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Policy Watch : India’s Integration into the Global Economy

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The rise of the global South is radically reshaping the world and is perhaps the most significant development of recent times. As one of the fastest growing economies, India has emerged as the seventh largest economy globally. Moreover, India’s 16-rung leap in the recently released Global Competitiveness ranking by the World Economic Forum points towards its sharp focus on improving competitiveness.

As India began to enhance its competitiveness journey and given the new direction of its economic and political diplomacy, it has signed FTAs with some of the most important economies like Japan, Korea, Malaysia and the ASEAN countries in the last few years. It is also in the process of negotiating comprehensive trade agreements with EU, Australia, Canada and New Zealand. It has made its presence felt in alliances like the G-20, IBA, and BRICS and has also deepened relations with the East Asian countries. All this points towards India’s growing integration into the Global Economy.

While Indian industry has adapted well to the changing global dynamics, it needs to work hard to integrate itself into the global value chains (GVCs) to boost its global trade, and the country’s economic development.

This edition of Policy Watch looks at some of the important issues that continue to impact the overall trade performance of India and highlights key policy interventions that need to be taken up on priority.

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Policy Watch : India’s Integration into the Global Economy

  1. 1. 1policy watch this IssueInside Message From the Director General............ 1 Chandrajit Banerjee, Director General, CII Policy Barometer.......... 4 Industry Voices............. 7 Fact File....................... 8 CEO Speak............................................................................................2 September 2016, Volume 5, Issue 3 Policy T h e w o r l d e c o n o m y has undergone tremendous structural shifts in the last few years due to rising influence and role of the emerging economies across the globe. This has led to a shift of balance of powers between the global north and the global south. This is perhaps the most significant geo-political development of the recent times. The emerging economies including countries like India, China and Brazil has evolved from being policy takers to policy makers. This development has brought the emerging economies to the forefront where they actively participate in the trade negotiations and global economic governance at various international fora. India has already marked its presence as one of the fastest growing economies of the world. As per the IMF forecast, the Indian economy is projected to grow at 7.5 per cent for fiscal year 2016-17. It has emerged as the fourth largest economy globally with a high growth rate and also improved its global ranking in terms of per capita income. Over the years, India has given a new direction to its economic and political diplomacy. It has negotiated comprehensive free trade agreements with some of the important economies of the world which include Japan, Korea and ASEAN. Currently, India is negotiating comprehensive trade agreements with EU, Australia, Canada and New Zealand. One of distinct features of India’s growing integration with the world is its deepening economic engagement with East Asian countries. Following the ’Look East Policy’, adopted in early 1990 and under its new phrase ’Act East Policy’, India’s economic and political engagements are being renewed with a series of pro- active measures. Today, while China is India’s major trading partner, Japan and Korea are major sources of foreign direct investment into India. India has been playing a more pro-active role in multilateral trade and climate change negotiations. It has emerged as an important voice in G-20. It is a member of formidable alliances such as IBSA and BRICS to champion the cause of South-South cooperation. In the run-up to the 2015 APEC Summit in Manila, a debate started on the possible accession of India into Asia- Pacific Economic Cooperation (APEC). APEC is of major economic significance as it includes the largest and most dynamic economies, namely - USA, China, Japan, Canada, Australia, Taiwan, Russia, Indonesia, Mexico and South Korea. Most of these economies are important trade and investment partners to India. While Indian industry has responded very well to this new emerging dynamics of global economy, one of the areas where industry has to work hard is integrating itself into the Global Value Chains (GVCs). Building production value chain is very important. Globally, value chains are important drivers of both trade and investment. More than fifty per cent of global trade is currently happening within GVCs. India, at present, has limited number of products where it owns GVCs. As a result, its’ share in total value added created by global trade is not more than 1 per cent. India’s exports and imports of intermediates, one of the important indicators of integration into GVCs, are much smaller than countries like China. Government and industry together, therefore, need to seriously think and discuss the whole dimension of value chain. This would require initiating several policy measures such as import duty structure across the entire value chain, improving trade infrastructure and upgrading the existing standards for goods and services. n Chandrajit Banerjee Director General Confederation of Indian Industry Sanjay Budhia, Co-Chairman, CII National Committee on International Trade Policy & Exports and Managing Director, Patton Group Focus: India’s Integration into the Global Economy
