India: Legal

Trade Talk: India’s revised trade vision is a work in progress


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Notwithstanding the Ukraine crisis and its attendant effects, FY22 ended on a rather cheerful note for India’s fisc and international trade. Indian exporters did not just demonstrated Covid resilience but also posted robust growth with record revenues. At the same time, the Centre successfully concluded economic partnerships with UAE and Australia, besides securing in-principle agreements with other trade partners such as UK, EU, and Israel. These agreements are being touted by policymakers as gateways for extensive opportunities for Indian entrepreneurs insofar as liberal market access terms are secured, particularly in the service and employment sector, which will allow India to export ‘cultural values as intangibles’, besides trade and merchandise. Though the news is welcome, it is the beginning of a new era in trade history.

The elephant in the room is absence of a clearly articulated policy. India’s 2019 rejection of RCEP exemplified a cautious policy of the incumbent government on free trade agreements (FTAs) in contrast to the enthusiasm of the earlier regime. The reconsideration of existing trade ties further revealed the present dispensation’s discontentment with FTAs. However, 2021 has marked a reversal in approach, so much so that it can be dubbed as the year of FTA revivals. The ministry of commerce has justified this volte face by (statistically) demonstrating India’s negative balance-of-payment position under the old FTAs besides arguing that the new FTAs are with developed countries which shall result into surpluses for India. Though it is premature to assess the claim on surpluses, the tariff schedules with UAE and Australia do appear promising for expanding India’s export trade basket. Having said so, India’s economic standing and its international trade portfolio justifies a clear policy stance reflecting its newly executed and under-negotiation FTAs.

Another notable though less debated aspect of the new FTA engagements is the expanded scope of economic partnerships. To illustrate, the text of the UAE FTA enlists new subject-matters on which India has agreed to expand the economic relationship. Chapters dealing with digital trade, with a special focus on small and medium enterprises and economic cooperation are notable. Further, the FTA stands out in view of a commitment to execute a distinct investment promotion treaty (BIT) by June 2022. India has generally not been in favour of such an intertwined approach to trade and investment, particularly in view of its adverse experiences with investment treaty arbitration. White Industries, Cairn, and Devas are notable examples. In fact, India’s 2016 repudiation of all BITs soon after its revised 2015 BIT model is another notable example of a limited purpose ascribed by the Centre to such investment treaties. However, the UAE FTA is not an outlier as India is simultaneously negotiating such a comprehensive FTA and BIT with the EU. Whether this is on account of a change of heart is not known, thus, it becomes crucial for policymakers to reveal their priorities in juggling between trade and investment to secure favourable terms for Indian businesses.

While the increased market access in partner countries for service exporters is appreciable, the crucial aspect is the extent to which the Centre has extended market access to the Indian service sector for partner countries. To illustrate, under the UAE FTA, Indian lawyers can operate in UAE but there is no reciprocity. This is against the fact that access to India for UK lawyers is a key demand by the UK government which has released its official consultation paper and is engaged in extensive stakeholder consultation to refine its expectation and negotiation terms. On the other hand, there is no clarity on the position which Indian negotiators are taking and the extent to which the domestic industry has been consulted. Clearly, it would augur well for the national interest if the consideration zone is expanded and a domestic-consensus-driven approach is adopted.

Besides the FTA position, another aspect that has been long awaiting the Centre’s advertence is a new foreign trade policy (FTP). Revisited and notified every five years since 1991 economic reforms under the Foreign Trade (Development and Regulation) Act of 1992, the FTP has been the guiding beacon for all stakeholders. The last FTP was notified in 2015. Since then, it has been periodically extended, though Covid-19 may be partly to blame for it. Absence of an updated FTP is stark because it sets out the regulations for cross-border trade and reveals the Centre’s position on a host of concomitant yet crucial policy variables such as technology flow, intangibles, and so on. This is essential to clarify country’s position and alignment with flagship programs like Make-in-India and PLI schemes, WTO’s ruling against India’s export incentive schemes, an overdue review of the SEZ scheme, changing geographical profiles of India’s export basket, and implications of the FTAs. Thus, one cannot over-emphasise the need for an urgent intervention to formulate and notify a comprehensive FTP at the earliest.

Another reason for overhauling the FTP is for export-oriented businesses reeling under apprehensions due to certain ad hoc, mistimed, and contradictory changes to the 2015 FTP. The original 2015 FTP incentivised exports (both goods and services) by way of a duty-credit scrips directly in proportion to exports. However, in 2020 the Centre limited the maximum export incentives for goods to Rs 20 million, and in 2021, limited it to Rs 20 million for services without reason. To add to exporters’ woes, the changes for service incentives were retrospectively notified in September 2021 to be applied from April 2019. This has triggered disputes which are before judicial forums.

One hopes that the policymakers urgently expand the zone of consideration to engage with all stakeholders such that a consciously-framed and guided policy outlook emerges which guides both the Centre and private businesses for the nation’s economic progress. These considerations should also factor the contemporary paradigm such as the impelling need for fuel-import substitution, leveraging the improvised logistic and infrastructural advancements, and fuelling entrepreneurial drive.

Mukesh Butani is Managing Partner and Tarun Jain is a Partner at BMR Legal Advocates.


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