India’s integration with the global trade in general and export in particular are at an important juncture today. With downward pressure of commodity prices coupled with international currency fluctuation and delayed recovery in major markets, Indian export has been constantly falling in the last few months. The external sector factors will continue to remain volatile in the near future. In this challenging time, India needs domestic policy level support that can boost export competitiveness. To effectively increase the contribution of exports to the GDP of the country, we need to increase the relative value addition in our production and also explore alternate high growth markets. To go up in the ladder of production value chain, we have to use highly qualified labor and technology, which will give India an edge in its foreign trade. In this situation, private sector investments have become even more important to the Indian growth story. Investments have to be the key enabler for increasing production capacity in both value and volume terms.
This edition of Policy Watch looks at some of the important issues that continue to impact the overall export performance of India and brings forth the key policy interventions that need to be taken up on priority.
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CII Policy Watch- Focus: Integration with the World
1. 1policy watch
this IssueInside
Message From the
Director General............ 1
Chandrajit Banerjee,
Director General, CII
Industry Voices��������������������������������������������������� 6
Factfile��������������������������������������������������������������� 7
CEO Speak...........................................................2
Policy Barometer..................................................4
October 2015, Volume 4, Issue 5
Policy
E
xternal sector volatilities such
as weak commodity prices, major
international currency fluctuation
and less than expected growth in major
export markets have weakened India’s
export performance over the last year.
Total merchandise exports in August 2015
registered over 20 per cent contraction
compared to the value a year ago, while
growth for the first four months of 2015‑16
came in at a negative 16 per cent.
In coming days, the global environment
presents both challenges and opportunities.
On one hand, the global trade structure is
shifting due to upcoming trade agreements,
particularly theTrans Pacific Partnership (TPP),
and compliance to higher product standards.
On the other hand, the decline in global
commodity prices and rising costs in other
economies presents a good opportunity for
India to make a mark in the global markets.
India would need to strategically balance the
impact of these developments to build its
export performance.
The Government has recently introduced
major policy level change in the Foreign
Trade Policy (FTP) 2015-2020, including
domestic and external sector reforms.
The Commerce Minister of India has
outlined a holistic approach covering
market and product strategy, infrastructure
development and overall enhancement of
the trade eco-system. The FTP seeks to
create an Export Promotion Mission to be
synergized with the campaigns for Make in
India, Digital India and Skill India. It also
aims at coordination with States to prepare
tailored export promotion strategies as also
to target specific sectors.
It is laudable that the Government has
strongly emphasized on the Ease of
Doing Business reforms and is addressing
hurdles related to land, labour, raw
material and tax system, with priority
being accorded to the Goods and Services
Tax (GST). Additionally, India needs
to improve its export infrastructure in
tandem with manufacturing infrastructure.
India performs poorly in trade facilitation
areas such as hinterland connectivity,
logistics infrastructure and customs and
administrative procedures. To improve its
export performance in a challenging and
ever-changing global environment, India
would need to lower transaction costs and
drive export competitiveness as also align
with emerging standards regimes.
In the coming days, the overall growth
prospect of the global economy will
remain uncertain. With diminishing demand
in the global market, producers in the
major exporting countries will look at
liquidating excess production. With the
recent devaluation of Chinese Yuan, there
is further downward pressure in the prices
of key export items. This is the right time
for India to attach importance to its market
and product diversification strategy. With
increasing income levels, emerging countries
in South-East Asia, Eastern Europe, Latin
America and Africa may prove to be better
markets for Indian exporters. India also has
to put in more effort to expand trade with
its immediate neighbors in South Asia.
In addition, the evolving standards regime
will place additional burden on local
producers which need to be addressed.The
Trans-Pacific Partnership (TPP) is expected
to cover environmental, safety, labour
and social issues in its ambit although
the details are not yet available. India
must be able to conform to these norms
and regulations which will emerge as
global standards to retain its place in its
traditional markets.
Technology upgradation will be a challenge
for high value-added products. Indian
industry has to earn its expertise in the
vertical specialization and increase its value
addition in different product development
stages.The conventional low cost advantage
in manufacturing may not work anymore.
To do so, Indian industry has to adopt
technology and invest in indigenous research
to build intellectual property.
