains level: Issue over trade of endangered species


News

  • All red sanders farmers, who were not allowed to export their produce as the foreign trade policy prohibited it, now can.
  • The Directorate General of Foreign Trade (DGFT), an agency of the Ministry of Commerce and Industry has revised its export policy to permit its export if it is obtained from cultivated land.

Why this move?

  • Ironically, the Indian government had itself asked for quotas to export red sanders from CITES as the tree is categorised as a species that needs protection.
  • Estimates suggest that there are more than 3,000 farmers across India who were unable to sell their produce due to the earlier export policy.
  • Earlier, only seized logs from smugglers were being exported depending on state government rules.
  • However, red sanders remains listed in the Appendix II of CITES (Convention on International Trade in Endangered Species of Wild Fauna and Flora).

Red Sanders and its uses

  • Red sanders (Pterocarpus santalinus), known for its rich hue and therapeutic properties, is high in demand across Asia, particularly in China and Japan.
  • It is used in cosmetics and medicinal products as well as for making furniture, woodcraft and musical instruments.
  • Its popularity can be gauged from the fact that a tonne of red sanders costs anything between Rs 50 lakh to Rs 1 crore in the international market.

Why restrictions?

  • The tree is endemic to several districts in Andhra Pradesh and some parts of Tamil Nadu and Karnataka.
  • But over-exploitation prompted the Union government in the 1980s to recommend inclusion of red sanders in Appendix II of CITES.
  • The Appendix II says that trade must be controlled in order to avoid utilization incompatible with their survival.
  • The species was listed in Appendix II of CITES in 1995, and subsequently export of red sanders was prohibited in 2004.

Lifting restrictions

  • In 2010, when the CITES was planning to suspend trade of red sanders obtained from India, the government submitted a Non-Detriment Finding (NDF) report saying it must be allowed to export from cultivated sources.
  • So in 2012, India got an export quota on red sanders from CITES, under which the country could export 310 tonnes of red sanders obtained from “artificially propagated” sources and 11,806 tonnes of wood from seized sources.

Boosting Farmers

  • Though a farmer can grow the tree, he/she requires permits to fell and transport the wood, which was difficult to obtain.
  • Moreover, the price of this wood in the domestic market is less than half of what it is in the international market as the demand is low.
  • At the same time, the farmer could not even export it earlier as the foreign trade policy prohibited it.

What else can be done?

  • The GoI should also create a separate Timber Development Board under the Ministry of Agriculture and Farmers’ Welfare as a single-window system for all farming activities to facilitate export process.
Trade Sector Updates – Falling Exports, TIES, MEIS, Foreign Trade Policy, etc.

World Gold CouncilPrelims Only


Note4students

Mains Paper 2: IR | Important International institutions, agencies & fora, their structure, mandate

From UPSC perspective, the following things are important:

Prelims level: WGC

Mains level: Effect of global trends on India’s gold trade


News

  • Increased market uncertainty and expansion of protectionist economic policies will make gold increasingly attractive as a hedge in 2019, says the latest report by the World Gold Council (WGC).
  • Since gold is considered a safe haven, during choppy markets, the demand for gold improves, normally.
  • Emerging markets, led by India and China–the biggest consuming markets–make up 70% of consumer demand for the metal.

About World Gold Council

  1. The World Gold Council is an association whose members comprise the world’s leading gold mining companies.
  2. Headquartered in London United Kingdom, it has offices in India, China, Singapore, Japan and the United States.
  3. It helps to support its members to mine in a responsible way and developed the Conflict Free Gold Standard.
  4. It is the market development organisation for the gold industry.
  5. It works across all parts of the industry, from gold mining to investment, and their aim is to stimulate and sustain demand for gold.
  6. WGC frequently publish research that demonstrates gold’s strength as a preserver of wealth – both for investors and countries.
  7. WGC also provide analysis of the industry, offering insights into the drivers of gold demand. They have also launched various products such as SPDR GLD and gold accumulation plans in India and China.
Trade Sector Updates – Falling Exports, TIES, MEIS, Foreign Trade Policy, etc.

[pib] No Agri Export Zones (AEZs) after 2004PIBPrelims Only


Note4students

Mains Paper 3: Economy | Food processing and related industries in India- scope and significance, location, upstream and downstream requirements, supply chain management.

From UPSC perspective, the following things are important:

Prelims level: AEZs

Mains level: Measures towards doubling farmer’s income and issues associated


News

AEZs under stress

  1. In all 60 Agri Export Zones (AEZ) were notified by the Government till 2004 – 05.
  2. In December 2004, an internal peer review conducted by Department of Commerce concluded that the notified AEZs had not been able to achieve the intended objectives.
  3. It was decided that there will be no creation of new AEZs, unless there were strong and compelling reasons.
  4. No new AEZs have been set up after 2004.
  5. All the notified AEZs have completed their intended span of 5 years and have been discontinued.

Agri Export Zone (AEZ)

  1. Nodal Agency: Ministry of Commerce
  2. The concept of Agri Export Zone (AEZ) was introduced in 2001, through EXIM Policy 1997-2001.
  3. It aims to take a comprehensive look at a particular produce/product located in a contiguous area for the purpose of developing and sourcing the raw materials, their processing/packaging, leading to final exports.
  4. The concept hinged primarily on convergence of existing Central and State Government schemes to take care of financial interventions required at various stages of value chain; partnership among various stakeholders’ viz. Governments, farmer, processor, exporter etc.; and focus on targeted products and areas to identify required policy interventions.
  5. All these activities did take place in certain respects in the notified Agri Export Zones.
Trade Sector Updates – Falling Exports, TIES, MEIS, Foreign Trade Policy, etc.

[pib] NABCB Accreditation Secures Recognition in Asia- Pacific RegionPIB


Note4students

Mains Paper 2: Governance | Statutory, regulatory and various quasi-judicial bodies

From UPSC perspective, the following things are important:

Prelims level: NABCB and other accreditation bodies mentioned in the newscard

Mains level: Bodies facilitation India’s export in global markets


News

  • India’s national accreditation body, National Accreditation Board for Certification Bodies (NABCB), has secured equivalence for its accreditation for Occupational Health and Safety Management Systems (OHSMS) Certification Bodies in Asia- Pacific region.

New agreement

  1. NABCB has signed the Multilateral Recognition Arrangement (MLA) of the Pacific Accreditation Cooperation (PAC).
  2. Any industry carrying ISO 45001 certificate with NABCB logo will be recognized in the Asia Pacific region.
  3. The immediate beneficiary of this equivalence is the Indian Industry which is exporting products to various countries especially in the Asia Pacific region.
  4. It can also be used by regulators for establishing confidence in certified units as Goa Government has done by accepting OHSMS certification under NABCB accreditation in lieu of annual audits under Factories’ Act.
  5. Now, NABCB can facilitate export of Indian goods into the world market by attesting that these are certified as per international standards by competent certifying bodies.

Importance of NABCB Accreditation

  1. The NABCB accreditation programme is based on international standards, ISO/IEC 17021-1 and ISO 45001, applicable for OHSMS.
  2. The recognition by PAC is based on demonstration by NABCB that it complies with international standard, ISO/IEC 17011.
  3. NABCB is the third accreditation body in the Asia Pacific Region to become internationally equivalent in the region, the other two being the accreditation bodies of Hong Kong and Mexico.
  4. This status signifies that the accreditation of certification bodies by NABCB for OHMS will be accepted as internationally equivalent.

Why need Accreditation?

  1. Accreditation reduces risk for business and its customers by assuring that accredited Certification Bodies (CBs) are competent to carry out the work they undertake within their scope of accreditation.
  2. Accreditation Bodies (ABs) are required to comply with appropriate international standards and the applicable PAC application documents for the consistent application of those standards.
  3. ABs that are signatories to the PAC Multilateral Recognition Arrangement (MLA) are evaluated regularly by an appointed team of peers to provide confidence in the operation of their programs.

Eliminating technical barriers for Exports

  1. Accreditation has become an essential tool for getting acceptance of inspection, testing and certification done in India internationally.
  2. It is referenced in many bilateral Free Trade Agreements like the India – Singapore Comprehensive Economic Cooperation Agreement in which NABCB accreditation is a requirement for certification of electrical/electronic and telecom products.
  3. Thus, accreditation eliminates technical barriers to trade and facilitates export of Indian products in world market.

Back2Basics

National Accreditation Board for Certification Bodies

  1. NABCB, a constituent Board of the Quality Council of India, is responsible for accreditation of certification/inspection bodies as per applicable international standards under an international system of equivalence.
  2. NABCB is internationally recognized and represents the interests of the Indian industry at international forums through membership and active participation with the objective of becoming a signatory to international Multilateral / Mutual Recognition Arrangements (MLA / MRA).
Trade Sector Updates – Falling Exports, TIES, MEIS, Foreign Trade Policy, etc.

[pib] PCS 1x SystemPIB


Note4students

Mains Paper 3: Economy | Infrastructure: Energy, Ports, Roads, Airports, Railways etc.

From UPSC perspective, the following things are important:

Prelims level: PCS 1x portal and its features

Mains level: Improving logistics sector of India


News

  • Indian Ports Association (IPA) under the guidance of Ministry of Shipping launched the Port Community System ‘PCS1x’ with url indianpcs.gov.in.
  • The platform has the potential to revolutionize maritime trade in India and bring it at par with global best practices and pave the way to improve the Ease of Doing Business world ranking and Logistics Performance Index (LPI) ranks.

PCS 1x

  1. ‘PCS 1x’ is a cloud based new generation technology, with user-friendly interface.
  2. This system seamlessly integrates 8 new stakeholders besides the 19 existing stakeholders from the maritime trade on a single platform.
  3. The platform offers value added services such as notification engine, workflow, mobile application, track and trace, better user interface, better security features, improved inclusion by offering dashboard for those with no IT capability.
  4. A unique feature of ‘PCS1x’ is that it can latch on to third party software which provides services to the maritime industry thereby enabling the stakeholders to access wide network of services.
  5. Another major feature is the deployment of a world class state of the art payment aggregator solution which removes dependency on bank specific payment eco system.

Features of this Portal

  1. This system will enable trade to have an improved communication with the customs as they have also embarked on Application Programming Interface (API) based architecture, thereby enabling real time interaction.
  2. This System offers a database that acts as a single data point to all transactions.
  3. It captures and stores data on its first occurrence thereby reducing manual intervention, the need to enter transaction data at various points and thereby reducing errors in the process.
  4. It is estimated that this feature alone will reduce 11/2 to 2 days in a life of transaction.
  5. The application will have a cascading effect in reducing dwell time and overall cost of transaction.
  6. A major training and outreach program is under way to educate the stakeholders about the uses and benefits of ‘PCS 1x’.
Trade Sector Updates – Falling Exports, TIES, MEIS, Foreign Trade Policy, etc.

Policy Commission of World Customs OrganizationIOCR


Note4students

Mains Paper 2: IR | Important International institutions, agencies & fora, their structure, mandate

From UPSC perspective, the following things are important:

Prelims level: WCO

Mains level:  Mandate of WCO in global trade


News

  • Recently the 80th Session of the Policy Commission of the World Customs Organization (WCO) was held in Mumbai.
  • The Session was organized by the WCO and hosted by the Central Board of Indirect Taxes and Customs (CBIC).
  • India has discussed on various issues relating to World Customs Tariffs, trade facilitation measures, international issues on trade under the ambit of WCO.

Policy Commission, WCO

  1. The Policy Commission is essentially an advisory body for the Council and normally arrives at its recommendations by consensus.
  2. Each member of the Policy Commission shall have one vote, representatives of a simple majority of the Policy Commission’s members shall constitute a quorum, and a two-thirds majority of those present and entitled to vote is needed in order to carry a decision.
  3. The WCO Secretariat is responsible for making the arrangements and preparations for Policy Commission sessions, providing professional, administrative and technical services during the sessions, and performing follow-up tasks after the sessions.

