TRADE POLICY REVIEW NOTES

 Trade policy formulation

1. Department of commerce - The policy framework is provided by the Foreign Trade
Policy (FTP), which is drawn up under the Foreign Trade (Development and
Regulation) Act, 1992, and formulated and implemented by the Department of
Commerce. Other key trade-related legislation includes the Customs Act, 1962, and
the Customs Tariff Act, 1975 (Table 2.1). The current FTP covers the period 2015-21
and is amended periodically to take into account changing domestic and international
economic considerations.

2. Other institutions - Policy advice may also be provided by other institutions within the
Central Government, such as the Director General of Foreign Trade (DGFT), the
Tariff Commission, and the National Institution for Transforming India (NITI
Aayog), established on 1 January 20158; and chambers of commerce, such as the
Federation of Indian Chambers of Commerce and Industry (FICCI).
 Trade policy objectives
1. Global exports - The current FTP (2015-21) aims to increase India's share of global
exports from 2% in 2015 to 3.5% by 2020.
2. Export incentives - To achieve these export targets, India uses incentives such as the
Merchandise Export from India Scheme (MEIS), the Services Export from India
Scheme (SEIS), and credit facilitation, to encourage exports. The objectives of the
MEIS and the SEIS under the FTP is to offset infrastructural inefficiencies and
associated costs of exporters.
 SEZs (India vs China) – Export led growth strategy

China India
Government owned and provided Owned and developed by private
developers
Big – over 20,000 hectares Small – over 500 hectares on
average
5 in number (all operational) 423 (some are formally approved
and not all are operational
Active and direct Passive

SEZs in India take up only 0.015% of land area and only 0.1% of arable land area in
the country. However revenue loss due to exemptions is around 1 lakh crores annually
(1 lakh crore revenue foregone).
 Trade – India VS China
1. India’s trade deficit with China is over 50 billion dollars. India imports way more
from China than it exports.
2. 20% of India’s imports come from China.
3. India exports low quality raw materials and products to China like fish, cotton, iron
ore, copper etc. India exports highly complex and good quality materials from China
like telephones, solar panels, data processing machines, electronic circuits, 70% APIs
(essential in pharmaceuticals).
 WTO and India’s disputes
1. As a founding Member of the WTO, India provides most-favoured nation (MFN)
treatment to all WTO Members (and other trading partners that are not WTO
Members), except Pakistan, for which it withdrew MFN treatment on 15 February
2019. What is MFN? Clause requires a country providing a trade concession to
one trading partner to extend the same treatment to all. This clause implies
universal equal treatment.
2. Agreement On Agriculture (AoA) - AoA is aimed to remove trade barriers and to
promote transparent market access and integration of global markets. Agreement
on agriculture stands on three pillars: Domestic Support: It calls for reduction in
domestic subsidies that distorts free trade and fair price. Under this provision, the
Aggregate Measurement of Support (AMS) is to be reduced by 20% over a period
of 6 years by developed countries and 13% over a period of 10 years by
developing countries. Under this, Subsidies are categorized into: 1. Green Box:
subsidies that do not distort trade, or at most cause minimal distortion. They are
government-funded and must not involve price support. They also include
environmental protection and regional development programmes. Green box
subsidies are therefore allowed without limits, provided they comply with the
policy-specific criteria. 2. Amber Box: All domestic support measures considered
to distort production and trade (with some exceptions) fall into the amber box as
all domestic supports except those in the blue and green boxes. These include
measures to support prices, or subsidies directly related to production quantities.
3. Blue Box: This is the “amber box with conditions”. Developed countries dole
out several times higher subsidies to their farmers than the rest of the world. They
label most of the sops as non-trade distorting (green-box subsidy at the WTO)
which, supposedly, have minimal effect on world trade. The WTO’s AMS
entitlement allows the US, Canada, EU, and Australia to offer greater support to
their farmers. So, it is unfair of them to ask for a cut in India’s subsidies. 95.77%
of AMS entitlement goes to developed countries and 4.23% goes to developing
countries.
 Regional trade agreements
1. Since January 2015, India has notified entry into force for one regional trade
agreement (RTA) with Thailand, and the accession by Afghanistan to the South
Asian Free Trade Agreement (SAFTA), bringing its network of RTAs to 16, as
notified to the WTO. In addition, services and investment commitments were
notified for its agreements with ASEAN and for the Asia-Pacific Trade
Agreement (APTA) during the period under review.
2. In November 2019, India declared that it would not sign the Regional and
Comprehensive Economic Partnership (RCEP) Agreement, which now involves
 the ASEAN members and five other countries in the region (Australia, China,
Japan, Republic of Korea, and New Zealand). Negotiations with a number of other
trading partners continue, including Australia, Bangladesh, Canada, the European
Union, the European Free Trade Area (EFTA), the Gulf Cooperation Council,
Indonesia, Iran, Israel, Mauritius, New Zealand, Peru and the Southern African
Customs Union (SACU), as well as the Bay of Bengal Initiative on Multi-Sectoral
Technical and Economic Cooperation (BIMSTEC).
 Investment regime
1. COMPANIES ACT - Establishment of companies in India is regulated by the
Companies Act, 2013, as amended in 2017 and 2019, which applies to both domestic
and foreign firms. The Act regulates the establishment, the functions and
responsibilities of senior management, and the auditing and accounting requirements.
The Act is administered by the Ministry of Corporate Affairs.
2. OTHER LEGISLATION – Limited liability Act 2008, Competition act 2002,
Industrial disputes act 1947, IBC 2016, SEBI act 1992.
3. COMPANY - A company may be established in India as a limited liability company,
a branch or project office, a joint venture with a foreign investor, or a wholly foreign-
owned company. To establish, the investor is required to register with the Ministry of
Corporate Affairs. Since 2016, this registration can be done electronically.
 Compulsory industrial licensing
1. INDUSTRY LICENSING – From 18 we are down to 4 industries where compulsory
licensing is required. These industries are Defense equipment, Explosives, Hazardous
chemicals and Cigars (and cigarettes) of tobacco.
2. RESERVED FOR PUBLIC SECTOR – Only 2 industries are reserved for the
public sector – atomic energy and railways.

 Foreign Investment
1. DPIIT- India's foreign direct investment (FDI) regime is implemented by the
Department of Promotion of Industry and Internal Trade (DPIIT), formerly the
Department of Industrial Policy and Promotion, in the Ministry of Commerce and
Industry, and issued through a Circular on Consolidated FDI Policy which is updated
periodically.
2. Gradually opening up sectors to FDI – Only 10 sectors remain where FDI is
prohibited. There are 11 sectors where government approval is required.

3. Easing of FDI restrictions – Automatic FDI of 100% is now allowed in defense

industry, telecom and insurance companies.
 Investment incentives
1. SEZs - Tax incentives are available for exports by companies based in SEZs and
EOUs, including a 100% tax exemption on export profits for the first five years from
when manufacturing commences, followed by a 50% tax exemption for the next five
years, and a 50% tax exemption for the final five years if export profits are reinvested
in the company.
2. Startup India - Under the Start-up India programme, launched in 2016, any start-up
established after 1 April 2016 (and before 1 April 2021) can get a tax exemption
under Section 80IAC of the Income Tax Act on 100% of profits for any three-year
period within seven years.
3. Assistance in priority sectors - Assistance is also provided in the form of lending
targets for all banks, of 40% of adjusted net bank credit per year to priority sectors,
including agriculture, SMEs, export, education, housing, renewable energy and social
infrastructure.