CII has a strong international footprint
and is deeply engaged across all markets
and regions. Recently, we have set
up a Standards Portal with American
National Standards Institute to provide
information on standards to exporters
and manufacturers. Our business missions
and trade shows help promote India’s
exports. We are working closely with the
Government on export policy and are
confident that with continued strong policy
action, our exports will turn the corner
shortly. n
Chandrajit Banerjee
Director General
Confederation of Indian Industry
Focus: Integration with the World
2. 2 policy watch
CEOSpeak
The current year has not been very
positive for Indian exports despite
many policy level supports provided
by the Government. What do you
think are the reasons behind India’s
poor export performance in recent
months?
The Foreign Trade Policy (FTP) 2015-20
has brought many policy level supports
for the manufacturers and exporters. The
benefits under different schemes have been
simplified and streamlined mainly under
‘Merchandise Exports from India Scheme
(MEIS)’ for export of specified goods to
specified markets and ‘Services Exports
from India Scheme (SEIS)’ for export of
notified services.
I would like to mention that while the
recommendations in FTP 2015-20 are
in sync with a number of domestic and
external sector reforms, in India these
policy reforms require wider consensus
and take longer than expected time. On
the other hand, from the beginning of FY
2015, the global macro-economic outlook
was not conducive for Indian export.
The global demand, more specifically in
the EU, which is India’s largest export
market, has remained lackadaisical. Even
though the Greek crisis did not have a
direct impact on India, the delayed recovery
of the European economy in general
hampered the exports from India. Further,
global commodity prices, more specifically
reducing price of petroleum products,
which have the highest contribution in
India’s exports has put negative impact
on India’s exports.
What should the Indian industry do
at such a challenging time?
In this challenging time and also in an
uncertain future, Indian exporters should
make extra effort on product and market
diversification. The United States and
the European Union are the two most
important export markets for India. As
per UN COMTRADE data, for the last
ten years (from 2005 to 2014), average
contribution of these two markets to India’s
merchandise exports is approximately 33
per cent. India’s constant dependency
on these markets and failure to diversify
export has caused severe concern at the
time of slowdown there. From the same
source of data, it has been seen that in
2009, the combined exports to the US
and EU dropped by 9 per cent, in 2012 it
dropped by 2 per cent and more recently
in 2014 by 4 per cent.
The second point is product diversification.
If the shares of major products in total
export from India are compared with the
same in total global import, a big mismatch
is observed. Indian exports are highly
concentrated on petroleum, gems jewelry
and other labour intensive products and
less on other products, more specifically
manufactured items that the global market
demands. India has to match its export
with the composition of global trade.
How can Indian industry attain
competitive advantage in the world
trade?
India’s product basket for the global market
is very wide but relative value addition in
individual product segments is considerably
low. India is considered a location of low
cost and low value added production. If
the gross value added content to the
manufactured product is low, it has two
effects that will subsequently follow. First,
the growth of export revenue will not
be high in comparison with the volume
and also, India has to import high value
added products for the consumption of the
domestic market. Effectively, it will widen
the trade deficit further. So, India has to
do vertical specialization in its product
basket and extend its expertise in high
value manufacturing. It is only possible
when Indian manufacturers expend more
on research and development, develop
Intellectual Property Rights (IPRs) and use
advanced technology.
Today a major share of trade is
happening through global value
chain where production of goods is
distributed across different regions
of the world. What are the key
challenges for India’s participation
in global value chain?
To make manufacturing the growth driver,
India has to participate in the global
value chain to contribute to value added
intermediary and final good production. In
this regard, India’s integration with regional
trading block and subsequently integration
with mega-regional blocks is very important
to facilitate free flow of goods, investment
and services. A strong standard regime and
an improved trade facilitation infrastructure
simultaneously with tariff liberalisation can
A Strong Domestic Standard Regime is the
Need of the Hour
G K Pillai
Chairman, CII National Committee on
International Trade Policy Exports and
Chairman,Tata International Limited
3. 3policy watch
CEOSpeak
be looked in the context of India’s integration
into the global value chain. Low tariffs help
in sourcing of intermediate products and raw
materials in order to produce high value
manufacturing products.
According to the OECD-WTO Trade in
Value Added (TiVA) initiative, India’s import
content of exports is about 22 per cent
while its exports of intermediates that are
used in third countries’ exports come to
about 20 per cent. Moreover, services have
increasingly become important, not only
as trade by itself, but as embodied in the
production of goods that are traded. Even
though India imports a lot of intermediate
goods, its contribution in the export is
relatively low and lags behind major export
led economies such as China, Japan, Korea,
Brazil and Australia.
