Foreign Trade

Engines of Global Integration and Economic Growth

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Introduction to Foreign Trade

Foreign trade, encompassing exports and imports of goods and services, is a critical engine for India's economic growth, employment generation, and global integration. It reflects the country's economic competitiveness, influences its Balance of Payments, and shapes its geopolitical engagements. India's foreign trade has undergone significant transformation, especially since the economic reforms of 1991, moving from a relatively closed economy to an increasingly open one. Understanding the trends, policy frameworks (like the Foreign Trade Policy), multilateral engagements (WTO), and bilateral/regional agreements is essential to grasp India's evolving economic landscape and its aspirations to become a major global trading power.

For the purpose of the "latest" analysis, this note will primarily refer to the Foreign Trade Policy 2023 and recent data from the Ministry of Commerce & Industry/RBI.

Core Aspects of India's Foreign Trade

2.2. Foreign Trade Policy (FTP)

A set of guidelines and incentives by the Government of India for promoting exports and regulating imports.

Current Affairs Link: FTP 2023

The Foreign Trade Policy 2023 was unveiled on March 31, 2023, effective from April 1, 2023. Unlike previous 5-year policies, FTP 2023 has no end date and will be updated as and when necessary. (Source: DGFT, PIB)

Objectives (FTP 2023 Emphasis):

  • Boosting India's exports to achieve USD 2 trillion by 2030 (USD 1T merchandise and USD 1T services).
  • Employment generation through increased trade activities.
  • Improving Ease of Doing Business for exporters.
  • Moving from an incentive-based regime to a facilitative, technology-driven, and WTO-compliant regime.
  • Promoting international trade settlement in Indian Rupee (INR).
  • Focus on emerging areas like e-commerce exports and streamlining SCOMET policy.

Key Features and Initiatives:

  • Incentive to Remission: Focus on WTO-compliant schemes.
  • Export promotion through collaboration: Exporters, States, Districts, Indian Missions.
  • Ease of doing business, reduction in transaction cost and e-initiatives.
  • Emerging Areas: E-Commerce, Developing Districts as Export Hubs, streamlining SCOMET policy.

A WTO-compliant scheme launched in January 2021, replacing MEIS. Refunds various embedded central, state, and local duties/taxes that were not being rebated or refunded earlier, thus making Indian exports more competitive.

For apparel and made-ups sector, to rebate all embedded state and central taxes/levies. WTO-compliant.

For one-time settlement of default in export obligations by Advance Authorisation and EPCG authorisation holders (under FTP 2023).

Four new towns (Faridabad, Mirzapur, Moradabad, Varanasi) added under FTP 2023, taking total to 39. TEEs get financial assistance. 'District as Export Hubs' aims to identify products with export potential in each district, address bottlenecks, and support local exporters.

  • Merchandise Exports from India Scheme (MEIS): Provided duty credit scrips. Phased out due to WTO non-compliance concerns.
  • Service Exports from India Scheme (SEIS): Provided duty credit scrips for notified services. FTP 2023 has not extended it for services exports from 2020-21 onwards.

Special Economic Zones (SEZs):

Geographically demarcated areas within a country's national borders where economic laws are generally more liberal than a country's typical economic laws. Regulated under SEZ Act, 2005.

  • Objectives: Promote exports, attract foreign and domestic investment, generate employment, and develop infrastructure.
  • Challenges: Withdrawal of tax benefits (sunset clauses), competition, need for better infrastructure linkage.

Baba Kalyani Committee & DESH Bill

Baba Kalyani Committee (2018) recommended transforming SEZs into "Employment and Economic Enclaves" (3Es), focusing on broader economic activity and shifting from fiscal incentives to infrastructure and EoDB. The government proposed the Development of Enterprise and Service Hubs (DESH) Bill to revamp the SEZ legislation, aiming for WTO-compliance and broader economic activity, including domestic sales.

Export Oriented Units (EOUs):

Scheme introduced in 1981. Units can be set up anywhere in the country (unlike SEZs) and undertake to export their entire production (with some permissible domestic sales). Enjoy similar benefits to SEZs like duty-free imports/procurement.

