Government engaging in multi-pronged drive to boost export industry
As part of the “Make in India” initiative launched in 2014, India has set an ambitious export target of USD 2 trillion by FY 2030. India seeks to garner a larger share of the export market by capitalizing on potential opportunities consequent to the global pandemic and the urgent need for alternative supply chains arising from the global disruption during the pandemic. In addition to achieving the goals in the Make in India initiative, the government is proactively moving forward with other objectives, such as concluding Free Trade Agreements (FTAs), revamping the Special Economic Zone (SEZ) structure to achieve export growth and revamping the general foreign trade policy. All of these activities should help India achieve its target of becoming a USD 5 trillion economy based on its four-pillar “EDGE” strategy (economies of scale, demographic dividends (i.e., growth resulting from the age profile of the population), good governance and encouraging innovation in industry) (see the article in the October 2022 issue of Indirect Tax News).
The government has reset its approach to bilateral and multilateral trade agreements, as is evidenced by its efforts to cement trade relations with various blocs/countries. Over the past two years, progress has been made on discussions for potential FTAs with several countries, which is expected to boost domestic and export-oriented manufacturing. The Minister of Commerce and Industry has asserted that India fully supports free trade within a rule-based multilateral trading environment.
Recent developments in the FTA area include the following:
- India–Australia Economic Co-operation and Trade Agreement (ECTA): The ECTA, which came into force on 29 December 2022, aims to boost bilateral trade and investment between the two countries and deliver new market access opportunities for both Indian and Australian businesses and consumers. Tariffs on goods traded between the countries are reduced substantially or eliminated under the ECTA. Based on the agreement, Indian exports are expected to benefit from preferential zero duty market access in Australia for 100% of its tariff lines, which will help India’s labour-intensive sectors such as gems and jewellery, textiles, leather, footwear, furniture, food and agricultural products, engineering products, medical devices and automobiles. India has provided preferential access to Australia on over 70% of its tariff lines, primarily raw materials and intermediaries such as coal, mineral ore, etc., which are required for India’s domestic manufacturing industry.
- During 2023, Indian trade negotiators will engage with four key economies: Canada, the EU, the Gulf Cooperation Council (GCC) and the UK. Key developments under these trade negotiations are as follows:
- India-Canada CEPA: After the fifth round of negotiations in November 2022, an Interim Agreement or Early Progress Trade Agreement (EPTA) is being negotiated.
- India-EU Trade and Investment Agreement: India and the EU (currently India’s second largest trading partner and export market, after the U.S.) have concluded a third round of talks for a Trade and Investment Agreement, with a follow-up discussion slated for March 2023.
- India-GCC FTA: India and the GCC are negotiating terms of reference for an FTA, with negotiations expected to start in Q1 of 2023.
- India-UK FTA: The sixth round of negotiations for the India-UK FTA was concluded on 16 December 2022 and the seventh round is due to take place in early 2023. The UK expects a deal to cut tariffs, open opportunities for UK services, such as financial and legal services, and allow its businesses to expand in India, which will give a major boost to Indian exports in labour-intensive sectors, including leather, textile, jewellery and processed agro products.
Revamp of SEZ
Until recently, SEZs have been instrumental in helping to increase Indian exports by creating large export-focused zones. SEZs are areas in India that promote and aid both foreign investment and exports, and companies operating in the zones are granted preferential treatment, including exemptions from taxes and tariffs.
In the budget speech for FY 2022-23, the Union Finance Minister announced that the SEZ legislation (which dates from 2005) would be overhauled and replaced by a new law. The government has begun drafting new legislation, the “Development of Enterprise and Service Hubs (DESH) Act,” which would allow:
- Units to produce and cater to both domestic and international markets;
- Net forex earnings criteria to be replaced with net positive growth to assess performance;
- An equalisation levy to be imposed on supplies made to the domestic market;
- Collaboration with state governments to achieve momentum and growth;
- Single window administrative clearances to be given; and
- Land use criteria to be revised to unlock potential.
Foreign Trade Policy
Imports and exports in India are, inter alia, regulated by the Foreign Trade (Development & Regulation) Act, 1992, in addition to the Union government’s foreign trade policy, which provides fiscal incentives to eligible exporters and is revised every five years. The current policy, which was due for renewal in April 2020, has been extended multiple times and will apply through 31 March 2023, at which time it is expected to be replaced with a new policy starting from 1 April.
The pandemic-stricken import and export industry expects significant benefits from the revised foreign trade policy, particularly since certain fiscal incentives have been suspended. Taking into account some adverse observations made by the Dispute Resolution Body of the WTO about export incentives, it seems likely that the revised foreign trade policy would be more inclined to adopt a trade facilitation approach rather than resorting to incentives.
The Finance Minister will present the Union Budget 2023-24 on 1 February 2023 and it is expected that government will offer a roadmap and direction on how it intends to recalibrate the above initiatives.