About World Custom Organisation

  1. The World Customs Organization (WCO) is an intergovernmental organization headquartered in Brussels, Belgium.
  2. The WCO maintains the international Harmonized System (HS) goods nomenclature and administers the technical aspects of the World Trade Organization (WTO) Agreements on Customs Valuation and Rules of Origin.
  3. The WCO’s primary objective is to enhance the efficiency and effectiveness of member customs administrations, thereby assisting them to contribute successfully to national development goals, particularly revenue collection, national security, trade facilitation, community protection, and collection of trade statistics.
  4. The WCO is noted for its work in areas covering the development of international conventions, instruments, and tools on topics such as commodity classification, valuation, rules of origin, collection of customs revenue, supply chain security, international trade facilitation, customs enforcement activities, combating counterfeiting in support of Intellectual Property Rights (IPR), drugs enforcement, illegal weapons trading, integrity promotion etc.
Trade Sector Updates – Falling Exports, TIES, MEIS, Foreign Trade Policy, etc.

[pib] Kimberley ProcessPIB


Note4students

Mains Paper 2: IR | Bilateral, regional & global groupings & agreements involving India &/or affecting India’s interests

From UPSC perspective, the following things are important:

Prelims level: Kimberley Process

Mains level: International collaboration against illegal trade of Diamonds


News

Kimberley Process

  1. The Kimberley Process Certification Scheme (KPCS) is the process established in 2000 to prevent conflict diamonds from entering the mainstream rough diamond market.
  2. It was ruled by UNGA Resolution 55/56 following recommendations in the Fowler Report.
  3. The process was set up to ensure that diamond purchases were not financing violence by rebel movements and their allies seeking to undermine legitimate governments.

Why in news?

  1. The KPCS Plenary 2018, was held in Brussels, Belgium in November 2018 and EU handed over the chair of KPCS to India from January, 2019.
  2. The next session is slated to be held in India as Chair. Botswana and the Russian Federation will serve as Vice-Chair during the period of 2019-2020.

India and KPCS

  1. India is the founding member of KPCS and is actively involved in KP activities to ensure that almost 99% of the diamond trade in the world is conflict free.
  2. India is committed to maintain KP as an efficient and effective process in order to ensure the conflict diamond free status.
  3. India is at the forefront in addressing the issue of differentiation between Natural Diamonds and Lab Grown Diamonds and ensure responsible business in this area.
  4. India chaired the Ad hoc Committee on Review and Reform (AHCRR).

Importance of KPCS

  1. This year was the fifteenth anniversary of KPCS. Since its launch in 2003, the Kimberley Process has contributed towards peace, security and prosperity.
  2. It has proven to be an effective multilateral tool for conflict prevention in stemming the flow of conflict diamonds.
  3. The Kimberley Process has made valuable developmental impact in improving the lives of most people dependent on the trade in diamonds.
Trade Sector Updates – Falling Exports, TIES, MEIS, Foreign Trade Policy, etc.

[pib] Logix India 2019PIB


Note4students

Mains Paper 3: Economy | Infrastructure: Energy, Ports, Roads, Airports, Railways etc.

From UPSC perspective, the following things are important:

Prelims level: Logix India

Mains level:  Logistics sector of India


News

  • Union Minister of Commerce & Industry has launched the logo and brochure of Logix India 2019.

Logix India 2019

  1. The logistics event is being organized by the Federation of Indian Export Organisations (FIEO) as a major initiative to improve logistics cost effectiveness and operational efficiencies for India’s global trade.
  2. Over 20 countries are sending delegations to explore logistics partnerships with India and FIEO is focusing on logistical solutions for difficult to reach markets.
  3. Over 100 international delegates are expected to attend Logix India 2019.
  4. FIEO will also focus on investment opportunities in infrastructure development, warehouse consolidation, technology integration and IT enablement and skilling of manpower at the three-day meet.
  5. Logix India will enable effective international trade logistics and help provide efficient and cost-effective flow of goods on which other commercial sectors depend.

India’s Logistics Sector

  1. India ranked 44 in the World Bank Logistics Performance Index 2018.
  2. As per the Economic Survey 2017-18, India’s logistics industry which is worth around USD 160 billion is likely to touch USD 215 billion in the next two years.
  3. This sector provides employment to more than 22 million people and is expected to grow at the rate of 10.5 per cent over the next 5 years.
Trade Sector Updates – Falling Exports, TIES, MEIS, Foreign Trade Policy, etc.

India steps up agro-diplomacy with ChinaPriority 1


Image result for india china trade deficit

Note4Students

Mains Paper 2: IR | Bilateral, regional and global groupings and agreements involving India and/or affecting India’s interests

From UPSC perspective, the following things are important:

Prelims level: Not Much

Mains level:  Indian measures to counter trade imbalances with China


News

China opens up to non-US Imports

  1. As the trade war with the US continues to grow, China appears to be opening up to non-U.S. imports.
  2. Sensing that China would look first at its food security by diversifying imports in view of the trade war, New Delhi has stepped up its agro-diplomacy with Beijing.
  3. The focus so far has been on pushing agri-products into the Chinese market.
  4. Over the past two months, Indian food and beverage producers have been conducting seminars and road shows in the Chinese capital.

Chinese Agri-imports likely to grow from India

Soya bean

  • Indian soya bean exports are apparently a priority, especially after the China imposed a 25% levy on U.S. imports.
  • Success in the huge Chinese soya bean market is yet to materialize, though some progress may have registered during talks.

Tea

  • Recently an Indian Company signed a $1-million black tea export contract with Chinese state-owned COFCO.
  • China has been traditionally a green tea market. Assam tea, in particular, has good prospects in China as it blends well with milk-based tea drinks.
  • But of late, its young people are developing a taste for milk infused bubble tea, potentially opening a larger market for Indian black teas.

Sugar

  • India’s efforts to export sugar to China, which began in earnest in June, also appear to have paid dividends.
  • The Indian Sugar Mills Association had signed its first sugar export contract of 50,000 tonnes with COFCO
  • The Chinese Sugar Association was recently briefed about India’s proven capacity to meet China’s sugar needs over the long haul.

Rice

  • China is a lucrative $1.5-$2 billion market for Indian rice.
  • Recently China has opened up imports of non-Basmati rice from India in June on the sidelines of the Qingdao summit of the SCO.

Hurdles to Trade Balance

  1. Despite signs of incremental progress, India’s $63-billion trade imbalance with China is alarming.
  2. India had raised the red flag about its adverse trade balance during China’s trade policy review at the WTO.
  3. It specifically cited hindrances that Indian exporters of rice, meat, pharmaceuticals and IT products were encountering to access the Chinese market.

Way Forward

  1. It’s a matter to be considered that pharmaceuticals, information technology services and tourism, in which India has a significant global footprint, had a minuscule presence in China.
  2. There are some positive developments as well in this regard. But we want that to be reflected in concrete trade figures.
  3. Then only we can conclude that there has been a turnaround in our commercial ties with China.
Trade Sector Updates – Falling Exports, TIES, MEIS, Foreign Trade Policy, etc.

[op-ed snap] The need of customs duty rationalizationop-ed snap


Note4students

Mains Paper 3: Economy | Effects of liberalization on the economy, changes in industrial policy & their effects on industrial growth

From the UPSC perspective, the following things are important:

Prelims level: Import duty, CAD

Mains level: Underutiliztaion of resources in India and need of a structured import policy


Context

Rise in custom duties

  1. A second round of hikes in import duties was announced recently, this time on telecom equipment
  2. This is a move to not only curb imports but also rein in a rising current account deficit (CAD), aiming to check the rupee’s weakness against the dollar
  3. The Indian rupee has been one of the worst performing currencies among the emerging markets in this calendar year

Import theory

  1. Imports are a necessity when a nation doesn’t have the wherewithal to produce goods locally
  2. However, it is an inefficient utilization of resources when a nation allows a copious flow of imports even when the domestic industry has the necessary capacity and expertise to manufacture the same products
  3. Supplies of various materials have been facing persistent dumping for several years now

Need for tweaking duty structure

  1. A key area that has been efficiently manufacturing and has the necessary scale to not just meet domestic demand but even exports is metals and minerals
  2. However, the lopsided duty structures and free trade agreements (FTA) have translated into a raw deal for the domestic industry
  3. About 38% imports for domestic consumption results from various FTAs
  4. A correction in the duty structure, within the World Trade Organization (WTO) guidelines, and liberalization of the mining sector is sufficient to boost domestic manufacturing and significantly cut down India’s import bill
  5. Such is the inherent strength of India’s resources sector that right policies can boost domestic manufacturing and cut down India’s import bill by as much as $20 billion per annum

Underutilization of resources

  1. Given India’s massive untapped hydrocarbon reserves, the nation has the potential to easily enhance the domestic production of oil and gas to cut import dependency by more than 10% in the foreseeable future
  2. India currently meets more than 80% of its oil and gas demand through imports
  3. Despite having the fifth largest coal reserves in the world, India is likely to import 164 million tonnes in the current calendar year as production inefficiencies and transport bottlenecks force companies to look overseas
  4. Iron ore is another example. India produces 210 million tonnes of iron ore every year, which is far more than what it consumes
  5. More than 150 million tonnes of iron ore is lying idle in Odisha, Chhattisgarh and other parts of the country. The local prices of iron ore are 30 to 40% cheaper than imports
  6. Even then some of the largest steel companies continue to import iron ore, putting pressure on domestic miners
  7. Data shows that India’s primary aluminium production capacity of 4.1 million tons per annum is 1.25 times its consumption
  8. Yet, imports account for nearly 60% of consumption
  9. India imports about 1.1 million tons of scrap because the import duty on aluminium scrap is merely 2.5%
  10. Experts fear that with the ongoing trade war between the US and China, aluminium meant for the US will now find its way into India, worsening the situation
  11. While domestic producers can meet the industry’s demand, India imported 185,000 tonnes of refined zinc in 2017-18
  12. Of this, 70% came from South Korea because of an ill-conceived comprehensive economic partnership agreement (CEPA)

Stopping misuse of FTAs

  1. The misuse of FTAs for variously identified imports should be looked into very seriously with heavy penalties on importers who deliberately misuse these agreements
  2. As a corollary, rationalization of customs duty and prevention of FTA misuse will give a fillip to domestic output, boost the ancillary eco-system and lead to employment generation

Way forward

  1. The need of the hour is to take bold decisions that will not only help cushion the rupee but also usher in a sustained reduction in India’s import dependency
  2. A well-thought-out strategy that benefits the nation in the long run by bringing down dependency on non-essential imports will not only save foreign exchange but also add to the stability of key macro-economic numbers
Trade Sector Updates – Falling Exports, TIES, MEIS, Foreign Trade Policy, etc.

[op-ed snap] A discredited playbookop-ed snap


Note4students

Mains Paper 3: Economy | Effects of liberalization on the economy, changes in industrial policy & their effects on industrial growth

From UPSC perspective, the following things are important:

Prelims level: Not much

Mains level: Declining exports from India & how the government policy is proving to be adverse


Context

Decision to implement tariffs

  1. The government of India recently raised tariffs on 19 different items in order to curb imports with the goal of narrowing the widening current account deficit
  2. The backdrop for the tariff hikes is the ongoing widening of the current account deficit as well as the recent depreciation of the rupee
  3. The move is supposed to help with both of these
  4. The import bill for the targeted goods was about $13 billion in the last fiscal year

Will imposition of tariffs help?