2.3. WTO & India

The World Trade Organization (WTO) is an intergovernmental organization that regulates and facilitates international trade. India is a founding member of WTO (and earlier GATT, 1948). (Source: WTO website, Ministry of Commerce, Ramesh Singh)

Principles:

  • Non-discrimination:
    • Most-Favoured-Nation (MFN): Treating other WTO members equally. If a special favour (e.g., lower customs duty) is granted to one, it must be granted to all. (Exceptions: FTAs, GSP).
    • National Treatment: Treating foreign goods, services, and IPRs on par with domestic ones once they have entered the market.
  • Freer trade: Gradually, through negotiation.
  • Predictability: Through binding commitments on tariffs and non-tariff measures.
  • Promoting fair competition.
  • Encouraging development and economic reform.

Key Agreements:

Prohibits investment measures that restrict trade (e.g., local content requirements).

Sets minimum standards for protection of IPRs (patents, copyrights, trademarks, GIs).
Current Affairs: India, along with South Africa, proposed a TRIPS waiver for COVID-19 vaccines, therapeutics, and diagnostics. A limited waiver was agreed at MC12 for vaccines. India pushes for broader waiver.

Framework for liberalizing trade in services. India has offensive interests in Mode 1 (cross-border supply) and Mode 4 (movement of natural persons).

Aims to reform agricultural trade (Market Access, Domestic Support, Export Subsidies). India faces challenges related to its MSP and public stockholding programs being considered trade-distorting.

Current Affairs: An agreement was reached at MC12 (June 2022) to curb harmful fisheries subsidies contributing to overfishing and illegal fishing. India negotiated for S&DT. MC13 (Feb 2024) saw further discussions but no final agreement on outstanding issues.

Dispute Settlement Mechanism (DSM):

A key function of the WTO, allows members to resolve trade disputes. Has a two-tier system: Panels and an Appellate Body.

Current Affairs Link: Appellate Body Non-functional

The Appellate Body has been non-functional since late 2019 due to the USA blocking appointments. This has weakened the DSM. Efforts are underway to reform it, but progress at MC13 was limited. India supports restoring the Appellate Body.

Doha Development Round (Doha Agenda):

Launched in 2001 with a focus on development needs of developing countries. Largely stalled due to differences between developed and developing countries.

India's position: Advocates for fulfilling the development mandate of the Doha Round, particularly on agriculture, food security, and meaningful S&DT.

India's Specific Concerns at WTO:

  • Public Stockholding (PSH) for Food Security: India seeks a permanent solution for its PSH programs (like MSP-based procurement for PDS) without onerous conditions, arguing it is crucial for food security. A "peace clause" provides temporary protection.
  • Special & Differential Treatment (S&DT): Provisions that give developing countries special rights and more time to implement agreements. India strongly defends S&DT against attempts to dilute it.
  • E-commerce Moratorium: India opposes making the current moratorium on customs duties on electronic transmissions permanent, citing potential revenue loss and policy space. Extended at MC13 until MC14/March 2026.
  • Non-tariff barriers (NTBs): Faced by Indian exports in developed markets (e.g., sanitary and phytosanitary measures, technical barriers to trade).

2.4. Regional & Bilateral Trade Agreements

Agreements between two or more countries to reduce trade barriers among themselves.

Definitions:

  • Free Trade Agreements (FTAs): Eliminate tariffs and reduce non-tariff barriers on substantially all trade between member countries.
  • Preferential Trade Agreements (PTAs): Reduce tariffs on a limited number of products.
  • Comprehensive Economic Partnership Agreements (CEPAs) / Comprehensive Economic Cooperation Agreements (CECAs): Broader than FTAs, covering trade in goods, services, investment, IPR, competition, etc.

India's FTAs (Key examples):

  • South Asian Free Trade Area (SAFTA)
  • India-ASEAN CECA (Goods, Services, Investment)
  • India-Japan CEPA
  • India-South Korea CEPA

Current Affairs Link: Recent FTAs

  • India-Mauritius CECPA (Effective April 2021)
  • India-UAE CEPA (Effective May 1, 2022): A landmark, fast-tracked agreement, expected to significantly boost bilateral trade.
  • India-Australia Economic Cooperation and Trade Agreement (ECTA) (Effective December 29, 2022): An interim agreement, precursor to a full CECA.
  • Negotiations Underway: India-UK FTA, India-EU FTA (BTIA), India-Canada CEPA.
  • India withdrew from RCEP (Regional Comprehensive Economic Partnership) negotiations in 2019.

