1policy watch

this IssueInsideMessage From the Director General. .......... 1Chandrajit Banerjee, Director General, cii

industry Voices ................................................... 6

Factfile ............................................................... 7

cEo Speak ..........................................................2

policy Barometer .................................................4

October 2015, Volume 4, Issue 5

PolicyE 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 the trans 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 BanerjeeDirector Generalconfederation of indian industry

Focus: Integration with the World

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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 Pillaichairman, cii National committee on

international trade policy & Exports and chairman, tata international limited

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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 turmoi l 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 Khoroshkov\shutterstock.com

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Policy Barometer

CII Recommendations for Key Issues in International TradeReview 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 thecountry’s tariff lines

• Identify trade barriers with eachFta partner country and recommend measures to increase trade

• Analyze how FTAs are helping thecompetitiveness of indian industry

• Use FTA negotiation to reduce non-tariff barriers

• Create awareness in Industry andenable 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 Design\shutterstock.com

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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

• Duringtradenegotiations,Indiashouldnegotiate conformity assessment and equivalence with its trading partners

• Thereisaneedforanationalplatformfor capacity building activities in india. there should be equal representation from the Government, industry, standards setting bodies and export promotion boards

• Industryshouldtakehelpfromscientificand technical research institutions in the country to set the process standards

• The capac i t ies o f the ex i s t ingaccredi tat ion 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 specif ical ly small and medium enterprises to use technology and engage in research and development. Strengthen national level policy framework protecting intellectual p ro p e r t y r i g h t s t o i n c re a s e 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 cul ture of technology adopt ion. 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

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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

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Factfile

India's Merchandise Export Growth in Major Regions

India's Top Trading Partners for 2014-15 (US$ Bn)

Source: DGciS

Source: DGciS

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Factfile

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No part of this publication may be reproduced, stored in, or introduced into a retrieval system, or transmitted in any form or by any means (electronic, mechanical, photocopying, recording or otherwise), in part or full in any manner whatsoever, or translated into any language, without the prior written permission of the copyright owner. cii has made every effort to ensure the accuracy of the information and material presented in this document. Nonetheless, all information, estimates and opinions contained in this publication are subject to change without notice, and do not constitute professional advice in any manner. Neither cii nor any of its office bearers or analysts or employees accept or assume any responsibility or liability in respect of the information provided herein. however, any discrepancy, error, etc. found in this publication may please be brought to the notice of cii for appropriate correction.

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India's Top Merchandise Exported Items

Year Wise India's Services Exports in US$ Bn

Commodity2013-2014 in US$ Mn

% Share2014-2015 in US$ Mn

% Share % Growth

Mineral Fuels, Mineral oils and products of their Distillation; Bituminous Substances; Mineral waxes

64,685.32 20.57 57,620.04 18.56 ‑10.92

Natural or cultured pearls, precious or Semiprecious Stones, pre.Metals, clad with pre.Metal and artcls thereof; Jewlry; coin

41,692.25 13.26 41,549.72 13.38 ‑0.34

Vehicles other than Railway or tramway Rolling Stock, and parts and accessories thereof

12,933.03 4.11 14,473.84 4.66 11.91

Nuclear Reactors, Boilers, Machinery and Mechanical appliances; parts thereof

12,077.17 3.84 13,802.85 4.44 14.29

organic chemicals 12,017.17 3.82 11,948.91 3.85 ‑0.57

pharmaceutical products 11,140.50 3.54 11,584.58 3.73 3.99

cereals 10,562.89 3.35 9,550.98 3.07 ‑9.58

articles of apparel and clothing accessories, Not Knitted or crocheted 8,343.35 2.65 9,192.14 2.96 10.17

Electrical Machinery and Equipment and parts thereof; Sound Recorders and Reproducers, television image and Sound Recorders and Reproducers, and parts

10,298.51 3.27 8,696.79 2.80 ‑15.55

iron and Steel 9,223.38 2.93 8,684.38 2.79 ‑5.84

cotton 9,926.42 3.15 7,717.95 2.48 ‑22.25

india's total Export 3,14,405.30 3,10,338.48 ‑1.29

Source: DGciS

Sector 2013-14 (April-June) 2012-13 2011-12 2010-11 2009-10 2008-09 2007-08

Provisional Provisional Provisional Partially Revised

Revised Revised Revised

travel 3.82 17.99 18.46 15.27 11.85 10.89 11.34

transportation 4.13 17.33 18.24 14.2 11.17 11.31 10.01

insurance 0.5 2.22 2.63 1.94 1.59 1.42 1.63

Government G.N.i.E* 0.13 0.57 0.47 0.53 0.44 0.38 0.33

Software Services 16.48 65.86 62.21 55.46 49.7 46.3 40.3

Business Services 7.26 28.44 25.91 24.05 11.32 18.6 16.77

Financial Services 1.72 4.94 5.96 6.5 3.69 4.42 3.21

communication Services 0.63 1.68 1.6 1.56 1.22 2.29 2.4

Services Exports 36.52 145.67 142.32 132.88 96.04 105.96 90.34

*(G.N.i.E) Goods and Services Not included Elsewhere

Source: RBi balance of payment release on 30.09.2013