  1. Since India has little to no market power over these goods in international markets, the impact of the tariffs on the current account will depend on their effect on the volume of imports of these goods
  2. The fall in demand for these goods in response to the rise in tariffs depends on the price elasticity of demand for these imports
  3. A study by World Bank economists provides some useful insights
  4. The study estimates the import elasticity of demand for India to be -1.3 at the 3-digit level of product aggregation
  5. This implies that a 10 percentage point increase in import tariffs will induce a 13 percentage point decrease in imports
  6. The corresponding elasticity at a more disaggregated six-digit level of product aggregation is -3.2
  7. The goods that have been targeted by the higher tariffs are mostly at the four-digit level of aggregation. Hence, the relevant elasticity is somewhere between these two estimates

Assessing the impact of the tariffs

  1. The import-weighted average tariff rate on the goods that have been targeted has risen from 9.6 per cent to 14.3 per cent, an increase of 4.7 percentage points
  2. Based on the range of elasticities in the World Bank study, one may use a conservative elasticity estimate of 2 to assess the impact of the tariffs which are mostly on goods at the four-digit level
  3. This implies a 9.4 percentage point reduction in imports of these goods or a fall in imports of these goods by $1.2 billion
  4. This is a shade below 0.05 per cent of Indian GDP. Hence, if the current account deficit was expected to be around 2.8 per cent of GDP, the tariff measures will reduce that deficit to 2.75 per cent of GDP
  5. The government stands to collect the higher tariffs on the goods that continue to be imported
  6. At the earlier rates, the government was collecting about $1.26 billion from imports of these targeted goods. After the tariff increase, estimates imply a tariff collection of $1.7 billion
  7. This is an estimated revenue gain of $440 million (around Rs 3,000 crore), or less than 0.02 per cent of GDP. Thus, the tariffs might reduce the fiscal deficit from a projected 3.3 per cent to 3.28 per cent
  8. In summary, the announced tariffs are likely to have no measurable effect on the stated target of reducing the current account deficit. Neither will they make any dent on our fiscal accounts

The intention of the government

  1. The measures signal some intent on the part of the government that it is serious about managing the current account deficit
  2. The move is another one of a slew of recent measures on the trade that signal the protectionist instincts of the government
  3. This can only have negative effects on investor sentiments as it brings back memories of the pre-1991 period when protection was the norm

Measures needed

  1. Dealing with this issue requires addressing fundamental issues plaguing our export sector
  2. A good place to start would be to review one of the deepest theorems of trade: Tariffs on imports have the same effect as taxes on exports
  3. Ignorance of this basic symmetry is probably the explanation for why policymakers would impose import tariffs while simultaneously looking for ways to boost exports

Way forward

  1. Move to impose barriers on imports to manage the current account deficit is a throwback to the licence raj
  2. We need to focus on the systemic issues pulling down productivity in export sectors
Trade Sector Updates – Falling Exports, TIES, MEIS, Foreign Trade Policy, etc.

[op-ed snap] Bonds to rescue the rupeeop-ed snap


Note4students

Mains Paper 3: Economy | Mobilization of resources

From UPSC perspective, the following things are important:

Prelims level: NRI bonds

Mains level: Various options available to stem the fall of the rupee


Context

Issue of NRI bonds

  1. The sharp slide in the value of the rupee has led to speculation that the RBI might opt to issue NRI bonds worth $30-35 billion in order to help attract dollar investment into the country
  2. NRI bonds were also issued in 1998 and 2000 to help curb the slide of the rupee

What are the NRI bonds?

  1. These are bonds issued by the Reserve Bank of India to non-resident Indians who are interested in investing their money in India
  2. Since these bonds offer higher returns than other similar investments, they can be used as a tool to attract capital during times when other domestic assets fail to attract the interest of foreign investors

Two important factors behind the rupee’s fall

  • Capital has been moving out of India’s capital markets
  1. Foreign portfolio investors pulled out ₹47,836 crore in the first half of the year, a 10-year high
  • Indian exports have been losing demand, while imports of commodities like crude oil have risen significantly
  1. India’s current account deficit hit a five-year high in July

How will NRI bonds help?

  1. NRI bonds could theoretically help increase demand for the rupee and stabilise its value against the dollar
  2. In 2013, when the rupee witnessed a fall of about 25% in just four months following the U.S. Federal Reserve’s decision to taper down its bond-purchase programme, the RBI was able to collect more than $30 billion worth of foreign capital

Way Forward

  1. While these bonds can provide temporary assistance to the rupee by encouraging capital inflows into the economy, they may not address the fundamental economic issues that are causing the fall of the rupee
  2. Until the RBI can rein in domestic inflation and the government can take steps to boost exports and curb imports, emergency measures like the issuance of NRI bonds can only offer temporary respite to the rupee
Trade Sector Updates – Falling Exports, TIES, MEIS, Foreign Trade Policy, etc.

[op-ed snap] Why India should let the Rupee fallop-ed snap


Note4students

Mains Paper 3: Economy | Effects of liberalization on the economy

From UPSC perspective, the following things are important:

Prelims level: Not much

Mains level: Exchange rate economics & India’s exchange rate management system


Context

Falling value of the rupee

  1. The Indian rupee has been sliding against the U.S. dollar in recent days as emerging markets come under pressure
  2. That’s made the currency one of Asia’s worst performers, losing 12 percent this year

Effects of falling value on economy

  1. Currency depreciation will have an impact on corporate balance sheets
  2. India’s currency-derivative markets, with many restrictions and limited liquidity, make hedging quite expensive, so these companies are now exposed
  3. India imports about 80 percent of its petroleum needs, a factor only complicated by the country’s exorbitant domestic taxes on fuel — almost 100 percent on gasoline and 60 percent to 70 percent on diesel
  4. This means that when the rupee depreciates, the exchange-rate pass through to fuel prices and, as a result, the rest of the economy, is high

Steps that RBI can take

  1. The central bank has more than $400 billion in reserves at its disposal and it could intervene in foreign-exchange markets by selling dollars
  2. It could raise interest rates, a move justified by the currency weakness, higher oil prices and the latest above-target inflation data
  3. It can also raise dollars by borrowing from non-resident Indians

Previous measures and their impacts

  1. The RBI has used these instruments in the past but rupee fared worse than all other emerging-market currencies
  2. Currency and derivatives markets, money and credit markets, and high costs of borrowing all hurt the economy in subsequent months

A new way to manage the exchange rate

  1. RBI has continued to manage the rupee carefully
  2. This was achieved by reducing the size of the rupee-dollar derivatives market, which made its intervention more effective and then buying rupees forward
  3. By doing this, while the real exchange rate of the rupee appreciated, the currency didn’t weaken in line with India’s higher inflation

How is rupee depreciation beneficial?

  1. A weaker currency helps export growth, which has been weak in recent years
  2. A weaker rupee would also offset competition of cheap imports from countries like China, which could give domestic industries a much-needed boost
Trade Sector Updates – Falling Exports, TIES, MEIS, Foreign Trade Policy, etc.

[op-ed snap] Is It Really Time For India to Shift Away From the Fiscal Deficit Debate?op-ed snapPriority 1


Note4students

Mains Paper 3: Economy | Effects of liberalization on the economy

From UPSC perspective, the following things are important:

Prelims level: Fiscal deficit, CAD, Quantitative easing

Mains level: Faling value of rupee & its associated effects


Context

The recent debate on loosening fiscal policy

  1. Last week, NITI Aayog vice-chairman is reported to have stated that he is more concerned about the rising trade deficit than the falling rupee
  2. The remedy suggested by him is “more exports”
  3. He warns that under the current circumstances, tightening fiscal and monetary policy at the same time would be asking for trouble

The connection between the trade deficit and the falling rupee

  1. The rupee’s depreciation would raise the landed prices of imports
  2. If imports are quoted in dollars, especially petroleum crude, the import bill goes up
  3. India imports nearly 75% of total oil requirements (half of the country’s imports)
  4. Though India’s exports would become cheaper and more attractive to foreigners as the rupee falls in value, in the short run, production of exports cannot be stepped up to take advantage of the depreciation
  5. Also, India’s exports are not as diversified as China’s
  6. With the festival season around the corner, India’s gold imports would rise

CAD likely to increase

  1. The current account deficit (CAD) or the net of inflows and outflows of foreign exchange would deteriorate to reach 2.8% of GDP in 2018-19 from 1.9% in 2017-18
  2. The basic balance (current account plus net flows of FDI) in the light of heavy pullout of hot money by portfolio investors is likely to be negative

RBI intervention approved by IMF

  1. The International Monetary Fund is concerned with the falling rupee and approves of RBI’s efforts towards stopping the fall in the rupee by using the reserves of $426 billion
  2. The two-way nature of exchange management, namely purchasing foreign exchange when the rupee is overvalued in 2017 to contain rupee appreciation and selling foreign exchange for arresting the further decline in rupee in the last few weeks, is appropriate
  3. Why such a policy? If the fall in the rupee is not stopped, the CAD would increase. That would further exercise pressure on the rupee and the currency would further depreciate regardless of outflow of hot moneys

Why ignoring fiscal deficit will not be a good option?

  1. Large economies like the USA, China and the European Union do not give much importance to the fiscal deficit
  2. The fact is that the world’s advanced economies, after the 2008 global recession, resorted to buying bad debts of banks under the name of quantitative easing for pumping in money to get out of the economic rut
  3. The near zero interest rate in the US and negative rates of interest in the Eurozone and Japan did not work
  4. Finding themselves caught in the liquidity trap, they switched onto a traditional Keynesian remedy of public expenditure
  5. India is not an advanced economy. Here, the conventional theory applies: fiscal and trade deficits are twins
  6. If an open economy spends more (aggregate demand exceeds aggregate supply), the excess demand spills over into external sector, leading to a trade deficit

Differences in calculating the fiscal deficit

  1. If state governments’ fiscal deficits are added to central government deficit, the nation’s actual deficit for 2017-18 is 7% of GDP
  2. If we go by the government’s definition though, it is only 3.5%
  3. In 2018-19, the IMF’s estimate is 6.6% of GDP, whereas the budget estimate is only 3.3%

Way Forward

  1. India cannot afford any fiscal indiscipline
  2. The central bank has done its job, having raised the policy interest rate and intervened in the currency market towards stabilising the exchange rate
  3. Now, it is the government’s turn. It should do what is expected of it: maintain fiscal stability
Trade Sector Updates – Falling Exports, TIES, MEIS, Foreign Trade Policy, etc.

National Logistics Portal to boost trade competitivenessPrelims OnlyPriority 1


Note4students

Mains Paper 3: Economy | Infrastructure: Energy, Ports, Roads, Airports, and Railways etc.

From UPSC perspective, the following things are important:

Prelims level: Particulars of the portal

Mains level: Importance and Contribution of  Logistics sector in India’s GDP.


News

Context

  1. A National Logistics Portal is being developed to ensure ease of trading in the international and domestic markets.
  2. India eyes lowering logistics cost from 14 per cent of GDP to less than 10 per cent by 2022.

National Logistics Portal

  1. The portal will link all the stakeholders of export-import, domestic trade and all trade activities on a single platform.
  2. This will help in generating jobs, increasing trade competitiveness and helping the country transform into a logistics hub.
  3. It will connect business, create opportunities and bring together various ministries, departments and the private sector.
  4. Stakeholders like traders, manufacturers, logistics service providers, infrastructure providers, financial services, government departments and groups and associations will all be on one platform
  5. The Department of Commerce has earlier decided to create a portal which will be a single window online marketplace for trade.