Bilateral Investment Treaties (BITs):

Agreements between two countries to promote and protect bilateral investments. Provide investor confidence, legal protection against non-commercial risks.

New Model BIT (2016):

Adopted by India to balance investment protection with the host state's right to regulate. Aims to address concerns from past BIT disputes where India faced significant claims. Key features: Restrictive definition of 'investment', emphasis on exhaustion of local remedies before invoking international arbitration, provisions for state's right to regulate for public policy objectives.

Prelims-ready Notes

Summary Tables:

Scheme Full Form Objective Nature
RoDTEP Remission of Duties and Taxes on Exported Products Refund embedded non-creditable duties/taxes on exports WTO-compliant
RoSCTL Remission of State and Central Levies and Taxes Refund embedded taxes/levies for apparel/made-ups exports WTO-compliant
Issue India's Stance Recent Development (MC12/MC13)
Public Stockholding Seeks permanent solution for food security programs Peace clause continues; no permanent solution at MC13
Fisheries Subsidies Curb harmful subsidies; S&DT for developing nations MC12 partial agreement; MC13 no deal on comprehensive rules
E-commerce Moratorium Opposes making customs duty moratorium permanent Moratorium extended till MC14/March 2026 at MC13
S&DT Defends and seeks strengthening of S&DT provisions Ongoing debate, pressure from developed countries to differentiate
TRIPS Waiver (COVID-19) Proposed waiver for vaccines, therapeutics, diagnostics Limited waiver for vaccines at MC12
DSM Reform Supports restoring a fully functional two-tier DSM Discussions ongoing, commitment for reform by 2024 not fully met

Mains-ready Analytical Notes

  • Concerns: Persistent high merchandise trade deficit (POL, electronics, gold) pressures CAD and INR.
  • Strategies: Export promotion (FTP 2023 focus, diversification), import substitution (PLI, API), services exports surplus, oil import bill management (diversification, renewables).
  • Evolution: From import-substitution (pre-1991) to export-promotion (post-1991). Shift from direct subsidies (MEIS) to WTO-compliant remission schemes (RoDTEP). FTP 2023 emphasizes facilitation, technology, long-term vision.
  • Effectiveness: Mixed. India's global trade share remains relatively low. Challenges: infrastructure, logistics, EoDB, global uncertainties. FTP 2023's focus on districts and e-commerce addresses some of these.
  • Performance: Significant export contribution, but concentration and underperformance in some. Loss of tax benefits reduced attractiveness.
  • Way Forward: Implementing Baba Kalyani Committee recommendations (3Es, broader economic activity, WTO compliance via domestic sales, improving infrastructure) through DESH Bill can revitalize SEZs.
  • India's Role: Active participant, leader of developing countries (G33). Advocates for rule-based, equitable system.
  • Dilemmas: Protecting food security (PSH, MSP) vs. WTO subsidy rules; policy space vs. liberalization; defending S&DT.
  • Challenges to Multilateralism: Protectionism, unilateralism, non-functional DSM. India must navigate via alliances and reforms.
  • Opportunities: Market access, cheaper inputs, investment attraction, strategic integration (UAE, Australia FTAs positive).
  • Challenges: Import surges hurting domestic industry, underutilization, complex Rules of Origin, inverted duty structures, need for domestic reforms. Balancing offensive (services) and defensive (agriculture) interests.
  • Past Issues: India faced numerous investor-state dispute settlement (ISDS) cases (e.g., White Industries), raising concerns about policy space.
  • New Model BIT (2016): Balances protection with host state's right to regulate. Features: narrower 'investment' definition, exhaustion of local remedies, state's right to regulate in public interest.
  • Impact: Provides more state protection, but could impact investment attraction if perceived as too restrictive. India renegotiates existing BITs based on this model.

UPSC Previous Year Questions (PYQs)

Prelims MCQs:

1. Consider the following statements: (UPSC CSE 2023)

  1. India accounts for 3.2% of global exports of goods.
  2. Many local companies and some foreign companies operating in India have taken advantage of India’s ‘Production-linked Incentive’ scheme.

Which of the statements given above is/are correct?

(a) 1 only
(b) 2 only
(c) Both 1 and 2
(d) Neither 1 nor 2

Answer: (b)

Hint/Explanation: Statement 1 is incorrect. India's share in global merchandise exports is around 1.8% (WTO data for 2022). Statement 2 is correct as PLI schemes are aimed at boosting domestic manufacturing and exports, attracting both local and foreign companies.