Why conforming with standards has
become very important for Indian
exports today?
Post liberalization, with declining tariff
in foreign trade, the new focus of main
trading partners in the world has shifted
to standards and technical regulations.
With the proper compliance and conformity
assessment of standards, trade can
increase to a substantial level, both in
value and volume term.
Traditionally, Indian exports were not
standards driven. Industry has not given
due priority to it. During the Uruguay
round of WTO, the role of standards gained
tremendous importance and India has
to comply with international obligations
to meet certain standards in order to
gain access to certain markets. Now as
the mega-regionals have mandated the
adoption of high technical standards and
regulations, the prospect of trade may shut
in some major markets in the absence of a
proper standards regime. A strong domestic
standard regime is also needed to check
sub-standard import into the country.
Do you foresee any impact of the
slowdown of the Chinese economy
on India, particularly on Indian
exports?
The recent turmoil in the Chinese
economy has raised the obvious question
- whether China is slowing down or if
the giant economy is preparing to go
into recession. Riding on the advantage
of cheap production, much of the growth
in China was driven by exports to the
west and large emerging markets like
India. Subsequent to the economic crisis
in two of China’s most important markets
namely the US and EU, accompanied by
increasing cost of production in domestic
market, China started piling inventory of
unsold products.
To revive exports Chinese currency was
recently devalued to help exporters push
their products to the world market. Even
though this deliberate attempt to revive the
Chinese economy will put tremendous price
pressure on Indian exporters, the potential
impact is not as severe as it seems to be.
The recent economic data of China shows
an interesting trend of growing service sector
in Chinese economy. Will this continue and
can India tap this opportunity? Only time will
tell us. What is more important to us now is
to focus on key structural reforms that will
strengthen our manufacturing ecosystem and
increase our export competitiveness. To take
opportunity of adverse industrial outlook in
any giant economy, our manufacturing has
to be innovation driven and high value
added. n
Source: Nickolay Khoroshkovshutterstock.com
4. 4 policy watch
Policy Barometer
CII Recommendations for Key Issues in
International Trade
Review the impact of Free Trade
Agreements (FTAs) and Regional
Comprehensive Economic Partnership
(RCEP) agreement on India’s sector-
specific exports and encourage Indian
industries to take FTA route for their
exports
Free Trade Agreements (FTAs) have proven
to be one of the best ways to open up
foreign markets for exporters. FTAs reduce
trade barriers and create a more stable
and transparent trading and investment
environment to make it easier and cheaper
for businesses to export their products
and services to trading partner markets.
According to the World Trade Organization
(WTO), more than 50 per cent of the
current global trade is on account of trade
agreements. Most of such trade agreements
are FTAs which are agreements to liberalize
trade in goods between signatory nations.
FTAs also serve as an important tool to
integrate national manufacturing industry
with the global value chain.
The main role of FTAs is to increase trade by
removing tariff barriers between countries.
However, in recent years, FTAs have gone
beyond the traditional mode of liberalizing
tariffs. Service trade liberalization is now
increasingly becoming part of FTAs.
Investment measures are also part of
these new age FTAs. India’s initiative in
regional economic integration gets a bigger
and more comprehensive form with the
participation in Regional Comprehensive
Economic Partnership (RCEP) agreement
with the 10 ASEAN countries and with
Australia, China, Japan, the Republic of
Korea and New Zealand. This is one of
the most significant and biggest FTA
initiatives in the world involving economic
powers such as China, Japan and India.
After completion, the free trade area will
generate tremendous opportunity for the
participating economies in particular and
world economy in general.
It has been observed that a large number
of Indian exporters do not currently use
FTA preference. There may be several
factors behind this. The following analysis
need to be done to understand the
effectiveness of India’s FTAs with its
partner countries:
• Review each FTA with respect to the
country’s tariff lines
• Identify trade barriers with each
FTA partner country and recommend
measures to increase trade
• Analyze how FTAs are helping the
competitiveness of Indian industry
• Use FTA negotiation to reduce non-
tariff barriers
• Create awareness in Industry and
enable them to follow FTA route for
both trade and investment
Post liberalization the focus has now shifted
to non-tariff and technical measures such
as standards and conformity assessment.