  2. 2. 2 policy watch CEOSpeak India has signed and operationalised FTAs with some of the important economies like Japan, Korea, ASEAN, and Malaysia in the last few years. But their implementation has also coincided with continued stagnation and slowdown in exports. Do you think the FTAs have not helped India to achieve its export target and are also responsible for the trade deficit? It is true that the export slowdown and the worsening trade balance with FTA partners contributed to a general perception that the FTAs are largely responsible for this deteriorating trade position. There is a rising trade deficit with all the FTA partner countries except Singapore. The trade data indicates that trade deficit in all the three cases –Japan, Korea and ASEAN – has worsened post FTA implementation but not significantly. India’s worsening trade deficit is largely because of the massive import surge from China, a non-FTA trading partner. India’s lack of competitiveness in the chosen FTA countries and growing competition from third world countries like China in these FTA partner country markets are the more important factors responsible for these bilateral deficits, rather than the FTAs. In all its FTAs negotiations, India has been more aggressive on Services. However, in Services too India’s exports to its FTA partners have not increased much. What, according to you, are the major reasons? India has pursued aggressive market access interests in most of its FTAs. But has not gained much in Services trade even though India has secured good market access on movement of professionals from countries like Singapore, Japan and Korea. What has been seen is that effective market access in the Services sectors is undermined by the domestic regulatory barriers in these markets. These are in the form of immigration, recognition and Standards related restrictions on mobility of service providers or by data protection related challenges to IT-enabled services exports. Moreover, India’s Services export basket is also not diversified. IT-enabled services (ITeS) dominate India’s Services export. At present the ITeS sector is still able to secure good business from USA and Europe. India’s IT services export is largely driven by movement of professionals, which is always difficult in a new territory because of several challenges like language, culture, food etc. The third important component of new-age FTAs is investment. Do you think an FTA can be utilized as an instrument to attract inward investment which helps expand exports? Leveraging FTA to Integrate with the World Sanjay Budhia Co-Chairman, CII National Committee on International Trade Policy & Exports and Managing Director, Patton Group Source: Stephen Marquesshutterstock.com FTAs can be of help to generate investment between trading partners. Many countries have successfully used FTAs to attract FDI. Korea, Mexico, Chile have leveraged FTAs to attract high quality investment. The idea behind signing the Comprehensive Economic Partnership Agreement (CEPA) with Japan and Korea was to enable these countries to invest more in India. Three of the partner countries, namely Singapore, Japan and South Korea feature among the leading sources of FDI inflows for India. But poor business climate and slow progress on key domestic reforms
  3. 3. 3policy watch CEOSpeak have restricted FDI inflow. The gains would have definitely been much more had India succeeded in attracting FDI and technology and knowledge transfer from these partners in both Services and the Manufacturing sectors. These FDI could have helped India in creating more jobs and exportable surplus. In addition, it would help the downstream industries as well. It appears that on all three key components of FTAs – goods, services and investment – we have not been able to achieve the desired outcomes. What, according to you, are the major factors? There are both internal and external factors. Internally, on the domestic front, the declining competitiveness of Indian manufacturing and various constraints faced by Indian manufacturing have made it difficult to compete in these countries vis-à- vis other competitors. Further, India’s difficult business environment makes it difficult to attract FDI and leverage this for trade flows though there is a significant improvement on this in the last two years. Then there is lack of information and capacity amongst MSMEs to understand and leverage FTAs for market gains. With regard to external factors, one has to understand that these FTAs, practically speaking, do not provide preference as most of our competitors too have the same preference in those markets. Hence, competition from countries like China which are more competitive than India in these FTA countries is eroding our preference. Further, the more competitive countries are able to negotiate a much deeper concession agreement such as ‘zero-for-zero’. Indian industry is not yet ready for a ‘zero-for-zero’ type trade agreement. Can we identify few focus sectors/ products and push for exports in these FTA countries? In order to ensure gains from FTAs, it is important to push exports of those products where India has comparative advantage and complementarity with FTA partners. Various studies done post-FTA reveal areas of complementarity between India and their FTA partners where India could be a competitive exporter to these markets. However, the export data indicates that India has not exploited these complementarities effectively as its export performance in these sectors in the FTA partner markets has not been strong. For instance, Pharmaceuticals has a huge market potential in Japan. Japan’s market is worth US$50 billion. But because of stringent regulatory process, the Indian Pharma industry is not able to expand / grow in this market. Similarly, Japan’s food market is also big but Indian exporters face stringent SPS standards. Many food additives are banned in Japan. Likewise, there is huge potential for engineering and electronics equipment as Korea has many big MNCs sourcing components from several countries. In ASEAN there is good