Foreign Trade Policy & WTO

Foreign trade is a vital engine of economic growth for India. This topic covers India's Foreign Trade Policy (FTP), the role of the World Trade Organization (WTO), globalisation dynamics, regional trade integration, and key institutions like the EXIM Bank and Asian Clearing Union. For JAIIB candidates, understanding trade policy is essential as it directly impacts banking operations in trade finance, export credit, and foreign exchange.

Foreign trade policy refers to the economic policy that governs an economy's export-import activity. Economic policies such as Foreign Trade Policy and Foreign Investment Policy are critical components of the economic process. A well-planned foreign policy adds to the local economy's output and the nation's prosperity.

Launched on April 1, 2015, in line with the Make in India initiative, the FTP 2015-20 provides a framework for promoting goods and services exports, as well as employment generation and value addition.

• Increase India's merchandise and services exports from $465 billion (2013-14) to $900 billion by 2019-20
• Increase India's share of global exports from 2% to 3.5%
• Help both industrial and service sectors with emphasis on ease of doing business
• Adapt to external challenges in a rapidly evolving trade environment

Earlier there were five different schemes for rewarding merchandise exports, each with different conditions:

1. Focus Product Scheme
2. Market Linked Focus Product Scheme
3. Focus Market Scheme
4. Agricultural Infrastructure Incentive Scrip
5. Vishesh Krishi Gram Udyog Yojana (VKGUY)

These were merged and simplified under the new FTP.

• As per the World Investment Report 2021 (UNCTAD), India in 2020 was the 5th largest recipient of FDI
• India is amongst the top ten service exporter countries globally
• Of total net service exports, about 40% pertains to software
• The IT-BPM industry grew by 8.4% in 2017-18 (US$167 billion) and reached US$181 billion in 2018-19
• Services sector accounts for 54% of India's GVA; its proportion has increased from 33% in 1950 to 53% in 2021-22

• Manufacturing employs roughly 12% of the labour force
• The construction sector is the 2nd largest employment sector, after agriculture
• With agriculture's job-creation capacity dwindling and services' limited ability to absorb unskilled labour, hopes rest on manufacturing for mass employment

• Increased per capita income
• Better employment opportunities
• More options for customers
• New options for agriculture exports
• New technologies boosted long-term productivity

• Mutual understanding and dialogue among governments is key
• Fair globalisation must ensure benefits are shared equally
• Government measures must safeguard the interests of all citizens, including workers
• Must be supported by economic, social, and environmental development pillars

Deglobalisation is the process of reducing dependency and integration amongst particular units throughout the world. Protectionism takes three main forms:

Protectionism results in:

• Decline in trade
• Price rise
• Necessity for subsidies for protected industries
• Some jobs saved in protected industries, but jobs lost in others

WTO regulations allow governments to practise trade protection measures to preserve national interests within specific limits.

MSMEs are India's strongest drivers of economic growth, innovation, and employment:

• Over 64 million enterprises in the MSME sector
• Manufacturing output: roughly 45%
• Exports: >40%
• GDP contribution: >28%
• Employment: approximately 120 million people (2nd only to agriculture)
• Primary benefit: employment potential at low capital cost

• Enterprises must register online on the Udyam Registration Portal
• Registration is entirely online, digital, and paperless — based on self-declaration
• No documents or proof required for registration
• SMEs account for around 90% of businesses and more than 50% of employment globally

• Established under the Export-Import Bank Act, 1981 (September 1981); commenced operations in March 1982
• Wholly owned by the Government of India
• Purpose: Financing, facilitating, and promoting foreign trade in India
• Principal financial institution for coordinating institutions engaged in financing exports and imports
• An apex institution promoting foreign trade; has domestic and nine overseas offices

• A payment arrangement where participants settle payments for intra-regional transactions among participating central banks on a net multilateral basis
• Established at the initiative of UN ESCAP in December 1974
• Members: Bangladesh, Bhutan, India, Iran, Maldives, Myanmar, Nepal, Pakistan, and Sri Lanka

• Facilitate payments among member countries for eligible transactions
• Economise on foreign exchange reserves and transfer costs
• Promote trade and banking relations among participating countries

• Exports/imports among members expand faster due to conservation of forex
• Trade liberalisation promoted among members
• Scale economies made possible by enlarged trade
• Adjustment process raises international competitiveness

1. FTP 2015-20: Target was to increase exports from $465 billion to $900 billion; share from 2% to 3.5%
2. MEIS for merchandise exports; SEIS for service exports — replaced 5 earlier schemes
3. India was 5th largest FDI recipient in 2020 (UNCTAD)
4. 40% of net service exports = software; IT-BPM industry reached US$181 billion (2018-19)
5. MSME sector: 64 million enterprises, 120 million jobs, >28% of GDP, >40% of exports
6. EXIM Bank: Established March 1982; wholly government-owned; principal institution for trade finance
7. Asian Clearing Union: Established December 1974; 9 members; net multilateral settlement
8. Protectionism: Tariffs, import quotas, non-tariff barriers — allowed by WTO within limits
9. PLI Scheme: Rs. 1.97 lakh crore for 13 sectors; 4-6% incentive on additional sales
10. Udyam Registration: Online, paperless, self-declaration based (July 2020)
11. Services sector share: 33% (1950) → 53% (2021-22)
12. Construction is the 2nd largest employment sector after agriculture