Logistics Sector of India

  1. India’s logistics sector is highly defragmented and the department aims to reduce the logistics cost from the present 14 per cent of GDP to less than 10 per cent by 2022.
  2. The country’s logistics is very complex with more than 20 government agencies, 40 partnering government agencies (PGAs), 37 export promotion councils, 500 certifications, 10,000 commodities and USD 160 billion market size.
  3. It also involves12 million employment base, 200 shipping agencies, 36logisticsservices, 50 IT ecosystems and banks and insurance agencies.
  4. As per the Economic Survey 2017-18, the Indian logistics sector provides livelihood to more than 22 million people.
  5. Improving the sector will facilitate 10 per cent decrease in indirect logistics cost leading to the growth of 5 to 8 per cent in exports.
  6. Further, the Survey estimates that the worth of Indian logistics market would be around USD 215 billion in next two years compared to about USD 160 billion currently.
Trade Sector Updates – Falling Exports, TIES, MEIS, Foreign Trade Policy, etc.

[op-ed snap] Tilting at windmillsop-ed snap


Note4students

Mains Paper 2: IR | Effect of policies & politics of developed & developing countries on India’s interests, Indian diaspora

From UPSC perspective, the following things are important:

Prelims level: Not much

Mains level: What lessons can be learnt from trade war by India in order to avoid a US type collapse of job market


Context

Trade war scenario

  1. Donald Trump’s trade war ignores the complexity of world supply chains and glosses over issues within the U.S. industry
  2. In his simplistic world-view, slapping tariffs on the U.S.’s main trading partners — Canada, China, the European Union, and Mexico — will reduce U.S. trade deficits, bring back well-paying manufacturing jobs, and make America great again
  3. These changes, rather than globalisation, are responsible for the stagnation of average U.S. wages in real terms for almost 40 years

Fewer companies due to oligopoly

  1. Recently, Apple became the first company to have a $1 trillion valuation
  2. Today just 30 companies reap half of all profits produced by all publicly traded companies
  3. Half of all the gains registered by Standard & Poor’s 500-stock index was delivered by just five companies: Apple, Amazon, Facebook, Netflix, and Alphabet, the parent company of Google

What does this mean for workers?

  1. The greater concentration of capital allows the giant oligopolies to raise prices which takes more of a worker’s pay cheque
  2. Fewer companies mean workers have less choice of employers and so have less bargaining power
  3. Anti-poaching and mandatory arbitration arrangements further weaken labour’s hand
  4. The focus on short-term profits leads firms to use their capital to buy back shares, driving up share prices to benefit shareholders and top managers who have an increasing percentage of their compensation in company shares

Comparing the US & Germany

  1. Between 2002 and 2008, when the U.S. lost one-third of its manufacturing jobs, Germany lost a mere 11%
  2. This was because most German firms are privately owned and rather than buying back shares they invested their capital in boosting their productivity
  3. German firms include worker representatives on their corporate boards, invest in apprenticeship programmes, and in relevant research and development projects
  4. During the recession of 2008-09, instead of dismissing employees outright, German firms reduced work hours and helped retrain workers
  5. They thus have a deep pool of skilled labour

Impact of low skilling

  1. When computers and numerically controlled machines are progressively inducted into production, constant upgrading of labour skills is vital to preserve well-paying jobs
  2. Washington has made no systematic effort to upgrade skills
  3. Tim Cook, the CEO of Apple, constantly emphasises that his company has shifted production to China not because labour is cheaper there but because it has a much wider pool of skilled labour than does the U.S.

Lesson for India

  1. India also needs to focus on skill development more rather than only focusing on startups and ease of doing business as the industry is run mostly by the labourers and not the managers and top-level management
  2. Lessons can be taken from Germany to avoid a USA like situation in India
Trade Sector Updates – Falling Exports, TIES, MEIS, Foreign Trade Policy, etc.

What does the falling rupee mean for you and economy?Priority 1


Note4students

Mains Paper 3: Economy | Indian Economy

From UPSC perspective, the following things are important:

Prelims level: Not much

Mains level: Impact of rising crude oil prices on CAD, fiscal deficit, etc.


News

Context

  1. With the rupee recently weakening past ₹70 to a dollar and hovering about that level since, concerns over the impact of the devaluation on economic indicators are intensifying.
  2. This is again fueled by stubbornly high oil price.

What happens to inflation?

  1. One of the first visible effects of currency depreciation is the country’s imports become more expensive and exports cheaper.
  2. It takes more rupees to pay for the same quantum of imports and fewer dollars for a buyer to pay for the same quantity of exports.
  3. More expensive imports are likely to drive inflation upward, especially in India where input products constitute a large part of our imports.
  4. In addition, a depreciating rupee also impacts the oil import bill since it costs more rupees per barrel of oil, which plays its own part in pushing inflation up.

What happens to GDP growth?

  1. This is a more complex issue given the number of factors that affect GDP growth.
  2. On the one hand, costlier inputs and the subsequent increase in the prices of finished goods should have a positive impact on GDP. But the consequent decrease in demand due to higher prices could nullify this.
  3. This is best explained using the textbook formula of aggregate demand equalling the sum of household consumption of goods and services, investment, government expenditure on goods and services, and exports minus imports.
  4. A depreciating rupee certainly affects the exports and imports, since exports are likely to receive a boost while imports could flag somewhat.
  5. It remains to be seen what impact a reduction in household consumption would have on demand, especially when the festive season is nearing.

What does this mean for the citizens?

  1. A depreciating rupee means higher prices of goods and services, costlier petrol and trips abroad turning more expensive.
  2. On the flip side, the domestic tourism could grow as more tourists visit India since their currency now buys more here.
  3. In the medium term, export-oriented industries may also create more jobs.
Trade Sector Updates – Falling Exports, TIES, MEIS, Foreign Trade Policy, etc.

[pib] Mobile App Niryat MitraPIBPrelims Only


Note4students

Mains Paper 3: Economy | Effects of liberalization on the economy, changes in industrial policy and their effects on industrial growth

From UPSC perspective, the following things are important:

Prelims level: Particulars of the app

Mains level: Initiatives for Export Promotion by the Govt.


News

Niryat Mitra Mobile App

  1. Nodal Agency: Union Minister of Commerce & Industry
  2. The app developed by the Federation of Indian Export Organisations (FIEO) is available both on Android and on IOS platforms.
  3. It provides wide range of information required to undertake international trade right from the policy provisions for export and import, applicable GST rate, available export incentives, tariff, preferential tariff, market access requirements – SPS and TBT measures.
  4. The most interesting part is that all the information is available at tariff line.
  5. The app works internally to map the ITC HS code of other countries with that of India and provides all the required data without the users bothering about the HS code of any country.
  6. Presently the app comes with the data of 87 countries.

Promoting Ease of Doing Business

  1. The exports are showing good sign and registering increase at the rate of 20%.
  2. The app will provide big opportunity to everybody and help promote export interests in the country.
  3. The Human Resource tool of the app enables candidates with interest in the international trade sector to register and apply against the vacancies arising in the sector.
  4. Companies can also search the profiles of the candidates and engage them.
Trade Sector Updates – Falling Exports, TIES, MEIS, Foreign Trade Policy, etc.

Indian shipping companies headed for troubled watersPriority 1


Note4students

Mains Paper 3: Economy | Infrastructure: Energy, Ports, Roads, Airports, Railways etc.

From UPSC perspective, the following things are important:

Prelims level: ROFR Clause

Mains level: The newscard highlights the drawbacks of scrapping the RORR clause. However it will provide more options to Government for less expensive shipping thus reducing the overall logistics cost.


News

Scrapping of Right of First Refusal (ROFR) clause

  1. A proposed move by the Centre to abolish the ROFR clause for transportation of Indian cargo by Indian-flagged vessels, the only benefit available to Indian shipping companies is threatening the existence of the domestic shipping industry.
  2. Indian shipping companies have a combined fleet of 1,372 ships with a total capacity of 12.35 million Gross Tonnage (GT).

What is a Right of First Refusal?

  1. Right of first refusal is a contractual right, but not obligation, to enter into a business transaction with a person or company before anyone else can.
  2. If the entity with the right of first refusal declines to enter into a transaction, the owner of the asset who offered the right is free to open the bidding up to other interested parties.

Benefiting Foreign Shipping?

  1. The government is preparing ground to do away with the ROFR clause which ensures Indian-registered ships carry Indian bulk dry/liquid cargo of Indian public and private sector companies at the lowest rate.
  2. This rate is to be quoted by a foreign shipping line by matching the price.
  3. Thus, while it does not add any extra cost to the importer or exporter, it provides assured business to the national fleet but at a rate quoted by a foreign line.
  4. Hence Indian Shipping firms are de-registering their vessels from India and flag them in tax havens of Panama and Bahama to survive and compete with foreign lines.
  5. Currently, 92% of India’s export import trade is carried by foreign flag ships. And the 8% that is assured to Indian ships is likely to go if the ROFR is scrapped.

Domestic shipping is Costlier

  1. Since foreign flag vessels do not pay any tax in India while Indian companies are costlier since they have to pay multiple taxes.
  2. In 2017 alone, Indian shipping companies have made investments of around ₹4,700 crore in assets in anticipation of business.
  3. To heal this, Shipping Ministry issued orders that permitted foreign flag vessels to transport export import-laden containers, agri products, horticulture, fisheries, animal husbandry commodities and fertilizers between two or more Indian ports without obtaining a licence from the Directorate General of Shipping.
  4. This means that an Indian flag vessel, if available, has lost the opportunity of doing this business.

What concerns Indian firms ?

  1. Indian shipping companies said this move is being contemplated without any consultative process.
  2. Also, the integrity and security of transportation of critical cargo in times of war or economic sanctions seem to have been completely ignored.
  3. The right of first refusal is the only incentive to the Indian flag, which suffers from many disadvantages versus foreign flags.
  4. De-registering of vessels from the Indian flag will be a strategic blow to Indian security as merchant naval fleet always acts as a second line of defence for coastal security.

Way Forward

  1. Some experts feel the objective of the government is to shift cargo movement from railways and roadways to the waterways to reduce logistics costs and ensure faster movement of cargo, which the domestic lines have failed to deliver.
  2. This move should not be looked at in isolation.
  3. The government wants to build volumes and see a large-scale shift of cargo movement to waterways which foreign lines can provide as we do not have a strong domestic shipping industry.
Trade Sector Updates – Falling Exports, TIES, MEIS, Foreign Trade Policy, etc.

[op-ed snap] What India must do to be a free trade championop-ed snapPriority 1


Note4students

Mains Paper 3: Economy | Effects of liberalization on the economy, changes in industrial policy & their effects on industrial growth

From UPSC perspective, the following things are important:

Prelims level: World Trade Organization, Regional Comprehensive Economic Partnership (RCEP)

Mains level: Various constraints affecting India’s exports and how to reduce them to boost exports


Context

Trade war across the globe

  1. The tariffs and counter-tariffs levied by the US and its allies and rivals alike are mounting
  2. The World Trade Organization has warned that growth in global trade is contingent on escalating trade tensions not acting as a spoiler

India’s position on liberalization

  1. It has spoken repeatedly about the benefits of a liberal trade regime at international forums in the recent past
  2. But rhetoric and reality don’t always match up as can be seen by its Regional Comprehensive Economic Partnership (RCEP) dilemma

What does India want in RCEP?

  1. India has been making efforts to fold services trade liberalization into the pact
  2. Why? As of 2016-17, India’s share of world merchandise exports stood at 1.65% while its share of world service exports was twice that at 3.35%
  3. This essentially means that India is more efficient and in a better position to export services rather than goods
  4. But the political sensitivity of the factors affecting services trade— the cross-border movement of professionals and the behind-the-border nature of regulation among them—makes it difficult to make headway

India’s goods trade and associated issues

  1. Indian goods exports are currently dominated by petroleum products, chemical products, textiles and garments, and engineering goods
  2. But quality matters more than quantity
  3. Exports with higher productivity and sophistication will contribute more to economic growth
  4. India’s basket of export continues to be dominated by goods of relatively low sophistication
  5. It skews substantially more towards low-tech manufacturing than the median of peer emerging economies

What does this lead to?