potential for exports of capital goods and chemicals. Global Value Chains (GVCs) are a point of discussion these days. FTAs are also considered as effective means to integrate with GVCs. How could Indian industry leverage FTAs to integrate into GVCs? India has limited number of products where it owns GVCs. As a result, its share in total value added created by global trade is not more than 1 per cent. India’s exports and imports of intermediates are much smaller than countries like China. In 2014 India imported intermediates worth US$213 billion (US$1147 billion for China) and exported only US$140 billion (US$963 billion for China). One of the ways to achieve this is if India initiates its own GVCs in sectors like Automotive, Textiles, IT hardware and Pharmaceuticals. ‘Make in India’ and FTAs could be leveraged to attract more FDI and use them to connect Indian SMEs to large firms. For that India needs to improve Standards compliance which is a problem for a large number of MSMEs. It needs to improve trade facilitation infrastructure for faster movement of imports and exports. Going forward, Standards are going to play a major role in trade as tariffs are being liberalised continuously. Now with mega- FTAs like Trans-Pacific Partnership, the importance of Standards in influencing trade is further going to be critical. What should India do to improve the Standards infrastructure and compliance by industry? Understanding the implications of Standards in international trade is very important for Government, Standard setting agencies and Industry. Upgrading and harmonising with international Standards, making them mandatory, requisite infrastructural facilities like testing, certification, packaging and labelling as well as schemes for promoting compliance to international Standards can go a long way in enhancing our competitiveness. The Department of Commerce, in partnership with CII and Standard setting bodies of India, has in recent years taken several important initiatives to create a robust Standards ecosystem in India. I think a momentum has been created and industry has also realised that Standards compliance is a must to access the global market. What recommendations would you like to make for better utiliziation and leveraging of FTAs for larger economic gains? We can take immediate as well as medium to long-term measures. In the immediate term, the Government needs to devise mechanisms to offset some of the inherent disadvantages faced by Indian Industry till they are removed through long term reform measures. Inter-Ministerial coordination needs to be enhanced to decide on incentives that may be needed to offset disadvantages created by FTAs. FTAs have provisions of formation of specific sub-committees. In most cases sub-committees have not been constituted. These can be effective mechanism to address several problems like NTBs and regulations. Industry also needs to help Government in identifying high export potential products and seek fiscal incentives. An industry-led core group should help Government in identifying and pursuing offensive areas of interest in negotiations. A closer examination of investment chapters in FTAs and issues affecting investment flows from our partners is required. The future FTAs must be negotiated with utmost care so that hidden regulatory and NTBs are properly addressed. n
  4. 4. 4 policy watch Policy Barometer CII Recommendations for G-20 Summit, China On September 4, 2016, the 11th G-20 Summit was held at Hangzhou, China. CII has been engaged through B-20 to submit private sector‘s inputs into the G-20 process. After considering the success of the pervious B-20 Task Forces, liaising with G-20 members and affiliated business representatives and reviewing the statistics of three rounds of questionnaire surveys, the B-20 China has established five Task Forces, one each on Financing Growth, Trade and Investment, Infrastructure, SME Development and Employment. The Task Forces, comprising senior Industry members, actively participate and share recommendations highlighting the Indian perspective on issues in order to boost exports and overall economic activity. Some of the issues and key CII recommendations pertaining to each of the areas are given below: I. Financing Growth Finance is vital to global economic growth and employment, both of which are G-20 priorities. For the international business community, the focus is on how to best utilize finance to stimulate economic growth. The Financing Growth Task Force proposed to focus on policy recommendations to G-20 on five key issues. The issues highlighted by B-20 China are as follows: • Improve global financial regulations by optimizing the domestic regulatory framework and enhancing international cooperation and coordination • Promotethediversificationofinternational settlement currencies to facilitate global and regional trade and capital flows • Explore the means to enhance international taxation cooperation and coordination so that taxation collection can be more transparent and double taxation can be avoided • Encourage green finance to pursue economic growth combined with significant improvement in environmental quality and sustainable resource use • Improve financial infrastructure to facilitate diversification, fairness and competition. CII Recommendations • There is a need to mobilise low cost debt. This could be done through multilateral funding. Funds that are part of the climate change negotiations (costs of mitigation which the developed countries need to pay to the developing countries) could be deployed to lower the debt cost • Need to follow target based approach to channel finance streams. Disparate finance streams could be channelled in a more targeted way. Stakeholders were of the view that currently local funding agencies are providing debt at high interest rates • A long term tenor (the duration of lending) is required for infrastructure projects. Spreading the loan over a 20- year period will lead to improved cash flows. The tenor currently tends to be insufficient in India, typically up to 8 years. This mismatch means there is a shortage of appropriate debt as investors seek out alternative assets that fit better with their investment horizons. II. Infrastructure Infrastructure is one of the important subjects of deliberations at the G-20. This issue is of primary concern to the international business community. The Source: Suwinshutterstock.com
