Overview of India’s Trade Policy from 2014-2024

India’s trade policy through 2014-24 has seen both hits and misses, fortunately more hits than misses. Getting a permanent peace clause at the WTO for our food security schemes in 2014, walking out of the RCEP agreement in 2019, and focusing on FTAs thereafter have been the pluses. Lack of success in the WTO Ministerial meetings and creeping protectionism, adversely impacting our competitiveness were the minuses.

WTO Engagement

The first issue that the new government faced, as early as July 2014, was the fight for protecting subsidies given to farmers for procurement of food grains for the public stockholding programme which feeds the food ration distribution scheme. The principal outcome of the Bali Ministerial Council meeting in Jakarta in December 2013 was the Trade Facilitation Agreement (TFA) which included elements of import facilitation and customs cooperation, items of interest predominantly for developed countries. The balance in the Bali Ministerial deliverables was sought to be ensured by a decision related to public stockholding for food security.

Many developing countries, notably India, use the strategy of procuring food staples like rice and wheat from farmers at a minimum support price (MSP) which provides them with a safety net. While developed countries have huge agricultural subsidy entitlements enshrined in the WTO law, the total subsidy that can be provided by developing countries is 10% of the value of production of each crop. The WTO rules put subsidies to farmers in developing countries under strong disciplines to avoid overproduction, reduction of prices and consequent distortion of agriculture markets. This iniquitous burden of preventing trade distortion on the Global South can be reduced by various measures including what is termed as a permanent solution for public stockholding for food security (PSH), negotiations for which are going on at the WTO. A peace clause, to protect PSH programmes from WTO disputes, was finally agreed at Bali in 2013. This was operative for 4 years till 2017 or till a permanent solution on public stockholding on food security was found. The US argued that this four-year peace clause was sufficient payment for the TFA.

When the Modi government took office in 2014 its task was cut out. Either accept the Bali decision or negotiate a new enforceable decision of the WTO that would prevent our food subsidy schemes from being challenged at the WTO after 2017. With the courage of conviction and through skilful negotiations the government was able to get an agreement which extended the peace clause in perpetuity or till a permanent solution was agreed and adopted. India’s stand showed a willingness to take risks and link issues to achieve its goals in national interest. This was a big diplomatic victory for Govt. of India (GoI) which had stood firm on the issue of protecting our MSP related subsidies so essential for our farmers. In the last decade, the Modi government has taken a number of decisions for the benefit of farmers. This arguably was the one with the most far-reaching impact!

The GoI, though it worked for upholding multilateralism, was less successful in getting favourable outcomes at WTO Ministerial meetings. The outcome at the Nairobi Ministerial Conference in 2015 was less than satisfactory. On that occasion, India had mysteriously agreed to a Ministerial declaration putting the Doha Work Programme of multilateral negotiations in deep freeze, allowed the entry of new issues and new approaches that muddied the mandate and the primacy of our critical issues in agriculture and development. The MC 10 decision, characterised as ‘a fracture moment’ in developing country solidarity at the WTO, came back to bite us when negotiations resumed in Geneva. India failed again to get an agreement on its TRIPS waiver proposal at the MC12 in June 2022. This would have been a key measure to ensure that intellectual property (IP) rights like patents do not become a barrier in scaling up the production of medical products like vaccines, diagnostics and therapeutics. Such a decision, which had wide support even of intellectuals and civil society in developed countries, would also have ensured equity in the access of developing countries to these products during the covid pandemic. In what has been labelled as a failure in economic diplomacy, India had to accept a limited, watered down EU proposal that did not include diagnostics and therapeutics. Likewise, at MC13 in February-March 2024, we agreed to a Ministerial Declaration with no priority or timeline for a permanent solution on public stockholding, no comprehensive negotiating mandate for other agriculture issues like asymmetric subsidy entitlements of developed countries or the restoration of the two-tier dispute resolution system of the WTO.

Walking out of RCEP

Regional Comprehensive Partnership Agreement (RCEP) was proposed as a regional economic integration agreement amongst the ten ASEAN countries and their six FTA partners, namely Australia, China, India, Japan, Korea and New Zealand. It was by far the most comprehensive and far-reaching FTA that India was negotiating with any of its trading partners. It was also a continuation of our look east policy. It was seen as an opportunity to derive market access for our goods and services exports and become a part of the value chains in the region and an effective means of attracting investment into the country as investment rides on trade.

India also faced multiple challenges under the RCEP agreement. The asymmetry of existing tariff structures of India and RCEP partners, with our tariffs much higher than theirs, implied that India would have to make much higher tariff concessions to meet the requirement of eliminating tariffs on the same number of trade lines and trade value. Moreover, tariff preferences could lead to significant increase in imports which would hurt the Make in India effort and further enhance our already high trade deficit. A very large section of Indian industry was extremely wary of competition from low-cost Chinese imports.