2. With reference to the 'RoDTEP' scheme, which of the following statements is/are correct? (UPSC CSE Question Style - Hypothetical, as RoDTEP is recent)

  1. It aims to reimburse all taxes and duties levied at the Central, State, and local levels that are not currently refunded under any other mechanism.
  2. It is a WTO-compliant scheme that replaced the Merchandise Exports from India Scheme (MEIS).
  3. The scheme is applicable to all export sectors without any exceptions.

Select the correct answer using the code given below:

(a) 1 and 2 only
(b) 2 only
(c) 1 and 3 only
(d) 1, 2 and 3

Answer: (a)

Hint/Explanation: Statement 1 is generally correct in its aim. Statement 2 is correct. Statement 3 is incorrect; RoDTEP rates and coverage vary across sectors, and some sectors/items may be excluded or have specific conditions.

3. India is a member of which of the following? (UPSC CSE 2015 - adapted for relevance)

  1. Asia-Pacific Economic Cooperation (APEC)
  2. Association of South-East Asian Nations (ASEAN)
  3. East Asia Summit (EAS)

Select the correct answer using the code given below.

(a) 1 and 2 only
(b) 3 only
(c) 1, 2 and 3
(d) India is not a member of any of the above

Answer: (b)

Hint/Explanation: India is not a member of APEC. India is a dialogue partner of ASEAN, not a member. India is a member of the East Asia Summit.

Mains Questions:

1. What are the key challenges that India faces in its pursuit of a $2 trillion export target by 2030 as envisaged in the Foreign Trade Policy 2023? Suggest measures to overcome these challenges. (UPSC CSE Style)

  • Direction: Introduction on FTP 2023 target. Challenges: Global economic slowdown/uncertainty, infrastructure bottlenecks (logistics, ports), high cost of credit, supply chain disruptions, non-tariff barriers, skill gaps, low R&D investment, competition, need for WTO-compliant support. Measures: Improving EoDB, investing in infrastructure (PM Gati Shakti), enhancing trade finance, upskilling, promoting R&D and innovation, strategic FTAs, effective implementation of 'Districts as Export Hubs', promoting e-commerce exports.

2. "The effectiveness of the WTO's dispute settlement mechanism has been significantly undermined in recent years." In this context, discuss the implications for India and the steps India should advocate for its reform. (UPSC CSE 2021 - adapted)

  • Direction: Briefly explain WTO DSM and its importance. Discuss how its Appellate Body became non-functional (reasons). Implications for India: Difficulty in enforcing rights, resolving disputes with powerful nations, increased unilateralism risk. Steps India should advocate: Restoring two-tier system, ensuring independence, addressing member concerns, exploring interim solutions (MPIA) but pushing for full restoration.

3. Critically examine the impact of Special Economic Zones (SEZs) on India's economy. Discuss the relevance of the recommendations of the Baba Kalyani Committee in revitalizing SEZs. (UPSC CSE Style)

  • Direction: Introduction on SEZ objectives. Positive impacts: Export growth, FDI, employment. Criticisms/Limitations: Underutilization, concentration, revenue loss, issues after tax benefits withdrawal. Baba Kalyani Committee recommendations: Shift to 3Es, broader economic activity, infrastructure focus, WTO compliance, simplification. Relevance: To make SEZs aligned with current priorities, attract diverse investments, integrate with domestic economy, and make them WTO-compliant (link to DESH Bill).

UPSC Trend Analysis (Past 10 Years)

Prelims:

  • Shift from static questions on WTO agreements to more dynamic aspects like India's stance, recent negotiations (MC outcomes), and new schemes (RoDTEP).
  • Questions on India's major trading partners, export/import composition (often linked to current economic trends like oil prices, electronics demand).
  • Focus on recent FTAs and their partner countries.
  • Increasingly, questions testing awareness of new policy documents (like FTP updates) and committee recommendations (Baba Kalyani).
  • Conceptual understanding of terms like MFN, National Treatment, S&DT.