  5. 5. 5policy watch Policy Barometer global economy is undergoing significant adjustment and countries need to join forces to nurture new growth points and competitive advantages. Conventional wisdom is that promoting the development of infrastructure not only helps identify new growth points but also lays the foundation for deep, enduring economic development in each country. The recommendations by the Task Force are based on the principles of selecting high impact, G-20 consistent and ready-for-solution areas. The issues are as follows: • Infrastructure investment policy environment • Innovation in infrastructure financing (especially PPP) • Effectiveness of multilateral development banks and institutions CII Recommendations • Strengthening Project Preparation: Successful PPP projects require risks to be accurately estimated, appropriately provisioned in the contract and proactively managed during execution by the respective parties. The success or failure of the project is very often determined by the way the contracts have been structured by the parties. The importance of clearly laying out the objective and fair set of conditions precedent, penalty, compensation and incentive structure, performance norms etc. cannot be under estimated. Going forward, it is extremely important to create a robust project pipeline which also needs to be transparent and should be determined through a comprehensive assessment of needs. It must be derived from the integrated infrastructure country plan addressing socio-economic objectives. The focus should be on projects which are financially viable and have sustainable social and economic benefits • Evolve long-term alternate Funding Mechanism: There is an urgent need to develop alternate funding mechanisms for financing long-term infrastructure needs given the increased exposure and rising NPAs in banks’ balance sheets. While Infrastructure Investment Trusts are the need of the hour, it is important to modify it to be successful in the current context Source: Rawpixel.comshutterstock.com
  6. 6. 6 policy watch Policy Barometer exports of different services are critical for the growth of their economies. In the global services trade, the movement of natural persons or mode IV of services is becoming very restrictive.As a result, the services exporters are finding difficulties in exporting their services • As of now, multinational enterprises are using Global Value Chains (GVC) and are getting benefits of distributed production processes. Such benefits should reach the small and medium sized enterprises (SMEs) also.Within the existing structure of trade, they are mostly left out and they are losing trade competitiveness • A large number of countries, mainly developing and least developed countries, are not participating in any of the existing negotiations of mega- FTAs. There is a high chance of trade diversion from non-partner countries to partner countries. G-20 should focus on more inclusive global trade • Many developing and least developed countries are losing their exports because of the changing international Standards environment. There should be a mechanism to transfer knowledge and expertise to help these countries in reforming their individual domestic Standards eco-system. • Long-Term Infrastructure Fund: It is imperative to develop a dedicated institutional funding arrangement for meeting long-term Infrastructure needs. This fund can be an innovative means for financing growth and ensure market penetration. Further, it will enable greater ability to access funds in the international market and will also create in-built flexibility to revise financing norms depending on the situation in the industry. III. Trade and Investment Trade and Investment which are intimately linked to the creation of business value and innovation are important sources of economic growth and job creation. They have always been central to both B-20 and G-20 meetings over the years. Building on the success of previous B-20s, B-20 China focuses on global investment and trade governance system, and implementation of the Trade Facilitation Agreement (TFA), among other matters of concern to the business community. The Trade and Investment Task Force proposes to focus policy recommendations on three issues based on the principle of selecting high impact, G-20 consistent and ready-for- solution areas. The issues are as follows: • Improve trade co-operation mechanisms and standstill/roll-back protectionism • Ratify Trade Facilitation Agreement (TFA) and take implementation to the next level • Build a global investment governance system to promote favourable foreign direct investment environments and improve the safety and fairness of global investments. CII Recommendations • Specific protectionism in the Services sector should be discussed and deliberated upon at the G-20. Many developing countries are building their economies on the Services sectors and confronted with even more challenges. For this reason, promoting SME development has become an important objective for both G-20 leaders and business representatives. B-20 China continues to focus on the priorities identified by the previous B-20 Task Forces: SME financing, access to GVCs, improving the regulatory environment for SMEs and SME innovation. However, inadequate access to finance, access to GVCs and the regulatory environment are major challenges for SMEs, especially in terms of scaling up their business. B-20 recommendations