This hamstrings India on two fronts

  1. It limits the domestic productivity and income-boosting effects of exports
  2. It also makes it harder for India to gain the comparative advantage needed to take full advantage of bilateral and regional free trade pacts

Factors affecting exports

  1. The current poor performance of Indian exports undoubtedly has something to do with the demonetization shock, the goods and services tax (GST) snafu when it comes to refund payments for exporters and the twin balance sheet problem
  2. Indian exports are more sensitive to demand than the price
  3. India’s exports are also driven by domestic supply-side constraints
  4. Power shortages and poor reliability also affect export growth significantly
  5. There are the multiple factors, ranging from onerous labour laws to regulatory costs, that keep companies small
  6. Such companies have neither the capital and scale to move to more sophisticated goods, nor the worker skills to be part of such value chains
  7. Poor innovation capital—due to the lack of quality higher education, low public and private expenditure on research and development and a lacking legislative framework

Findings in Economic Survey 2017-18

  1. Improved logistics have huge implications on increasing exports, as a 10% decrease in indirect logistics cost can contribute to around 5-8% of extra exports
  2. India has logistics costs around double of those in developed economies

Way forward

  1. Free trade, for all the distributional issues that have rightly come into sharp focus over the past few years, is a net good
  2. India needs to sort out its goods versus services dilemma & the gap between theory and practice
  3. This won’t be bridged without a structural transformation in Indian exports
Trade Sector Updates – Falling Exports, TIES, MEIS, Foreign Trade Policy, etc.

[pib] Cabinet approves capital infusion in Export Credit Guarantee Corporation Ltd.DOMRPIB


Note4students

Mains Paper 3: Economy | Effects of liberalization on the economy, changes in industrial policy & their effects on industrial growth

From UPSC perspective, the following things are important:

Prelims level: ECGC

Mains level: Various initiatives by government to boost trade and exports 


News

The Cabinet Committee on Economic Affairs has approved the capital infusion of Rs.2000 crore for strengthening of  Export Credit Guarantee Corporation (ECGC)

How will it benefit?

  1. The infusion would enhance insurance coverage to MSME exports and strengthen India’s exports to emerging and challenging markets like Africa, CIS and Latin American countries.
  2. With enhanced capital, ECGC’s underwriting capacity and risk to capital ratio will improve considerably.
  3. With a stronger underwriting capacity, ECGC will be in a better position to support Indian exporters to tap new and unexplored markets.
  4. Increased capital infusion will help ECGC to diversify its product portfolio and provide cost effective credit insurance helping exporters to gain a stronger foothold in the difficult markets.
  5. Covers from ECGC will help in improving competitive position of India exporters in International markets.
  6. More than 85% of customers benefitted by ECGC’s covers are MSMEs.

 Back2Basics

Export Credit Guarantee Corporation of India (ECGC)

  1. The ECGC Limited is a company wholly owned by the Government of India based in Mumbai, Maharashtra.
  2. It provides export credit insurance support to Indian exporters to facilitate exports from the country and is controlled by the Ministry of Commerce, GoI.
  3. The ECGC offers credit insurance schemes to exporters to protect them against losses due to non-payment of export dues by overseas buyers due to political and / or commercial risks.
  4. ECGC covers exports to around 200 countries in the world.
  5. The ECGS:
  • Offers insurance protection to exporters against payment risks
  • Provides guidance in export-related activities
  • Makes available information on different countries with its own credit ratings
  • Makes it easy to obtain export finance from banks/financial institutions
  • Assists exporters in recovering bad debt
  • Provides information on credit-worthiness of overseas buyers
Trade Sector Updates – Falling Exports, TIES, MEIS, Foreign Trade Policy, etc.

[pib] First Livestock export from Nagpur airportPIB


Note4students

From UPSC perspective, the following things are important:

Prelims level: Not Much

Mains level: Utilizing Livestock export for benefiting distressed farmers of Vidarbha Region


News

First livestock Export by Air

  1. On June 30, 2018, livestock of sheep and goat will be exported for the first time to Sharjah from Nagpur
  2. Around 1 lakh sheep and goat will be exported over a period of three months from the Nagpur airport.
  3. This project is taking off due to the joint efforts of Multi-modal International Cargo Hub and Airport at Nagpur (MIHAN), Air India, Agriculture Ministry and Commerce Ministry.

Far-reaching benefits for Vidarbha Farmers

  1. The export of livestock will benefit farmers of the Vidarbha region which is witnessing farmer’s suicides.
  2. Shepherd’s and farmers of the region will greatly benefit from this and may consider Sheep and Goat rearing as a side business along with farming.
  3. When there is drought or when the farmer is in need of money he will be able to sell the sheep and goat. Women too can take this up as a business and make it a source of earning.
Trade Sector Updates – Falling Exports, TIES, MEIS, Foreign Trade Policy, etc.

[op-ed snap] China’s growing role in Asian trade and its impactPriority 1


Note4students

Mains Paper 3: Economy | Effects of liberalization on the economy, changes in industrial policy & their effects on industrial growth

From UPSC perspective, the following things are important:

Prelims level: World Trade Organization, Trade in Value-added (TiVA) database, Onshoring, Backward & forward participation

Mains level: China’s increasing participation in global trade and its implications on India as well as Asia


Context

Ongoing trade dispute between the US and China

  1. The ongoing trade dispute between the US and China is of particular concern for emerging Asian economies
  2. These economies have prospered by being active participants in regional and global value chains (GVCs)

Dependence of Asia on triad & China’s role

  1. Trade in Asia over the past 30 years has been shaped by GVCs
  2. Asia’s dependence on the triad (the US, Europe and Japan) as sources of technology, management and organization expertise—which are embodied in multinationals from these countries—as well as final export markets remains critical
  3. China has become a key assembling hub in many Asian supply chains and has played a major role in ensuring that manufactured exports from Asia have remained cost-competitive globally
  4. China has emerged as an export powerhouse and a key player in both intra-regional and extra-regional trade

China’s impact on Asian trade

  1. China has assumed an increasingly prominent role in the intra-regional trade landscape, especially after it joined the World Trade Organization (WTO) in 2001
  2. China’s trade performance has had a major impact on Asia’s intra-regional trade as a whole
  3. The recent trade slowdown in Asia has been driven in part by the stagnation and contraction of rest of Asia (ROA)’s exports to China between 2012 and 2016

Backward & forward participation

  1. Backward participation is measured by the share of foreign value-added content in total gross exports
  2. East and South-East Asian economies averaged almost 30% based on the WTO’s Trade in Value-added (TiVA) database in terms of backward participation
  3. Forward participation captures the domestic value-added content embodied in the exports of other economies

Rising prospects of China

  1. With a rapid growth in per capita domestic incomes, the country is emerging as an important destination for final exports
  2. It is experiencing a transition from investment to consumption and manufacturing to services
  3. Progress in China’s technological sophistication has enabled the economy to utilize an increasing share of domestic capital and intermediate goods in export production (onshoring)

Implications for India

  1. India has not been able to fit prominently into the Asian GVCs
  2. The initial expectation was that the Regional Comprehensive Economic Partnership (RCEP) would be the catalyst for this to happen
  3. But it is believed that such trade agreements have been the cause of and may be part of the reason of the limited success of the much-touted “Make in India” scheme
  4. India’s anemic manufacturing performance and the inability of India to plug effectively into regional global supply chains can be attributed to the sustained supply-side distortions and rigidities as well as relatively high trade costs in India

Way forward

  1. The fourth industrial revolution appears to be disrupting and shortening GVCs
  2. India should focus on leapfrogging and getting prepared for this Industry 4.0
Trade Sector Updates – Falling Exports, TIES, MEIS, Foreign Trade Policy, etc.

[op-ed snap] International trade tensions: a worry for Asiaop-ed snap


Note4students

Mains Paper 3: Economy | Effects of liberalization on the economy, changes in industrial policy and their effects on industrial growth

From UPSC perspective, the following things are important:

Prelims level: Trade Related Aspects of Intellectual Property Rights (TRIPs) and Trade Related Aspects of Investment Measures (TRIMs), etc.

Mains level: There is a (so called) trade war going on between the US and China. The newscard discusses its possible implications on the Indian Economy.


News

Context

  1. The uncertainty in the global trade environment does not bode well for Asian economies that are heavily dependent on international trade and investment as a means of sustained growth

The growth decade between 2002 and 2017

  1. Between 2002 and 2017, economic growth in Asia averaged about 6% annually which expanded about 4% on an average
  2. Consequently, Asia’s share of GDP rose from 25% in 2002 to about 35% in 2017
  3. Asia’s share of global exports spiked from about 29% in 2002 to 38% in 2017,
  4. while its share of global imports increased from about 22% to 31% during the period

The tit-for-tat tariff threats by the US and China

  1. The Donald Trump administration announced the imposition of tariffs on $60 billion worth of Chinese imports
  2. This was in addition to the more general tariffs imposed on washing machines, solar panels, steel and aluminium imports on China and its other trading partners
  3. China, in turn, has threatened retaliatory tariffs worth $3 billion of goods from the US with 90% in food-related products and the rest in steel tubes and aluminium products

Both parties have a role to play in the US-China and overall global trade tensions

China is not following the WTO rules for its aspirations

  1. China is working on the “Made in China 2025” (inspired by Germany’s “Industry 4.0 plan”) which aims to develop world-class dominance in 10 domestic tech-manufacturing industries
  2. In so doing, critics have argued that China has failed at times to respect the World Trade Organization (WTO) agreements on Trade Related Aspects of Intellectual Property Rights (TRIPs) and Trade Related Aspects of Investment Measures (TRIMs)
  3. Counter view: Others have argued that the WTO itself is ill-equipped to deal with the unique challenges posed by a rising China with its unique economic structure

The US has undertaken aggressive unilateralism

  1. The US  administration has undertaken aggressive unilateralism due to its “diminished giant syndrome”
  2. The trade threats make it look as if “America believes in the law of the jungle rather than the rule of law”

Possible implications for Asia

  1. For now, the global trade environment will be much less buoyant and much more uncertain than it was in the past
  2. This does not bode well for Asian economies, particularly those, which are heavily dependent on international trade and investment as a means of sustained growth
  3. For the rest of Asia, it is critical that they reaffirm the importance of an open, transparent and rules-based multilateral trading system,
  4. while pushing forward with greater intra-regional trade initiatives that are of mutual benefit
Trade Sector Updates – Falling Exports, TIES, MEIS, Foreign Trade Policy, etc.

