Indirect Tax News - October 2022

Strategy to become a USD 5 trillion economy

India has become the fifth largest economy in the world and is rapidly moving towards its target of becoming a USD 5 trillion economy. The COVID-19 pandemic presented India with a unique opportunity to become a global manufacturing hub thereby attracting substantial foreign investment and position itself as a global sourcing market. To achieve its ambitious target of becoming a USD 5 trillion economy, India is adopting an “EDGE” strategy to create a competitive edge in the global economy:

  • Economies of scale;
  • Demographic dividend (i.e., growth resulting from the age profile of the population);
  • Good governance; and
  • Encourage innovation in industry.

The Minister of Commerce and Industry has suggested the following action plan to achieve the USD 5 trillion economy target:

  • FTAs concluded in 2022:
    • India-United Arab Emirates (UAE) Comprehensive Economic Partnership Agreement (CEPA): The CEPA with the UAE is the first comprehensive FTA to be signed by India in a decade (for prior coverage, see the article in the July 22 issue of Indirect Tax News). With this FTA, India will obtain preferential market access in the UAE for all labour-intensive sectors such as gems and jewellery, textiles, leather, footwear, sports goods, plastics, furniture, agricultural and wood products, engineering products, medical devices and automobiles.
    • India–Australia Economic Co-operation and Trade Agreement (ECTA): The ECTA with Australia is the first trade agreement concluded by India with a developed nation in over a decade. Similar to the India-UAE CEPA, India will obtain preferential market access in Australia for all labour-intensive sectors.
  • FTAs under negotiation:
    • India-Canada CEPA: India and Canada have agreed to re-launch negotiations for a CEPA and also consider an Interim Agreement or Early Progress Trade Agreement (EPTA) that could bring early commercial gains to both countries.
    • India-UK FTA: The fifth round of the India-UK FTA was concluded in July 2022, and it is anticipated that the majority of the talks on a comprehensive and balanced FTA is likely to be concluded in the near future.
    • India-EU Trade and Investment Agreements (TIA): India and the EU recently held a first round of discussions for a TIA, with a second round expected shortly. The trade agreement with EU would help India further expand and diversify its exports of goods and services, including securing the value chains.
    • India-U.S. Trade Policy Forum (TPF): India and the U.S. held the 12th Ministerial-level meeting of the TPF during which the ministers emphasised the importance of integrating the two economies across sectors, which would contribute to a more ambitious future for the bilateral trade and economic relationship.
  • Promote the “Make in India” initiative to achieve the goal of making the country self-reliant. With this objective in mind, the Union government will be actioning the following initiatives:
    • Revamping the existing Special Economic Zones model and introducing new legislation for the Development of Enterprise and Service Hubs (DESH) to expand from export-oriented manufacturing and shift the focus to broad-based parameters, such as boosting additional economic activity, generating employment and integrating industrial hubs. The legislation, which is expected to be enacted soon, would be compliant with the WTO standards under the Agreement on Subsidies and Countervailing Measures.
    • The Union government will be announcing the new foreign trade policy in the next quarter that will replace the current policy as from April 2023 and remain in effect for five years. The new policy is expected to be broad-based and likely to address some of the issues raised by the U.S. before the WTO Dispute Settlement Body.  
    • The Prime Minister unveiled the National Logistics Policy on 17 September 2022 that aims to reduce the costs of logistics from the existing 13%-14% and bring them in line with other developed countries. Reduced logistics costs will improve the competitiveness of Indian products in the domestic and international markets and enhance efficiency efforts in all sectors of the economy, which will encourage value addition and enterprise.

These policy initiatives are expected to help India increase the competitiveness of domestic goods in the global market, thereby encouraging businesses to strengthen their exports from India, further capital formation and create new employment opportunities.

Gunjan Prabhakaran