On one hand, standards have made the
flow of goods smooth and reliable, and
on the other, they have created multiple
trade barriers. As a result, in the modern
trading system, standards and technical
regulations define the export potential and
overall competitiveness of an economy.
They occupy a very significant space in
the agenda of the industry as well as
regulatory institutions.
The situation has become more critical
because of the formation of the three mega
regional trade agreements, namely Trans-
Pacific Partnership (TPP), Transatlantic
Trade and Investment Partnership (TTIP)
and Regional Comprehensive Economic
Partnership (RCEP) and among them, TPP
itself will control approximately 2/3rd
of the world trade. These mega trade
agreements, more specifically the former
two will define the role of standards in
international trade. Many of the stringent
requirements of product standards will be
influenced by the big economies such as
the US and EU. Some of the important
areas of focus will be sustainability, labour
and environment standards for which India
is not ready at all.
India is one of the members of RCEP
negotiation but it does not have the
negotiation power to set its own standards.
In the past, the matter of standards in
India’s foreign trade did not have much
provision of equivalence with other
trading partners. As a result, Indian
exporters regularly face issues related to
standards and SPS measures. In future
trade negotiations, India will have to
give more importance to equivalence and
conformity assessment.
Assess the gaps in the existing
procedural, administrative, regulatory
or legislative processes for a stronger
standards regime and suggest the
roadmap for change. Address Sanitary
and Phytosanitary Measures (SPS),
Technical Barriers to Trade (TBT)
and domestic regulations that have
impeded India's exports
Source: SK Designshutterstock.com
5. 5policy watch
Policy Barometer
Following are the recommended strategy
for upgrading India’s existing standards
eco-system and reducing technical barriers
in India’s exports
India needs to have a national standard
vision in a time bound manner and address
the issues of sustainability, labour and
environment protection. The standards for
the domestic market and for exports should
be the same for ensuring the compliance
and reduction in the cost of compliance
• During trade negotiations, India should
negotiate conformity assessment and
equivalence with its trading partners
• There is a need for a national platform
for capacity building activities in India.
There should be equal representation
from the Government, Industry,
standards setting bodies and export
promotion boards
• Industry should take help from scientific
and technical research institutions
in the country to set the process
standards
• The capacities of the existing
accreditation bodies are to be
upgraded. Also, the number of
mandatory standards in India has to
be increased considerably from the
present level.
Reduce procedural and compliance
bottlenecks in key sectors such
as land, labour, taxation and raw
materials to build domestic capacity
with desired investments
The overly rigid land acquisition process
in India has had an adverse impact on
the industrial growth. As the share of
agriculture to GDP falls, industry has
become the driver of economic growth.
In the hope of high value compensation,
protecting land from industry acquisition
is hampering industrial growth. Also, the
existing act prioritizes the right of the land
owner more than the social impact from
industrial development such as job creation,
rise of income etc. The compensation is
paid during the acquisition whereas the
right to stall the project remains with the
affected family later also. This increases
the uncertainty of the project. There is a
strong protective attitude of saving fertile
land from industrial development because
of potential impact on agricultural output.
However, industrial output is more valuable
than the same of agriculture and has a
bigger developmental impact on society.
India’s labour compliance is rigid and
hampers the operation of manufacturing
facilities. It has multiple levels of laws
and statutes in both Central and State
level and many of them overlap and make
the compliance very difficult. Many laws
related to working condition and minimum
wages have been framed to regulate big
companies. As a result, many businesses
intentionally keep the operation small.
India’s labour market reform is imminent
for the growth of the manufacturing
industry. Businesses should be encouraged
to increase labour productivity and quality
to gain competitive advantage in the global
market.They should be encouraged to grow
and create jobs in the industry.
Indian taxation system is in the evolutionary
phase and desired reforms should make
it more uniform. In the year 2005,
value added tax (VAT) was introduced
to replace local sales tax. It is a major
improvement over repeated taxation on
the same product. In order to implement a
comprehensive indirect taxation system in
the country, the goods and service tax (GST)
was proposed in the year 2009, but it is
still in the process of implementation. GST
addresses the issue of distortion because of
differential treatment to goods and services
and also because it is supposed to replace
all the indirect taxation in India. Such a
comprehensive tax system will remove
ambiguity, reduce tax burden on businesses
and improve transparency in the system.
On the other hand, the Government will
also benefit from the increased collection
of tax revenue.
