The recently published Economic Survey flagged the challenges for India’s external sector, particularly exports, amidst the change of power in the US and the shifting trade stances by other economies. The Survey suggested a long-term approach by positioning itself as a strategic partner in high-value sectors such as biotechnology, semiconductors, and space technologies, to name a few.
The Survey emphasises the need to adopt a short-term approach by diversifying the export basket to ensure that India remains resilient despite rising protectionism and trade costs. Foreign direct investments are critical in ensuring that a strategic shift to a high-value export basket takes place in the long run.
FDI initiatives
The most significant Budget announcement on external trade and foreign investment is the decision to revamp the Bilateral Investment Treaty (BIT) model to make it more “investment friendly.” The provisions in the current model BIT, especially those concerning the investor-state disputes, are a significant mood-dampener for foreign investors. The lack of flexibility in the new model BIT introduced in 2016 has impeded investment treaty negotiations, particularly with the developed countries. The announcement assumes significance, given that India is negotiating investment treaties with the UK, Saudi Arabia, the EU, and Qatar.
Although the Survey projects India as a long-term investment destination, any further delay in implementing reforms will have serious implications on FDI flows. The global economic uncertainty and rising borrowing costs further add to the woes.
Another important Budget announcement pertains to raising the FDI limit in the insurance sector to 100 per cent. The annual premiums to GDP ratio was a meagre 3.7 per cent in FY24, in contrast to the global average of 7 per cent.
The higher investment limits will attract more foreign players. The caveat in the announcement is that the enhanced limits apply to companies that invest the entire premium within India.
The previous instances when FDI insurance limits were raised in 2015 and 2021 were successful in attracting fund flows to the tune of ₹54,000 crore.
The Budget lacks concrete policy announcements on reforms to attract FDI in the manufacturing sector. Considering that the PLI scheme has not delivered the desired results, the manufacturing sector desperately needed reforms to attract foreign investment.
Exports Push
The Budget has recognised the need to encourage exports amidst the rising protectionist tendencies across the global economy. The Export Promotion Mission primarily aims to improve exports by providing easier access to credit for exporters, particularly SMEs, and reduce trade-related costs and compliances.
Digital platform
The new unified digital platform, the Bharat Trade Network, is laudable as it helps streamline export documentation and integrate major players such as DGFT, GSTN, and banks to reduce bureaucratic delays. Although the new announcement recognises the delay in export processes and lack of access to credit, the allocation of ₹2,250 crore is paltry and inadequate.
The mission must be scaled up further in the upcoming financial year to ensure that a positive impact on exports is visible. Another important outcome of the Budget is the effort to address the inverted duty structure and rationalise the tariff structure to boost Indian manufacturing. Sectors, such as agro-textiles and geotextiles, have received sops. Policy announcements to ensure the availability of certain critical minerals will boost the EV industry.
Nevertheless, there is a long way to go in addressing the inverted duty structure and rationalization of tariffs. Sector-specific announcements like these are inadequate in addressing the structural issues plaguing our external trade sector.
Furthermore, India’s real comparative strength lies in services exports. While focusing on promoting manufacturing exports, sustained policy efforts are required to strengthen our services export sector.
Krishnan is an Assistant Professor at Christ University, Bengaluru. Gopalakrishnan is Fellow, NITI Aayog. Views expressed are personal
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