Redefining India’s trade policy

As India loses its ‘developing country’ status, the foreign trade policy which has been guiding India’s market access in the past few decades needed to undergo fundamental change to ensure its competitiveness in the global economy.

Incentives, exemptions, and subsidy-based trade policy needed to give way to market-driven, competitiveness enhancing instruments of trade which are more acceptable in the multilateral global framework of the World Trade Organisation (WTO).

All of this made a new Foreign Trade Policy critical.

On the eve of India stepping into the new fiscal year, the government unveiled the Foreign Trade Policy 2023. Historically, the Foreign Trade Policy (‘FTP’) is issued with a five-year gap, and an annual update setting out the regulations for cross-border trade – with the objective of facilitating cross-border trade by reducing transaction costs.

FTP 2015-20, which was to end on March 31 2020, was extended due to the pandemic and volatile geo-political scenario for three years.

The established framework of India’s global trade has, in recent times, been redefined on various counts, including:

• The increased protection from key economic powers given the recent geopolitical developments, and current and emerging global trade tensions
• India moving up the development matrix and so losing trade policy manoeuvrability
• Thrust on local manufacturing and a direction towards bilateral trade conventions
• Alignment with flagship programs like ‘local for global’ and the production-linked incentives (‘PLI’) scheme
• WTO’s ruling against India’s export incentive schemes and overdue review of Special Economic Zones scheme – in 2019, a dispute resolution panel of WTO members had said that the export incentives under the FTP are violative of India’s WTO commitment

Foreign Trade Policy 2023

The FTP 2023 is based on an approach that encompasses:

• Replacing incentives to tax remission
• Greater trade facilitation through technology, automation, and continuous process re-engineering
• Export promotion through collaboration with exporters, states and developing districts as export hubs
• Focus on emerging areas such as ecommerce exports.

The key highlights of the policy that are relevant for international businesses can be summarised as:

Ease of doing business, reduction in transaction cost and e-initiatives

Online approvals without physical interface based on process simplifications and technology implementation have been introduced. Immediate approval of applications under an automatic route for exporters will reduce processing time from up to one month to a day. An electronic Certificate of Origin (‘CoO’) platform has been proposed to provide for self-certification of CoOs as well as automatic approval of CoOs, where feasible. Initiatives for electronic exchange of CoO data with partner countries is envisaged.

Export promotion initiatives

Exporters of goods, services and technology are eligible to privileges specified in the FTP. Depending upon export performance, they are categorised as status holders with star ratings. Export performance thresholds for recognition of exporters as status holders belonging to a different category of star rating is being rationalised – enabling more exporters to achieve higher status and reduced transaction costs.

To boost merchanting activities from India, merchanting trade involving shipment of goods from one foreign country to another without touching Indian ports, or involving an Indian intermediary, is being allowed subject to compliance with Reserve Bank of India (‘RBI’) guidelines.

In a major step towards internationalisation of the rupee, FTP benefits are now extended for rupee realisations through special Vostro accounts setup as per an RBI circular issued on 11 July 2022.

Ecommerce exports

A digital economy which includes internet platforms, ecommerce and digital content firms has the power to rapidly increase market penetration of products and services globally. Understanding the disruptive power of such business models for penetrating global markets at a rapid pace, the new FTP has extended all its benefits to ecommerce exports.

The FTP 2023 outlines the steps towards enablement of IT systems and streamlining ecommerce export facilitation. Designated hubs with warehousing facilities are to be notified, to help ecommerce aggregators for easy stocking, customs clearance and returns processing. Processing facilities are to be allowed for last-mile activities such as labelling, testing, repackaging etc.

Amnesty scheme for export obligation defaults

FTP 2023 has indicated relief is to be provided to exporters who are unable to fulfil their export obligations against the EPCG and Advance Authorisations through an amnesty scheme for one time settlement of defaults.

What does this mean for foreign businesses operating in India?

The FTP has shed its ‘once-in-five-years policy document’ image for a policy instrument which is more dynamic and responsive to emerging trade scenarios. A consultative mechanism is envisaged to resolve issues of trade and industry. The policy is forward-looking, enabling growth of scale and realisation of potential by focussing on key sectors and products, and encourages economic value addition in India.

Foreign companies can now look forward to integrating India into a global value chain of goods and services, and those already operating in India can now focus on the initiatives that this policy provides such as:

• Ease of doing business in India has been a major hurdle for several companies. A single-day processing time will go a long way in reducing transaction time and costs helping in global value chain integration
• Certificate of Origin has often been the unseen devil in full implementation of FTA’s, both existing and proposed. Facility of self-certification and a platform for sharing CoO data will go a long way in realising full benefits of the FTA
• A lower threshold for recognition of exporters as status holders in different star categories will enable realisation of higher privileges specified in the FTP
• Merchanting of trade may help in overcoming restrictions on trading partners
• Currency fluctuations and costs can be minimised by setting up vostro accounts for rupee trade
• E-Commerce exporters can now use designated hubs with warehousing facilities not only for easy stocking but also for activities such as labelling, testing, and repackaging
• Those companies which have not been able to achieve export obligations placed on them in EPCG and Advance Authorisations schemes in the past due to global turmoil can now look forward to getting amnesty.

Written by Prashant Deshpande of India Law Alliance. If you would like to contact Prashant or discuss this article please contact Nicolas Groffman or Syed Alam – contact details below’