To secure sustainable supply of raw
material to manufacturing industry, India
needs to implement a good governance
system and streamline the existing process
of legal clearance, more specifically
environmental clearance. There should
be active coordination among Central,
State and local stakeholders to avoid
the problem arising out of multiplicity of
control. The sector should be liberated to
welcome private enterprises to get the best
technology and high productivity.
Incentivize Indian companies, more
specifically small and medium
enterprises to use technology and
engage in research and development.
Strengthen national level policy
framework protecting intellectual
property rights to increase
manufacturing competitiveness of
the country
Innovation in manufacturing induces more
value and provides a better learning of the
design, process, product and technology.
This learning develops indigenous skill,
capability and competency and helps to
build a competitive national economy. In
manufacturing value chain, the original
manufacturer gets the maximum value and
the other players fight for minuscule share
of profit. Innovation can be a weapon for
Indian manufacturers to win over low cost
manufacturing destinations in East and
South East Asia and involve in more value
added product development.
To achieve innovation-led growth, Indian
companies, more specifically small and
medium sized enterprises, should be
encouraged in research and development
and build their intellectual property.
To create an eco-system of high value
manufacturing and subsequent exports,
India should strengthen its intellectual
property right (IPR) regime and establish
a culture of technology adoption.
To strengthen domestic industry, the
Government can introduce technology
and research fund for SME companies to
develop competency that will help them
to make superior products for the world
market. n
6. 6 policy watch
Industry Voices
Formulating a trade policy is always a challenging and complex task. It has to balance a number of interests,
ranging from access to best products for the domestic consumer to encouraging local industry on one
hand; and on the other hand factoring farmers’ interests while controlling food inflation. Many of these
conflicting claims are then superimposed on bilateral free trade agreements, commitments to trading blocks
and the need to comply with WTO requirements. It is therefore critical that trade policies are rolled out
after considering all its implications and are aligned with domestic priorities. Employment generation and
Make in India would be two such priorities.
Ajay Shriram
Immediate Past President, CII and Chairman Senior Managing Director, DCM Shriram Limited
Post liberalization, in a low tariff regime, the focus has now shifted to non-tariff and technical measures such
as standards and conformity assessment. Standards have made the flow of goods smooth and reliable, but they
have created various trade barriers. Traditionally, Indian trade has not been standards-driven and both Industry
and Government have not given it due priority. However, as the negotiations on mega-regional trading blocs
like Trans-Pacific Partnership (TPP), Regional Comprehensive Economic Partnership (RCEP) and Trans-Atlantic
Trade and Investment Partnership (TTIP) are focusing more on standards and regulations, it has become vital
to not only ‘adopt’ a stronger standards regime but ‘adapt’ to the changed reality at the earliest.
Rakesh Bharti Mittal
Chairman, CII Public Policy Council and Vice-Chairman, Bharti Enterprises
India’s exports have seen a continuous decline on a month-on-month basis for the past nine months. The
latest export data for the month of August 2015 shows an extremely worrisome 20 per cent contraction
when compared to the year-ago period. This structural decline in trade necessitates an immediate response
from the Government and policy planners. A micro level analysis shows that there are many sectors where
growth is flagging: from vehicles, to machinery, to commodity exports. It also shows that even after
many years of reform, India is still exporting the same products to largely the same markets. Short-term
measures to boost exports include targeted incentives, improvement in trade facilitation infrastructure, faster
implementation of GST and addressing some of the taxation issues related to functioning of SEZs may bring
about a turnaround in exports.
Sanjay Budhia
Co-Chairman, CII National Committee on International Trade Policy Exports and Managing Director, Patton International Limited
In the new paradigm of trade, production of goods is not centralized, rather, it is distributed among different
locations connected with value chain. The trade in intermediary goods is much higher than the trade in finished
goods. In this complex network, the gain in trade is not fully realized only with the cheap production at one
location. At present, Indian industry is not a visible player in global value chain except in very few sectors. In
all probability, most of the future investments in manufacturing will happen in value chain and Indian producers
have to be ready to move up in the production cycle. Our gains in the most of the FTAs and mega-FTAs like
Regional Comprehensive Economic Partnership (RCEP) agreement where we are a party, will depend on what
products we make and how much value we are able to add in the production.
S Sandilya
Member, CII National Council and Chairman, Eicher Group