Navigating this situation with only limited control over the external developments, India’s trade policymaking needs to reorient its focus on taking proactive measures internally that prepare its economy for such exogenous surprises. This internal focus should comprise of three levers: Dynamism, differentiation, and servicification.

Indian export ecosystem should be made more dynamic offering-wise and must be equipped with flexible capabilities that make it nimbler and responsive to fickle patterns of global trade. This brings benefits inherent in diversification of markets and products while limiting competitive disadvantages of broad diversification. The dynamism to anticipate and adapt to the changing situation can be built through suitable investments, innovation, and skill building. For this, the export policies need to evolve from merely enabling ‘static competitiveness’, that supports the exporters in the current situation, but to develop a more ‘dynamic competitiveness’ which is contingency-ready. This entails product-agnostic support for better market intelligence, versatile production/logistics infrastructure, development/design capabilities, minimal compliance barriers for transition.

Another lever for an economy robust to trade uncertainties is differentiation of the export profile building on quality, innovation, and branding. This can establish a less-contested niche for Indian exports in the world market and potentially help navigate technical barriers to trade in some cases. Indian firms have significantly lagged in this aspect over the years. Scientific research will have to leveraged to build and strengthen the differentiation of Indian products in foreign markets. A more comprehensive version of the Zero Effect Zero Defect (ZED) initiative can help set course for higher quality products. Similarly, capacity-building for Indian exporters to innovate, develop, and test new products through institutionalized academic-industry collaboration and shared facilities will be critical.

Service exports have been the mainstay for balancing India’s trade deficits. They can also be the buffer for managing global uncertainties. India’s human resource advantages of English, education, and efficiency of labour costs provide a ready foundation for exporting services, along with the offshoring models honed over years. Service exports are relatively less vulnerable and tractable to protectionist barriers unlike goods trade. Service exports can also be as employment intensive as manufacturing. However, the service export portfolio needs to be built on a balanced base of domestic and global demands, making it more robust to cyclical shocks. Moreover, Indian service exports are highly concentrated sectorally and at the lower rungs of the value chain, with IT/software services contributing around 55%. While India has diversified notably its merchandise export profile over last two decades, the shift has been more gradual in services. Shares of key service sectors like services related to goods, transport and professional advisory remain constrained. This should be corrected by broad basing and premiumisation of the service export portfolio.

An externally oriented trade policy can be overly focused on tariffs. It is important to deemphasise product-based tariff lining as the primary tool of trade policy as it may not be very efficient in leveraging trade for domestic growth. Practically, tariffs are more a labour of activity than of purpose. Tariffs contribute relatively little to revenues (7% of the Union budget) and are complex to design and administer. They are susceptible to political sensitivities and create uncertainties not only for foreign producers but also for domestic businesses. The objective of domestic industry protection through tariffs has hardly borne any fruit since liberalisation. Global experience shows that local firms are more likely to become competitive when faced with trade challenges and not under the protective cover of tariffs. Most significantly, they give a handy negotiating leverage to other countries, focused majorly on reciprocal tariff concessions, which dilates trade negotiations over decades and overshadows general diplomatic exchanges. Further, negotiating longer-term interests with short-term bargaining chips like tariffs may not yield optimal results.

A better tariff strategy, perhaps, will be to bypass specific tariff discussions and propose an off-the-shelf preferential trade proposition with a three- (or five-) year transition to a uniform minimal tariff regime covering a majority of the goods basket. Negotiations can be held with trading partners/blocs leveraging this declared intent to seek concessions that can help bolster the dynamism, differentiation, and servicification of India’s exports, along with reduction of non-tariff barriers, investment promotion and technological exchanges.

It will be prudent to acknowledge the limited significance of global trade to India’s economy at present. Currently, exports account for only about 22% India’s Gross Domestic Product and it ranks 153rd in terms of exports per capita. But trade will have a greater role in India’s future trajectory. As it grows, it will produce more, export more; but also import more to consume more. India’s trade policy must cater to these future needs going beyond proximate issues and strengthen them against the vicissitudes of global trade.

This article is authored by Mohitkumar Daga, independent public policy consultant and Manash Neog, managing director, Chase APAC.