Mains:

  • Consistent focus on India's trade performance, trade deficit, and export promotion strategies.
  • WTO-related issues are very prominent: India's stance on agriculture (PSH, subsidies), TRIPS, DSM, fisheries, e-commerce, and the overall relevance of WTO.
  • FTAs: Analysis of India's FTA strategy, pros and cons, specific agreements (e.g., RCEP debate, new FTAs).
  • SEZs: Performance, challenges, and reforms.
  • Linkages between foreign trade and broader economic issues like 'Make in India', employment, and industrial policy.
  • Questions often require a critical analytical approach, incorporating recent developments and suggesting policy measures.

Original Prelims MCQs

1. Consider the following statements regarding India's Foreign Trade Policy (FTP) 2023:

  1. It introduces a fixed 5-year roadmap for India's foreign trade, similar to previous policies.
  2. One of its key objectives is to promote international trade settlement in Indian Rupee (INR).
  3. The 'Districts as Export Hubs' initiative aims to decentralize export promotion by identifying and supporting export potential at the district level.

Which of the statements given above is/are correct?

(a) 1 and 2 only
(b) 2 and 3 only
(c) 3 only
(d) 1, 2 and 3

Answer: (b)

Explanation: Statement 1 is incorrect; FTP 2023 has no end date and will be dynamic. Statements 2 and 3 are correct features/objectives of FTP 2023.

2. With reference to the WTO Ministerial Conference (MC13) held in February 2024, which of the following outcomes is accurately stated?

  1. A permanent solution for public stockholding for food security purposes was achieved.
  2. The moratorium on customs duties on electronic transmissions was allowed to expire.
  3. A comprehensive agreement was reached on curbing all forms of fisheries subsidies.
  4. Members agreed to continue discussions on reforming the dispute settlement system to restore its full functionality.

Select the correct answer using the code given below:

(a) 1 only
(b) 2 only
(c) 3 only
(d) 4 only

Answer: (d)

Explanation: (a) is incorrect; no permanent solution on PSH. (b) is incorrect; the moratorium was extended. (c) is incorrect; no comprehensive agreement on all fisheries subsidies was reached, only discussions continued on outstanding issues from MC12. (d) is correct; members reiterated their commitment to reform the DSM and continue discussions.

Original Mains Questions

1. India's recent FTAs with developed economies like the UAE and Australia mark a strategic shift in its trade policy. Analyze the potential economic benefits and strategic implications of these agreements, while also highlighting the precautions India must take to safeguard its domestic interests.

  • Introduction: Briefly mention the context of India's recent FTAs and the shift from a more cautious approach.
  • Potential Economic Benefits: Increased market access for goods and services (identify specific sectors), attraction of FDI, integration into global value chains, reduced import costs for certain raw materials/intermediates, enhanced competitiveness.
  • Strategic Implications: Strengthening bilateral ties, diversifying away from over-reliance on certain partners, geopolitical signaling, countering influence of other trade blocs.
  • Precautions for Domestic Interests: Protecting sensitive sectors (agriculture, dairy, MSMEs) through appropriate safeguards, exclusion lists, or longer phase-out periods for tariffs. Ensuring stringent Rules of Origin to prevent circumvention. Addressing non-tariff barriers in partner countries. Improving domestic manufacturing competitiveness. Regular monitoring and review.
  • Conclusion: Emphasize that while FTAs offer significant opportunities, their success depends on careful negotiation, robust domestic policy support, and continuous evaluation.

2. The Foreign Trade Policy 2023 aims to move away from an incentive-based regime towards a facilitative, technology-driven, and WTO-compliant one. Discuss the key pillars of this new policy and evaluate their potential to achieve India's ambitious export targets amidst a challenging global environment.

  • Introduction: Briefly explain the context and core philosophy of FTP 2023.
  • Key Pillars of FTP 2023: Incentive to Remission (RoDTEP, RoSCTL); Export promotion through collaboration (States, Districts, Missions); Ease of doing business & e-initiatives; Emerging Areas (E-commerce, SCOMET).
  • Evaluation of Potential to Achieve Export Targets (USD 2 trillion by 2030): Strengths (WTO compliance, grassroots participation, technology focus, long-term vision). Challenges (Global uncertainties, domestic infrastructure gaps, logistics costs, skill development, competition). Effectiveness (Depends on robust implementation, inter-ministerial coordination, addressing structural issues beyond FTP).
  • Conclusion: FTP 2023 provides a sound directional framework. Its success will hinge on effective execution, adaptability, and complementary domestic reforms to enhance India's overall export competitiveness.