India merges anti-dumping, import safeguard bodies


Note4students

Mains Paper 3: Economy | Changes in industrial policy & their effects on industrial growth

From UPSC perspective, the following things are important:

Prelims level: Directorate General of Trade Remedies (DGTR),

Mains level: India’s import safeguard regime and its impact on overall trade


Better coordination in import duties

  1. India has finally merged the two separate bodies handling anti-dumping and import safeguards to form the Directorate General of Trade Remedies (DGTR)
  2. This is in line with US International Trade Commission (USITC)

Current Scenario

  1. Currently, Directorate General of Anti-Dumping and Allied Duties (DGAD) deals with anti-dumping and countervailing duty cases, while Directorate General of Safeguards (DGS) deals with safeguard measures and DGFT deals with quantitative restriction (QR) safeguards
  2. The finance ministry had administrative control over the DGS
  3. The commerce ministry has DGAD under its control

Functions of new body

  1. The refurbished DGTR will also bring safeguards (quantitative restrictions) functions of Directorate General of Foreign Trade (DGFT) into its fold
  2. DGTR will also provide trade defense support to India’s domestic industry and exporters in dealing with increasing instances of trade remedy investigations instituted against them by other countries

Back2Basics

Directorate General of Trade Remedies (DGTR)

  1. The Government of India carried out an Amendment to the Government of India (Allocation of Business) Rules, 1961 for the creation of an integrated single umbrella National Authority to be called the Directorate General of Trade Remedies (DGTR) for providing comprehensive and swift trade defense mechanism in India
  2. The amendment of Allocation of Business Rules has also mandated Department of Commerce with work pertaining to the recommendation of Safeguard measures
  3. The DGTR will bring DGAD, DGS and Safeguards (QR) functions of DGFT into its fold by merging them into one single national entity
  4. DGTR will deal with Anti-dumping, CVD and Safeguard measures
  5. The DGTR will function as an attached office of Department of Commerce
  6. The recommendation of DGTR for the imposition of Anti-dumping, countervailing & Safeguard duties would be considered by the Department of Revenue
Trade Sector Updates – Falling Exports, TIES, MEIS, Foreign Trade Policy, etc.

[op-ed snap] What the future holds for Indian exportsop-ed snap


Note4students

Mains Paper 3: Economy | Effects of liberalization on the economy, changes in industrial policy and their effects on industrial growth

From UPSC perspective, the following things are important:

Prelims level: Not much

Mains level: The four important factors discussed in the newscard.


News

Context

  1. The Economic Survey of 2017-18 identified exports as the biggest source of upside potential for growth in FY18
  2. But do the recent macroeconomic developments pose a threat or an opportunity for Indian exports?

Possible negative effect of the US policies on developing countries

  1. The US Federal Reserve has recently hiked the benchmark funds rate from 1.5% to 1.75%
  2. An interesting development is the expectation of a more aggressive monetary tightening in the future, with successive hikes over the next couple of years
  3. Such a hawkish stance has tremendous implications for the rest of the world, especially the emerging market economies

The current situation provides a favourable opportunity for an exports rebound in the coming quarters
There are at least four factors that augur well
FIRST:  Effects from dollar appreciation

  1. A Nomura report forecasts the 10-year US treasury yields to rise to 3.25% in Q3 2018 from 2.95% currently
  2. It identifies Q3 2018 as a quarter holding significant potential for dollar appreciation
  3. This has implications not only for Indo-US trade but also for India’s trade with other countries, as over 88% of Indian exports are invoiced in dollars

SECOND: Trade war between the US and China

  1. The inevitable trade war between the US and China offers another opportunity
  2. US President Donald Trump imposed tariffs on $50 billion worth of imports from China, to which China retaliated immediately and equally
  3. US importers from China cannot just shift this entire demand to US manufacturers as the local economy is already operating at close to full employment
  4. With factory wages in China escalating to the highest in emerging Asia, India can enjoy an export boom in sectors otherwise dominated by China like electronics and apparel

THIRD: Revival of demand from the European Union (EU)

  1. Financial crisis and PIIGS (Poland, Italy, Ireland, Greece, Spain) debt crisis broke the back of EU’s economic growth
  2. This led to a decline in demand from EU for Indian exports
  3. The projections for 2018 remain good, according to a European Commission report
  4. With the EU regaining, the resurgence in demand from the West will act as a boon for Indian exporters

FOURTH: Diversification of China’s manufacturing sector

  1. The growth in the manufacturing sector in February was at its lowest in the past 18 months due to a crackdown over pollution in major industrial provinces
  2. Understanding the long-term limitations, China has started diversifying its trading pattern by focusing more on technology-driven sophisticated goods
  3. It has already become a major exporter of green tech
  4. This is creating a vacuum in the manufactured goods export segment
  5. India should now capitalize on the opportunity

The way forward

  1. India is struggling for comparative advantage against low-end manufacturers, such as Bangladesh and Vietnam
  2. This weakening competitiveness needs to be addressed to sustain employment-generating export growth
  3. Although India may not be able to cater to the world market like China did for two decades, it should not lose out to rivals like Bangladesh and Vietnam
Trade Sector Updates – Falling Exports, TIES, MEIS, Foreign Trade Policy, etc.

Govt considering national policy for retail trade


Note4students

Mains Paper 3: Economy | Indian Economy Issues relating to planning

From UPSC perspective, the following things are important:

Prelims level: National policy on retail trade, Shops and Establishment Act

Mains level: India’s internal trade observations (from the economic survey)


New retail trade policy

  1. The government is considering a national policy on retail trade with a view to ensuring orderly growth of the fast-growing sector
  2. The commerce and industry ministry has written to the department of consumer affairs to set up a task force for framing the policy

Authority to regulate internal trade

  1. The consumer affairs ministry is the nodal agency for regulating internal trade
  2. The commerce ministry should also take on board state governments while framing the policy norms as retail trade is also governed by the Shops and Establishment Act
Trade Sector Updates – Falling Exports, TIES, MEIS, Foreign Trade Policy, etc.

[op-ed snap] India needs to fundamentally alter its export strategyop-ed snap


Note4students

Mains Paper 3: Economy | Effects of liberalization on the economy, changes in industrial policy & their effects on industrial growth

From UPSC perspective, the following things are important:

Prelims level: Not much

Mains level: Decline in India’s exports and its implication on overall economy


Context 

India’s falling exports

  1. India’s revenue from exports of merchandise over the last four fiscal years was $310 billion, $262 billion, $275 billion and $302 billion, respectively (No need of remembering these figures per se)
  2. Thus over the four years from April 2014 till March 2018, the total growth was zero, or, rather, a tad negative
  3. Even the ratio of exports to gross domestic product (GDP), at 11.6%, is at a 14-year low

In contrast to the global situation

  1. This comes at a time when the world is experiencing synchronized income and consumption growth
  2. Our Asian peers are also clocking decent export numbers

Factors affecting India’s exports

  1. The lingering effects of demonetisation
  • Due to last year’s cash disruption, orders were lost, and these can’t be regained easily from competitor countries
  • There is a kind of hysteresis as lost orders and jobs are not fully reversible

2. The delay in getting goods and services tax (GST) refunds

  • There is a burden of the cost of locked capital
  • The delayed refund does not include the interest cost

3. The overvalued exchange rate

  • It makes India’s exports relatively expensive

4. The continuing unreliability of electricity and other infrastructure facilities

  • Small and medium enterprises need a common plug and play, seamless hard and soft infrastructure—whether it’s effluent treatment or inspection or logistics

Changing export strategy

We need to move from merely focusing to becoming obsessed with rejuvenating our exports. This can be done by:

  1. Focus on labor-intensive exports such as agriculture, textiles, footwear and tourism
  2. Have a zero GST rate for all exports
  3. Shun product- and market-specific incentives and focus on regional or cluster subsidies, which benefit all producers, small or large, domestic or export-oriented
  4. Reduce and further reduce inspector raj
  5. Actively and aggressively promote participation in global value chains
  6. Be committed to open borders, notwithstanding the pressure to raise trade barriers

Way forward

  1. India is capable of investing in modern machinery and automation, as also in skilling its personnel, just like its competitors
  2. It is not by the protection that domestic industry will become world leaders in competitiveness
Trade Sector Updates – Falling Exports, TIES, MEIS, Foreign Trade Policy, etc.

Higher trade deficit pushes up Q3 current account deficit to $13.5 billion


Note4students

Mains Paper 3: Economy | Effects of liberalization on the economy, changes in industrial policy and their effects on industrial growth

From UPSC perspective, the following things are important:

Prelims level: CAD

Mains level: Reason behind the increase in CAD figures.


News

Rise in the current account deficit(CAD): Reserve Bank of India (RBI)

  1. The current account deficit (CAD) rose to 2% of the GDP or $13.5 billion in the December quarter, up from $8 billion or 1.4% in the year-ago period, on the back of higher trade deficit
  2. What is the CAD:  It shows the difference between foreign exchange earned and spent

Possible reason behind the increase of the CAD

  1. According to the RBI, the widening of the CAD on a year-on-year basis is primarily due to a higher trade deficit
  2. which rose to $44.1 billion in the reporting quarter due to a larger increase in merchandise imports relative to exports

Back2basics

Current Account Deficit

Trade Sector Updates – Falling Exports, TIES, MEIS, Foreign Trade Policy, etc.

Trade deficit widens to $16.3 bn in Jan.


Note4students

Mains Paper 3: Economy | Effects of liberalization on the economy, changes in industrial policy and their effects on industrial growth

From UPSC perspective, the following things are important:

Prelims level: Trade deficit

Mains level: Observe the data given in the newscard.


News

Level of trade deficit

  1. India’s goods trade deficit widened to $16.30 billion in January 2018 from $9.9 billion in the same month a year earlier owing to imports outpacing exports
  2. The data is released by commerce ministry recently
  3. The January trade deficit is a more than three-year high
  4. It was $16.86 billion in November 2014
  5. During the April-January 2017-18 period, trade deficit was $131.15 billion
  6. Exports during April-January 2017-18 increased by 11.75% to $247.89 billion,
  7. Imports: while imports during the 10-month period of the current fiscal registered a 22.21% growth to $379.05 billion

On export front

  1. Though exports in January 2018 witnessed positive growth for third time in a row, the rate of growth is declining on a month-on-month basis
  2. Besides, export growth of about 9%, more than 6% has been contributed by petroleum products alone

Other sectors

  1. Labour-intensive sectors like garments, carpets, handicrafts, man-made textiles are exhibiting negative growth primarily due to liquidity crunch emanating from blocking of funds in GST
Trade Sector Updates – Falling Exports, TIES, MEIS, Foreign Trade Policy, etc.

[op-ed snap] Labour-intensive exports need a policy pushop-ed snap


Note4students

Mains Paper 3: Economy | Growth

From UPSC perspective, the following things are important:

Prelims level: Ease of doing business, Economic survey,

Mains level: Opportunity for India to take China’s place in labour intensive manufacturing sector


Context

Mid term review of Foreign Trade Policy

  1. The government of India has taken several measures to boost exports in its midterm review of foreign trade policy 2015-20
  2. Apart from incentives for specific sectors such as ready-made garments and footwear, it also allowed duty-free procurement of the inputs needed for exports on a self-assessment basis
  3. A new logistics division has been established in the department of commerce to coordinate development in the logistics space
  4. Read the full news here

India losing exports to smaller economies

  1. It is often argued that India stands to gain as labour-intensive manufacturing is moving out of China due to rising wages and an ageing population
  2. But this is not happening in a big way, and India is losing out to other Asian countries such as Bangladesh and Vietnam
  3. India’s “revealed comparative advantage”, an indicator of competitiveness, in some of the labour-intensive sectors has actually declined over the past decade
  4. The latest Economic Survey (2016-17) also highlighted how India is losing out in labour-intensive sectors like apparel and footwear, and why it is important to focus on these sectors

What India can do to increase competitiveness?

