New Terms of Trade - Opportunity for Indian MSMEs

After rising by over 40% in the last fiscal year, India's merchandise exports growth has moderated. Although the recent moderation is partly because of the imposition of export restrictions to contain domestic inflation, the surge was not expected to sustain as it was significantly driven by global commodity prices. However, the importance of attaining and maintaining higher levels of exports cannot be overestimated. It can be an important driver of growth, which India has been missing for a while. The small businesses were worst hit beacuse of the Covid-Pandemic and their share in merchandise exports has been of vital importance.  Before the post-pandemic boom, exports remained virtually flat for several years, which affected the overall economic growth. It is thus important that India builds on the momentum it gained after the pandemic and sustains a reasonable rate of exports growth over the medium term. Since this will need policy support, the government did well by restructuring the commerce department.

The Director General of Foreign Trade will no longer have the power to make the foreign trade policy. The trade policy division has been bifurcated to handle bilateral and multilateral trade negotiations separately. This is significant move, as it will help provide focused attention to negotiations on free-trade agreements that India is currently engaged in with a number of countries. This will be critical as India moves forward with new trade agreements.

India needs to build institutional capacity in the trade policy establishment. This will not only help present India's position more effectively in trade negotiations, but also inform the broader domestic policy establishment to take a more practical move on foreign trade. To boost trade in a sustainable manner, it is now important to integrate with global value chains.

As things stand, India's participation in the global value chain has declined in the recent years, which seems to have affected exports. Data compiled by the World Bank shows that India's exports of goods and services as a percentage of gross domestic product steadily declined from a high of 25.4% in 2013 to 18.7% in 2020. India needs a comprehensive review as to why this happened to be able to find ways to reverse the trend sustainably. The Government thus would be well advised to use the restructuring of the Commerce department to build institutional strength. Aside from protecting trade interests at negotiation, which are often fairly detailed and time consuming, it would also help India prepare for a rapidly changing global economy. The support from exports is essential for attaining the Post-Covid revival of the MSME sector and also in achieving higher sustainable economic growth.

Source : An article from the Opinion section of Business Standard Newspaper