Reevaluating India’s Trade Policy - Budget Announcements, Tariff Strategies, and Global Integration
Jan. 30, 2025

Context:

  • While the Union Budget is not the primary forum for trade-related announcements, it has become an important medium to communicate India’s global economic policy.
  • The upcoming budget is expected to address trade deficits, currency stability, and export promotion.
  • However, questions arise regarding the frequent policy changes and their impact on India’s external trade objectives.

Challenges with Frequent Tariff Adjustments:

  • Policy instability: Frequent changes in customs duties create uncertainty and hinder investment and trade expansion.
  • Example of mobile phone components: The fluctuating tariffs on lenses, Printed Circuit Board Assemblies (PCBAs), and chargers demonstrate inconsistency in trade policies, negatively impacting manufacturers.
  • Impact on exports and FDI: Instability in trade policy discourages foreign investment and stagnates India’s export growth, which remains at around 2% of global exports.

The Need for Comprehensive Trade Policy Reform:

  • Lowering tariffs alone is insufficient: Trade reforms should go beyond tariff reductions to ensure long-term consistency.
  • Policy consistency: A dedicated committee should be established to draft and maintain a stable trade policy.
  • India’s Trade Agreements dilemma: The government remains hesitant to join global trade blocs like RCEP and CPTPP due to concerns about trade deficits and protecting domestic industries.

RCEP vs CPTPP:

  • RCEP: Regional Comprehensive Economic Partnership. It is a free trade agreement between 15 Asia-Pacific countries, signed in November 2020 and came into effect on January 1, 2022.
  • CPTPP: Comprehensive and Progressive Agreement for Trans-Pacific Partnership. It is a free trade agreement between Canada and 10 other countries in the Indo-Pacific.
  • Some difference between RCEP and CPTPP:
    • CPTPP has an Investor-state dispute settlement (ISDS) provision, which allows foreign investors to sue states in international arbitration tribunals. RCEP does not have an ISDS provision.
    • CPTPP includes provisions for labor issues and environmental protections, while RCEP does not.

Reevaluating Trade Agreements - RCEP vs CPTPP:

  • Impact of Free Trade Agreements (FTAs): India’s trade deficit is often driven by intermediate goods imports, which improve domestic manufacturing.
  • Growth in finished goods exports: Despite concerns, India has maintained a surplus in finished goods trade with ASEAN countries.
  • Simulation analysis:
    • RCEP risks: Heavily dominated by China, RCEP could exacerbate India’s trade deficit.
    • CPTPP benefits: With the exclusion of both the US and China, CPTPP offers a more balanced trade environment, potential for export growth, and alignment with India’s long-term economic goals.

The Way Forward:

  • Trade openness alone is not enough: Structural reforms must accompany trade liberalization to address domestic inefficiencies.
  • Reevaluation of trade pessimism: India must base its trade policy on informed discourse rather than nationalistic narratives.
  • Strategic engagement with Global Value Chains (GVCs): A well-thought-out trade policy can help India achieve its ambitious export target of $2 trillion by 2030.

Conclusion:

  • India’s trade policy needs a shift from protectionism to strategic global integration.
  • A stable and well-structured trade approach, supported by long-term policy consistency, will enhance India’s competitiveness in the global market.

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