India will have to work on multiple levels to increase its competitiveness

  1. It will need to improve logistics to increase efficiency, both in terms of the time and costs involved
  • The trade policy review shows that the government is addressing this issue

2. The government will need to move forward with reforms in the factor market

  • India has a large number of small enterprises, which are not in a position to attain economies of scale and compete in international markets
  • Economic Survey highlighted, Indian firms in the apparel and leather sectors are smaller than those in China, Vietnam and Bangladesh
  • The reason for this is regressive labour laws
  • Similarly, more flexibility in land acquisition will also help the manufacturing sector

3. India needs to be prepared to protect its interests without compromising on its open trade policy

  • There is a threat of rising protectionism
  • India has always supported rule-based multilateral trade negotiations under the WTO
  • Seeing low progress on these, India should also look for opportunities to reduce trade barriers at the regional and bilateral levels

4. Keep the currency competitive

  • India doesn’t need an undervalued currency, but the Reserve Bank of India (RBI) should not allow the rupee to appreciate sharply
  • The 36-currency exports-based real effective exchange rate is still showing significant overvaluation
  • Now that India has adequate forex reserves, policymakers should reassess the kind of funds it needs
  • This will not only assist in keeping the rupee competitive and stable but will also help in conducting the monetary policy

Way forward

  1. Challenges on the export front may increase owing to the growing threat of protectionism and rising automation
  2. The government is working on increasing the ease of doing business, which should also help India’s exports

Back2Basics

A good time to go back to Economic survey and revise important chapters. Read it here

Trade Sector Updates – Falling Exports, TIES, MEIS, Foreign Trade Policy, etc.

Boost for exports as Government announces more incentives


Note4students

Mains Paper 3: Economy | Effects of liberalization on the economy, changes in industrial policy & their effects on industrial growth

From UPSC perspective, the following things are important:

Prelims level: Foreign Trade Policy 2015-2020, Merchandise Exports from India Scheme (MEIS), Services Exports from India Scheme (SEIS), EPCG

Mains level: Various initiatives by government to boost trade and exports


News

Additional incentives to help boost exports

  1. In its mid-term review of the Foreign Trade Policy 2015-2020, government announced additional incentives to help boost exports
  2. This included simplified processes to help exporters and a commitment to roll out an e-wallet scheme to ease working capital issues for exporters in the post-GST regime
  3. Government also raised the incentive rate by 2 percent under the most popular Merchandise Exports from India Scheme (MEIS) and Services Exports from India Scheme (SEIS)

Benefits for whom?

  1. The additional incentives have been provided for exports by small and medium enterprises, labour-intensive and agriculture-based exports among others

Aim of Mid-term review

  1. It aims to promote exports by simplification of processes
  2. Enhance support to high employment sectors
  3. Leverage benefits of GST
  4. Promote services exports and monitoring exports performance through state-of-the-art analytics

About MEIS scheme

  1. Under the MEIS scheme available to exporters, identified sectors are given duty exemption scrips, which are fixed at a certain percentage of the total value of their exports
  2. These scrips can be used to pay duties on inputs and can be traded

Other steps to make processes relating to trade simpler

  1. Self certification scheme for duty free imports
  2. Single point electronic contact to traders with the Directorate General of Foreign Trade for trade and consignment related queries
  3. Creating a logistics division in the department of commerce
  4. Doing away with the testing of samples for drawback purpose and the introduction of e sealing facility for exporters
  5. Relaxations in the EPCG (Export Promotion Capital Goods) scheme
Trade Sector Updates – Falling Exports, TIES, MEIS, Foreign Trade Policy, etc.

[pib] What are the schemes and measures to increase India’s share in global trade?Govt. SchemesPIB


  1. The Merchandise Exports from India Scheme (MEIS) was introduced in the Foreign Trade Policy (FTP) 2015-20
  2. The Government is implementing the Niryat Bandhu Scheme with an objective to reach out to the new and potential exporters
  3. Interest Equalization Scheme on pre & post shipment credit launched to provide cheaper credit to exporters.
  4. By way of trade facilitation and enhancing the ease of doing business, Government reduced the number of mandatory documents required for exports and imports
Trade Sector Updates – Falling Exports, TIES, MEIS, Foreign Trade Policy, etc.

[pib] What is Min of Commerce doing for Plantation crops?Govt. SchemesPIB


  1. Department of Commerce has recently approved the Revenue Insurance Scheme for Plantation Crops  (RISPC)
  2. Aim: Protecting growers of tea, coffee, rubber, cardamom and tobacco from the twin risks of weather and price arising from yield loss due to adverse weather parameters, pest attacks etc.
  3. Scheme is to be implemented on pilot basis in eight districts in the States of West Bengal, Kerala, Karnataka, Andhra Pradesh, Assam, Sikkim and Tamil Nadu
  4. It will be implemented by the Commodity Boards through selected insurance companies.
Trade Sector Updates – Falling Exports, TIES, MEIS, Foreign Trade Policy, etc.

Improve ports, logistics to boost exports: WB II


  1. While restrictions on agricultural markets have constrained productive private investments in higher value food products
  2. Govt needs to better target subsidies so that only the poor farmers are benefited
  3. Passive and non-targeted subsidies are not encouraging farmers to adopt new technologies and seed varieties
  4. The electronics sector, according to the Bank, faced constraints such as underdeveloped clusters and poor trade logistics
  5. The apparel sector is facing difficulties to import man-made fibre, preventing upgrading and diversification
Trade Sector Updates – Falling Exports, TIES, MEIS, Foreign Trade Policy, etc.

Improve ports, logistics to boost exports: WB I


  1. What: World Bank report to improve Indian exports
  2. India must frame policies to reduce farm subsidies and cut import tariffs on cars and take steps to improve ports and logistics
  3. It suggested a set of policy actions in four sectors — agribusiness, apparel, electronics and automotive
  4. With the right set of productivity-enhancing policies, South Asia, led by India, could more than triple its share in global markets of electronics and motor vehicles
  5. In the farm sector, passive and non-targeted subsidies (e.g. water, fertilisers and minimum support price) have encouraged farmers to produce low value crops
  6. Farmers use low productivity and unsustainable techniques
Trade Sector Updates – Falling Exports, TIES, MEIS, Foreign Trade Policy, etc.

Support small enterprises to boost India’s exports: President II


  1. Reasons for contraction: A weak global demand has adversely impacted India’s exports
  2. Reviving exports in a scenario of sluggish demand worldwide will remain a serious challenge for India
  3. Geopolitical instability, economic downturn, war and terrorism have further hampered the growth of world trade
  4. India also needs to support its SME exporters as they have the potential for accelerated growth
  5. But at the same time, SME’s are considered a high-risk venture by commercial lenders
Trade Sector Updates – Falling Exports, TIES, MEIS, Foreign Trade Policy, etc.

Support small enterprises to boost India’s exports: President I


  1. Source: President Pranab Mukherjee
  2. The Centre needs to ensure that India’s exporters, particularly those in the SME segment, are adequately supported through appropriate policy interventions to help them tide over the present downturn
  3. India’s exports had contracted in 20 of the 21 months till August this year except in June 2016, when it expanded 1.27%
  4. The Centre will have to consider strengthening India’s institutional credit guarantee framework in the trade sector
  5. This includes the state-owned ECGC that promotes the country’s exports
  6. It improves the competitiveness of the Indian exporters through credit risk insurance covers and related services
Trade Sector Updates – Falling Exports, TIES, MEIS, Foreign Trade Policy, etc.

Way ahead for Indian cotton exports


  1. Competitiveness of Indian cotton yarn in the international market should improve
  2. Govt should give 2% under the Merchandise Export Incentivisation Scheme and 3% under the interest equalisation scheme for one year
  3. This will help India increase export to other countries too
  4. Cotton Corporation of India should buy 70 lakh to 80 lakh bales of cotton in the peak arrival period and supply it to the mills later to stabilise the prices
Trade Sector Updates – Falling Exports, TIES, MEIS, Foreign Trade Policy, etc.

India’s yarn exports decline


  1. The decline: India’s cotton yarn exports fell 11.58% in value terms and 4.44% in terms of volume during April – June this year compared to the same period last year
  2. Reasons: Exports to China, the main buyer of Indian cotton yarn, have declined
    Also an overall drop in demand in the domestic and export markets
  3. Problem for mills: Because of this, capacity utilisation in textile mills has also come down
  4. Further, fluctuations in cotton price have hit the textile mills
  5. Bangladesh is the second largest buyer of cotton yarn from India
  6. This year, India’s exports to Bangladesh & Pakistan have improved in terms of value and volume
Trade Sector Updates – Falling Exports, TIES, MEIS, Foreign Trade Policy, etc.

Centre eyes sops to spur internal trade- I


  1. The Centre may soon consider a three-pronged approach to revitalise India’s retail and wholesale trade
  2. This includes (i) establishing a regulatory body for national internal trade (retail and wholesale), (ii) a comprehensive domestic trade policy and (iii) a Board for Internal Trade
  3. Currently there is no single regulatory body or ministry for domestic trade- comprising mainly non-corporate small businesses providing employment to an estimated 460 million people
  4. There are about six crore such small enterprises in the country with an annual turnover of around Rs.30 lakh crore
  5. It has been estimated that about 70% of the country’s retail trade has not been linked to computers and digitised
Trade Sector Updates – Falling Exports, TIES, MEIS, Foreign Trade Policy, etc.

Centre plans to set up Board of Internal Trade


  1. Context: Setting up of Board of Internal Trade
  2. The Commerce and Industry Ministry will consider a proposal put forward by traders for setting up a Board of Internal Trade
  3. Aim: In a large and diverse market like India, internal trade has several issues that will need special attention
  4. The govt will benefit from getting alerts about the problems being faced by the domestic industry
  5. Even as exports have been affected by a weak global demand, India’s internal trade has been doing well
Trade Sector Updates – Falling Exports, TIES, MEIS, Foreign Trade Policy, etc.

New marble import policy to end licence raj- II


  1. Lower MIP: The Minimum Import Price for marble blocks has been reduced to address the distortions associated with an MIP
  2. SIT rec: Incidentally, the Special Investigation Team (SIT) constituted to probe black money had recommended doing away with the MIP on products such as marble
  3. It had indicated that continued imposition of MIPsaying otherwise it could lead to money laundering
  4. The SIT had mooted strong action under the anti-money laundering legislation to prevent foreign trade-linked money laundering
Trade Sector Updates – Falling Exports, TIES, MEIS, Foreign Trade Policy, etc.

New marble import policy to end licence raj- I


  1. The commerce ministry has notified the new import policy for marble and that it would come into effect from October 1
  2. Aim: To balance the interests of domestic consumers, producers and processors
  3. Also to end the cumbersome licensing system for import of marble and travertine blocks
  4. The Quantitative Restriction on the import of Marble & Travertine Blocks has also come to end
  5. To address the interests of domestic producers, the Basic Customs Duty on import of Marble will go up from the present 10 to 40%
Trade Sector Updates – Falling Exports, TIES, MEIS, Foreign Trade Policy, etc.

Exports return to growth after 18 months


  1. News: India’s merchandise exports rose 1.27% year-on-year in June 2016 to US$ 22.6 billion
  2. Reversed a declining trend that started in December 2014 due to weak global demand and a fall in commodity prices
  3. Merchandise exports: Exports of goods, not services; Also called tangible exports
  4. Imports during June 2016 slid 7.3% to US$ 30.7 billion
Trade Sector Updates – Falling Exports, TIES, MEIS, Foreign Trade Policy, etc.

Desperate need to check poor quality imports


  1. Context: Commerce Minister at ‘National Standards Conclave 2016’ organised by the Commerce Ministry along with CII
  2. Undesirable imports: Increasing tariffs or imposing quantitative restrictions alone cannot completely prevent poor quality and undesirable imports
  3. Solution: To ensure high quality standards for goods
  4. BIS: Bureau of Indian Standards needs to speed up its work with the ministries concerned to ensure matching high standards for locally-made and imported items
  5. Background: Allegations of a surge in imports of sub-standard goods from countries like China
Trade Sector Updates – Falling Exports, TIES, MEIS, Foreign Trade Policy, etc.