Proponents of India joining RCEP based their arguments primarily on the need to enhance our trade engagements in the region. They failed to appreciate that India already had deep FTAs with all RCEP partners except China, Australia and New Zealand which would give it market access in those countries. While New Zealand, because of its size and distance was inconsequential, India had the option of doing a separate FTA with Australia. Thus, for us the RCEP was for all intents and purposes like an FTA with China that required immediate tariff elimination on a substantial portion of our imports from China.

China, a late entrant to the WTO in 2001, had simple, average bound tariffs of 10% compared to 51% for India. Therefore, India had a greater possibility of using tariffs to protect itself from import surges by raising tariffs to bound rates. Making 75% of tariff lines and trade value duty free, as was envisaged in RCEP at the end of the tariff phasing out period, was very worrisome as it would nullify our comparative advantage and lead to an influx of Chinese finished goods, which were already flooding the Indian market and responsible for the huge trade deficit. Further, liberal rules of origin in RCEP would result in Chinese exports coming in with minimal value addition in other RCEP countries, right from entry into force of the agreement, at the cost of the growth of our domestic industry. India’s exports to China, on the other hand, were mostly raw materials attracting low duty in China and there would be little incremental benefit to India. Even if tariff reduction was staged over 15-20 years, industry rather than adjusting and becoming competitive would stop investing in those sectors, leading to their demise.

The US-China trade war was encouraging many companies manufacturing in China to shift production elsewhere including to India. If we reduced tariffs as part of an RCEP deal, such companies would use their Chinese capacity to export to India. Therefore, instead of investment flowing to India, Chinese goods would be dumped into India. Thus, even from the point of view of timing it was inopportune to join the RCEP agreement. In short, the RCEP Agreement did not fully measure up in protecting the interests of India. By backing off, even though belatedly, the country took a courageous decision and was saved from a trade disaster in the form of a calamitous train wreck of an agreement.

Engagement through FTAs

FTAs became popular as the world lost patience with the consensus by exhaustion approach of the WTO since the Doha Round almost collapsed in 2008. All FTAs affect India by shifting relative competitiveness of countries and consequent trade diversion. So, business as usual could not have been an option. Reduction in tariffs on import of intermediates enhances competitiveness of our finished goods. Doing so under FTAs allows trading off liberalisation and securing market access for our exporters. FTAs also result in more choices for consumers. Therefore, the Modi government which was opposed to FTAs when it came to power, re-started our FTA journey with small steps through FTAs with Mauritius, Australia, Oman and EFTA.

Our FTA engagement in the past has been overly defensive, perhaps on account of our experience of unfair trade terms during the colonial period and the balance of payment issues up to the early nineties. The predominant concern has been not to expand exports, attract investments or become part of Global Value Chains (GVCs), but to limit imports. We are also fearful that binding rules on the new issues in FTAs could seriously abridge the policy space available to us in these important areas, freeze the non-level playing field against our interests in digital trade and hurt our domestic manufacturing and agriculture.

Notwithstanding the need for caution, our approach has changed to negotiating FTAs with the EU and UK. This is a welcome step. It needs to be urgently and rapidly scaled up with deals with our major trade partners including the Continental Free Trade Area of Africa, with our experience serving both as a lesson and a warning. New FTAs need to switch to more liberal rules of origin in place of the insistence on the dual whammy of stringent value add and change in product classification which inhibit preferential trade. Comprehensive FTAs with both trade and investment are the need of the hour as low foreign direct investment has been the bugbear of our growth story. And we need to adopt a calibrated, best endeavour and non-binding approach to new issues like labour standards and environmental measures in exchange for tangible gains in areas like services rather than completely resisting them. India, the fastest growing major economy, appears ready for FTAs with all countries except China, the factory of the world, and the US, which demands gold standard rules for labour, environment, IP and digital trade.

Protectionism

PM Modi in his speech at Davos, the Mecca of globalisation, in January 2018, pledged to liberalise trade. However, in actual practice overall tariffs have moved northwards. Since 2014 there have been increases in tariffs on 3200 tariff lines. Similarly, export restrictions have been overused, depriving our farmers and agriculture exporters of predictability and certainty. Anti-dumping duty has been imposed liberally and in about a fourth of the cases it has been on products that have only one or two domestic manufacturers. Import licensing for computers, which was soon withdrawn, was the nadir of protection. Free trade is considered good economics, but alas, protectionism seems to have become good politics! All these measures have hurt the competitiveness of our trade and the economy. Clearly, we need to move to a more liberalised regime where consumers get choice, exporters get intermediate products at international prices and the domestic economy benefits from competition.

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