address the three critical challenges: • Access to Finance • Access to Global Value Chains Powered by Innovation • Improving the Regulatory Environment CII Recommendations In spite of the cognizance in all quarters of the importance and contributions of this sector, MSMEs in India, like many of their global counterparts, continue to be enervated by a host of challenges diminishing their growth potential. Lack of access to key resources like infrastructure, finance, etc., complex business environment, poor technological access, lack of adequate market linkages, lack of a comprehensive regulatory framework, etc. are some of the regular issues faced by the Indian MSMEs. The key factors to which this can be attributed include lack of a formal legal structure of most enterprises in this category, high risk perception of these enterprises, unreliable financial evaluation data and the wide geographical expanse of these enterprises. There is absence of a suitable ecosystem for process facilitation between banks and MSMEs. Further, delay and other issues related to credit delivery to MSMEs are primarily due to a lack of understanding of various schemes offered by the banks and financial institutions as well as the procedures and documentation required for accessing credit from these institutions. n Source: Tashatuvangoshutterstock.com SME Development SMEs are important contributors to economic growth, taxation revenue, employment and streamlining of industry structures. With global economic recovery progressing slowly, SMEs and especially MSMEs, SMEs are
  7. 7. 7policy watch Industry Voices Region/country focus is important to further our trade and investment interest. Africa and CLMV (Cambodia, Laos, Myanmar and Vietnam) as a region must be given adequate importance for promoting our bilateral trade and investment with these regions. Some of the problems in doing business with these regions could obviously be addressed by using India’s development cooperation programme. CLMV as a region needs particular focus as this acts as a gateway to East and South-East Asia. Focus on some specific region is also important from the strategy point of view to enter third country markets. For instance, investing and manufacturing in Africa would enable duty free market access into USA and EU as majority of the African countries enjoy zero duty access to these markets. Rakesh Bharti Mittal Vice President, CII and Vice-Chairman, Bharti Enterprises Building a production value chain is very important. Global Value Chains (GVCs) are important drives of both trade and investment. More than 50 per cent of global trade is currently happening within GVCs. India has low participation in GVCs despite the fact that it has improved its exports to GDP ratio. Linking into GVCs is increasingly being considered as the new development challenge in India. Government and Industry together need to think seriously and discuss the whole dimension of value chains. This would require initiating several policy measures such as examining duty structures across the entire value chain, improving trade infrastructure and upgrading the existing standards regime for goods and services. Sanjay C Kirloskar Chairman and Managing Director, Kirloskar Brothers Limited India is currently facing one of its worst export slowdown of recent years. To overcome this crisis situation, India needs to address some critical issues like trade infrastructure, export financing and Standards with an aim to make exports globally competitive. Building productive capacities, market linkages and enhancing investment attractiveness in selected sectors, particularly export-oriented investments, will have a strong impact on the export capacity of Indian business. Necessary reforms must be identified, both sector specific as well as cross-cutting reforms for all sectors, which will help make Indian exports competitive. Shreekant Somany Chairman, CII MSME Council and Chairman & Managing Director, Somany Ceramics Limited Mega-regionals are going to be a reality in a few years’ time. Unlike the existing bilateral FTAs and WTO agreement, the mega-trading agreements have much broader scope and reach in terms of coverage of issues and liberalisation. High standards and regulatory harmonisation amongst member countries are likely to pose a major challenge to countries who are not part of mega-regionals. They will have direct impact on the economy and subsequent growth and employment generation in participating countries. Mega-regionals like Trans Pacific Partnership (TPP) can bring considerable potential challenges for Indian Industry too. To face this emerging challenge, Government can play an important role by connecting trade policy with domestic policy. This will promote domestic development towards export oriented production. Deep Kapuria Chairman, CII Trade Fairs Council and Chairman, The Hi-Tech Gears Limited
  8. 8. 8 policy watch Factfile Copyright © 2016 Confederation of Indian Industry (CII). All rights reserved. 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. Published by Confederation of Indian Industry (CII), The Mantosh Sondhi Centre; 23, Institutional Area, Lodi Road, New Delhi 110003, India Tel: +91-11-24629994-7, Fax: +91-11-24626149; Email: info@cii.in; Web: www.cii.in For suggestions please contact Priya Shirali, Corporate Communications at priya.shirali@cii.in India’s Integration with World Economy: The Key Indicators Trade as a Percentage of GDP (%) Financial Year-wise FDI Outflow (US$ Million) Ease Of Doing Business in India Source: World Bank Group DatabankSource: Economic Survey, Various issues; Union Budget, RBI Monthly Bulletin, Annual Report & Weekly Statistical Supplement; Ministry of Finance Source: Economic Survey, Various issues; Union Budget, RBI Monthly Bulletin, Annual Report & Weekly Statistical Supplement; Ministry of Finance Financial Year-wise FDI Inflow (US$ Million)

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