Centre to evolve norms to enhance product quality


  1. Context: The Commerce Ministry will soon bring out a five-year National Standards Strategy Paper
  2. Aim: To weed out substandard products from the domestic market and boost India’s exports of high quality goods
  3. Also, improving regulations to ensure that India moves gradually towards adoption of more mandatory standards (also called technical regulations) that are harmonised with international standards
  4. An inter-ministerial panel is already working on identifying goods that do not conform to safety, security, environment and health standards
Trade Sector Updates – Falling Exports, TIES, MEIS, Foreign Trade Policy, etc.

About the Capital Goods Sector Policy


  1. This is first ever policy for Capital Goods sector with a clear objective of increasing production of capital goods from Rs.2,30,000 crore in 2014-15 to Rs.7,50,000 crore in 2025
  2. And also raising direct and indirect employment from the current 8.4 million to 30 million
  3. Benefits: Help realise the vision of ‘Building India as the World class hub for Capital Goods’
  4. Pivotal role in overall manufacturing as the pillar of strength to the vision of Make in India
  5. The objectives of the policy will be met by the Department of Heavy Industry in a time-bound manner
Trade Sector Updates – Falling Exports, TIES, MEIS, Foreign Trade Policy, etc.

Government approves capital goods sector policy


  1. Context: The Cabinet approved the first-ever policy for the capital goods sector in the country
  2. Aim: To triple the value of production of these goods to Rs.7.5 lakh crore by 2025 and create more than 21 million jobs
  3. Export: The policy also envisages increasing exports to 40% of production from the present 27%
  4. Domestic production: The share of domestic production in India’s demand will also be increased from 60% to 80%, making India a net exporter of capital goods
Trade Sector Updates – Falling Exports, TIES, MEIS, Foreign Trade Policy, etc.

Decline in exports ‘at the end of the worst’


  1. India’s exports slid for the 17th month in a row in April to $20.5 billion
  2. Commerce Secretary: India’s shrinking exports is not a cause for alarm and the decline may be at the end of the worst
  3. The rate of decline in exports has started slowing & perhaps the worst is over and slowly the world is coming out of slowdown
  4. The decline in exports is in line with what was happening in the rest of the world
  5. If the slowdown in India is different from what is happening in the rest of the world then we would have been alarmed
Trade Sector Updates – Falling Exports, TIES, MEIS, Foreign Trade Policy, etc.

Tap forex pool to help exporters: Ministry


  1. News: The Commerce Ministry wants the RBI to use a part of its forex reserves to give long-term loans at low interest rate to the Exim Bank of India
  2. Why? It will help Exim Bank of India to pass it on to exporters at lower rates than bank credit
  3. Criticism: Rate of export credit in India is 11-12 % as against 2-3 % in the Euro area and 5.5% in China
  4. Aim: To help reduce the costs and enhance the competitiveness of exporters at a time of global trade slowdown and weak demand overseas
  5. Fact: Recently, forex reserve had reached to a record high of around $360 billion
Trade Sector Updates – Falling Exports, TIES, MEIS, Foreign Trade Policy, etc.

Centre mulls priority lending, SEZ revival among moves to boost exports


  1. Why: contracting export month after month for more than 12 months
  2. What: plan to offer incentives to small exporters, SEZs, labour intensive sectors, organic food processors
  3. Other steps: categorization of the entire export credit given by all lenders separately under priority sector lending without riders
  4. Better coordination with Indian missions overseas, relaxing norms for the Export Import Bank of India (Exim Bank) and Export Credit Guarantee Corporation of India (ECGC)
  5. Data: exports have declined from $314 billion in FY’14 to $310 billion in FY’15 and are expected to shrink further to nearly $260 billion this year
  6. Importance: Double digit growth impossible without exports doing well
Trade Sector Updates – Falling Exports, TIES, MEIS, Foreign Trade Policy, etc.

Balance of Payments data


  1. Context: The balance of payments data released for the first nine months of 2015-16
  2. Investment: It has been falling sharply, coming down from 39% in 2011-12 to 32.9% of GDP
  3. The expectation was that higher real interest rates would pull up savings, but that doesn’t seem to be happening
  4. CAD: 1.4% of GDP at current prices for the April-December 2015 period
  5. The low CAD is the result of the investment drought in the economy, combined with a lower level of savings
Trade Sector Updates – Falling Exports, TIES, MEIS, Foreign Trade Policy, etc.

Inter-ministerial meet to discuss measures to increase exports


  1. Inter-ministerial talks will begin soon to consider measures to boost exports and improve the ease of doing business.
  2. Background: Merchandise exports dropping for 13th month in row.
  3. The govt will also look into the likely impact of the proposed GST on exports .
  4. It will review free trade agreements, including the one with Asean member-countries.
  5. The commerce ministry will approach the ministries of external affairs and finance on customs-related issues.
Trade Sector Updates – Falling Exports, TIES, MEIS, Foreign Trade Policy, etc.

Commerce Ministry prepares strategy to boost exports to Africa


Worried over declining exports, the commerce ministry has prepared a strategy to boost shipments to Africa.

  1. The ministry has identified several sectors as part of the strategy- engineering, agriculture and farm equipment have emerged as a major ones.
  2. The Department of Commerce will hold consultations with Ambassadors and High Commissioners of major African nations and industry stakeholders to implement the strategy.
  3. Indian farm and agri equipment are competitive as compared to western products.
  4. There are huge tracts of land in Africa and agriculture is the growing sector there.
  5. The two-way commerce between India and Africa is about USD 75 billion.
Trade Sector Updates – Falling Exports, TIES, MEIS, Foreign Trade Policy, etc.

Commerce ministry backs measures to boost SEZs


  1. The Commerce Ministry is in the process of identifying reasons for the slowdown in the Special Economic Zones (SEZ).
  2. It has asked Finance Ministry to consider steps to boost exports from SEZs.
  3. The commerce ministry has raised issues regarding the removal or reduction of Minimum Alternate Tax and Dividend Distribution Tax on SEZs.
  4. Finance ministry has been asked to extend the Sunset Clause (provision relating to the expiry of the benefits to SEZs) on SEZs up to 2023.
Trade Sector Updates – Falling Exports, TIES, MEIS, Foreign Trade Policy, etc.

States to formulate export promotion policies


  1. The aim is to give a concerted push to India’s declining exports.
  2. Centre has asked every state to come out with an export policy identifying product and services of interest that have significant potential in the global arena.
  3. The role of states is crucial with infrastructure, VAT, land and environmental clearances, and labour, under the domain of states.
  4. A few states, such as Jharkhand and Karnataka, already have export policies while Gujarat, Kerala, Andhra Pradesh and Punjab are in the process of formulating it. 
Trade Sector Updates – Falling Exports, TIES, MEIS, Foreign Trade Policy, etc.

Fall in exports projected to be worst since 1952-53


  1. Merchandise exports this fiscal are projected to fall around 16% over the previous financial year.
  2. This will be the second worst export performance since independence, according to official data.
  3. Only in 1952-53, exports had fared worse when it shrank by 18.7%.
  4. Shipments during April-November this fiscal, had shrunk 18.46% as compared to the same period in 2014-15.
Trade Sector Updates – Falling Exports, TIES, MEIS, Foreign Trade Policy, etc.

Exports of top 5 sectors dip 25% in August


  1. Exports of top 5 sectors viz. engineering, petroleum, gems and jewellery, textiles and pharmaceuticals fell by about 25%, due to global demand slowdown.
  2. These five sectors accounted for about 65% of the country’s total merchandise exports in 2014-15.
  3. These are labour intensive sectors and govt. should announce steps to contain the dip in outbound shipments.
  4. The continuous decline in exports is expected to impact jobs and put pressure on the current account deficit.

India has aimed at taking exports of goods and services to $900 billion by 2020 and raising the country’s share in world exports to 3.5% from 2%.

Total exports in the past 4 financial years have been hovering at around $300 billion.

Trade Sector Updates – Falling Exports, TIES, MEIS, Foreign Trade Policy, etc.

Merchandise exports to decline by over 13 % in FY16


  1. India’s merchandise exports in 2015-16 are forecast to decline to $265-268 billion, significantly lower than $310.5 billion in the previous fiscal.
  2. This is mainly due to sharp erosion in commodity prices globally.
  3. The global merchandise economy has moved to a bearish and low cost situation where demand relates mainly to the actual consumption.
  4. There is no sentiment build-up around commodities and thus the demand is actually restricted to the real consumption.
  5. Indian exports had achieved a landmark of $300 billion in 2011-12 for the first time, making the country a sizeable player in global exports.
Trade Sector Updates – Falling Exports, TIES, MEIS, Foreign Trade Policy, etc.

India’s global hub fears more job losses


  1. Nearly half a dozen large diamond companies in the city have closed down: a significant hit for an industry that employs nearly a million people in India, two-thirds of them in Surat.
  2. Chinese consumers pull back from luxury purchases, leaving jewellers with stocks of unsold jewellery and gems.
  3. Jobs are a critical issue for India’s government, struggling to revive economic growth to a rate that will create employment for millions joining the workforce every year.
  4. China represents fifth of the world polished diamond market and accounts for the same proportion of India’s $23 billion of annual exports.
Trade Sector Updates – Falling Exports, TIES, MEIS, Foreign Trade Policy, etc.

Interest subvention scheme for exporters likely. Why?


  1. Amidst declining global demand and depreciating currencies, India’s exports fell by 15.82% in June – 7th consecutive declining month.
  2. Now planning to launch loans with subsidized interest rates to bolster the exports.

    Under the scheme, a portion of the rates is reimbursed by govt to lenders; loans at subsidised rates would help exporters boost shipments

Trade Sector Updates – Falling Exports, TIES, MEIS, Foreign Trade Policy, etc.

Centre to set up trade facilitation council to promote exports


  1. Govt will set up a trade facilitation council comprising members of the Centre and states.
  2. The idea is to promote India’s overseas shipments with an objective of facilitating trade from states in a bid to boost the country’s exports.
  3. States will also be encouraged to set up a State Trade Policy in order to streamline procedures and increase exports.
Trade Sector Updates – Falling Exports, TIES, MEIS, Foreign Trade Policy, etc.

In conversation with the Commerce Secy – Rajeev Kher


 


Sir, your views on the export data. Last six months, it has been very bad on our export economy.

This whole dimension of exports going down is definitely alarming. Asia which is one of the largest destinations for Indian exports has also been generally slowing down whether it is China or Japan or any other market, ASEAN, so that is of course one major reason.

What is the typical constitution of the basket of India’s exports?

About more than 30% of exports are coming out of petroleum products and gems and jewellery and because the petroleum prices have gone down so therefore consequent reduction of petroleum product prices is also happening.

What about our export competitiveness?

Two main issues there – Structural issues for example infrastructure is one big issue & then the ‘Ease of doing business’, which to be fair is a work in progress.

What according to you are the measure that are needed as far as exports are concerned?

Measures would be required on both sides –

One is the front end side and that is where these small incentives that we do by way of export incentives do help particularly the small sector.

There is a huge demand for interest subvention schemes which were there in ’13-’14 but not operational in ’14-’15. It will be a great boon to sectors which are traditionally niche for example the textile sector.

 

Trade Sector Updates – Falling Exports, TIES, MEIS, Foreign Trade Policy, etc.

Drop in India’s exports continues. Why?


Continuing decline in exports would result in layoffs and also put pressure on Current Account Deficit (CAD).

  1. India’s exports fell over 20% in May to $22.3 billion, for the sixth straight month in a row. But why? 

Two probable reasons – 

  1. Sluggish demand in key global markets such as the U.S. and Europe have hurt Indian exports.
  2. While the sharp fall in crude oil prices since last June has helped India reduce its import bill, India’s export of petroleum products (which make a sizable share of the export bill) has also taken a hit!

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