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India must open up to attain trade integration, says IMF

G. Srinivasan

If India had opened up like China since the late 70s, its exports would have gone up to $200 billion instead of the current $45 billion, the IMF report has said.

NEW DELHI, Sept. 6

THE International Monetary Fund (IMF) has said "more efforts" will be needed to "eliminate the anti-export bias of the Indian economy" which would help achieve the "authorities' objective for trade integration".

In its comprehensive Country Report on India, the fund said notwithstanding India's increased outward orientation since the 90s, its share of global trade had remained unchanged. The simplest approach to measuring trade integration is to look at indicators of trade openness, defined as the ratio of imports and exports to GDP.

While the country's share of world merchandise exports has increased from 0.5 per cent to less than 0.7 per cent over the last 20 years, China's share has more than tripled to almost 4 per cent. In other words, if India had opened up like China since the late 70s, its exports would be up to $200 billion instead of the current $45 billion.

India's share of global trade is similar to that of the Philippines, an economy six times smaller. However, thanks to its competitive edge in the information technology (IT) sector, India's trade performance looked more favourable when trade in services was included, it said.

The fund said four factors could explain India's relatively low degree of trade integration. First is the continuing high degree of restrictiveness of the trade regime. Second, the process of trade liberalisation itself, whereby tariffs on inputs and intermediate goods have been lowered at a faster clip than tariffs on outputs, may have also led to an increase in India's effective protection and the anti-export bias.

Third, the existence of various domestic impediments to investment and growth has impacted both the tradable and non-tradable sectors of the economy.

Fourth, India, like other developing and emerging markets, is facing a number of market access or trade barriers in industrial countries that impede the full exploitation of comparative advantages.

The fund enumerates the essential steps for India's trade integration with the world trade, which include, among others:

The need to significantly reduce the statutory peak rate and lowering the average tariff rate to at least the "Asian level" of 12 per cent.

In this context, the pace of tariff reduction could be expedited in view of the extant strong external position.

  • Simplify the tariff regime by removing or reducing the exemptions and introduce a lower and more uniform duty structure. Specifically, there is a need to avoid complex and biased tax incentive systems, in particular, in the Special Economic Zones (SEZs) that could lead to substantial revenue losses and thus further complicate the process of tariff reduction.

  • Remove the remaining non-tariff and administrative barriers on imports and exports, while both domestic production and imports should be made subject to the same safety and quality standards.

  • Along with trade reforms, further liberalise and simplify the foreign investment regime.

  • Allow a more flexible exchange rate regime to reflect changing fundamentals resulting from trade and capital account liberalisation.

    Together with these steps, IMF said the various export promotion schemes should be streamlined and phased out. Citing a WTO study, it said while the share of exports qualifying for these schemes had risen steadily from around 37 per cent in 1997-98 to 71 per cent in 1999-2000, it was not clear whether these schemes had been successful in boosting Indian exports. "Instead, it has been suggested that India's opening up may be due more to the liberalisation policies pursued since 1991 rather than to the export promotion schemes themselves," the fund said.

    The IMF report emphasised the need to release the Indian industry to enable it to compete globally. "Thanks to its high-skilled and relatively low-cost labour force, particularly in areas of engineering and science, the Indian industry has great growth and export potential," the fund said, adding that this potential remained greatly undermined by the advantages that industries faced in terms of structural, regulatory and infrastructure impediments.

    Even as the SEZs are being planned with a view to providing world-class facilities for export-oriented manufacturing and to attract FDI, the fund said the experience from other countries suggested that they would be of more benefit to the whole economy if enterprises in SEZs developed close links with domestic firms to maximise productivity spill-overs. It said domestic enterprises could benefit more from these spill-overs if there were a major overhaul of the investment climate at both the Centre and State levels.

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