Economic Diplomacy: India’s Strategy for Enhancing Trade Relations

by Vaishali Basu Sharma - 20 May, 2024, 12:00 1041 Views 0 Comment

Globalisation has offered new economic opportunities in several fields, including science, communication, and technology, but at the same time, it has increased the competition for capital and economic marginalisation of developing countries. A bilateral relationship is a constituent of several items that encompass politically, culturally, and economically motivated relations between two independent nations. 

In contemporary diplomacy, economic diplomacy has acquired increasing importance involving a shift in priorities and becoming more multi-stakeholder in nature. Economic diplomacy can be characterised as an arrangement of activities with respect to procedures and strategies for cross-border monetary activities that help establish links between corporate players and the state for export or investment purposes. It focuses on tariffs, foreign exchange, the sale of goods, and customs negotiations. Economic diplomacy works on the premise that economic/commercial interests and political interests reinforce each other and, therefore, need to be considered together. 

Protectionism and political differences will always be the biggest blocks to the free flow of trade, and it is necessary that India align its trade policy with its domestic and international outlook on other issues, before rashly entering or leaving free trade agreement notifications. India’s active economic diplomacy of late has positively reinforced bilateral and bloc relations. 

India’s free trade agreements (FTAs) and Preferential Trade Agreements (PTAs) started out as a measured and calibrated exposure of the Indian economy to international competition. Today Free Trade Agreements are not just about tariff reductions and transactional approaches of give and take on market access or IPR- they are an avowment of mutual trust between two countries or regions, and in effect a commitment to give each other’s businesses and investments near national treatment. FTAs eliminate/reduce tariffs, quotas, non-tariff barriers, hindrances, and preferences on most goods and services traded between their member countries and can be considered the first stage of economic integration

The Indian government has implemented a range of policies and initiatives to enhance Foreign Direct Investment (FDI) in the country. Almost a year ago, Commerce, Industry and Textiles Minister Piyush Goyal on Friday unveiled India’s Foreign Trade Policy (FTP) 2023.

The ambitious plan focuses on giving incentives to remission, promoting exports through collaboration, and increasing the ease of doing business, especially for MSMEs (micro, small, and medium enterprises), and related emerging areas. 

Other notable efforts include the “Make in India” campaign, which focuses on simplifying procedures and promoting a favourable investment climate across sectors. Liberalisation of FDI policies, particularly in retail, defence, insurance, and single-brand retail trading, has been a key strategy. The Goods and Services Tax (GST) implementation has improved transparency, while Special Economic Zones (SEZs) provide dedicated spaces with tax incentives. India’s FDI inflows reached record levels, at US$ 84.84 billion during 2021-22. The service sector, Computer software and hardware and Trading were the major receivers of FDI.

The Foreign Trade Policy also seeks to make the Indian rupee a global currency and allow international trade settlement in the domestic currency.  Unlike the practice of announcing 5-year FTP, the latest policy has no end date and will be updated as and when needed. The FTP benefits have been extended to e-commerce exports which are estimated to grow to USD 200-300 billion by 2030.  In addition to the already existing 39 TEEs, the new FTP identifies four new Towns of Export Excellence — Faridabad, Moradabad, Mirzapur and Varanasi. While at present the Ministry of External Affairs oversees diplomacy, and the Ministry of Commerce negotiates Trade policies, we are seeing both come together more often for trade policy negotiations with other countries.

While presenting the interim Budget 2024-25 Finance Minister Nirmala Sitharaman announced “For encouraging sustained foreign investment, we are negotiating bilateral investment treaties with our foreign partners, in the spirit of ‘first develop India’.” She said during 2014-23 foreign direct investment (FDI) has doubled to $596 billion compared to the inflow received during 2005-14. 

At present India has FTAs with about a dozen countries and regions, most of which were signed pre-2014. More recently the government has signed 3 FTAs with Australia, United Arab Emirates (UAE) and Mauritius in 2022. In a bid to strengthen their economic alliance, on August 14, 2023, India, and UAE commenced crude oil trade using the local currency Settlement (LCS) framework

There are many more that India is negotiating, with trading partners like the United Kingdom, Israel and the European Union. It must be kept in mind that despite being primarily an economic arrangement, FTA agreements are ultimately a political decision and reinstate goodwill on both sides.

Recently India signed a Trade and Economic Partnership Agreement (TEPA) with a 4-nation non-EU European Bloc of Iceland, Norway, Liechtenstein and Switzerland. The agreement that was completed after 21 rounds of talks, and began in 2008, had been suspended between 2013-2023. The agreement included a chapter on investment promotion, with EFTA countries promising $100bn investment in 15 years, as long as high GDPs and other economic factors remain. The treaty is expected to improve the confidence of investors, especially large investors, resulting in an increase in foreign investments and overseas direct investment (ODI) opportunities, the statement said, adding that this may have a positive impact on employment generation.

FTA negotiations with the United States were initiated during the Trump presidency and were dropped by the Biden Administration. It is possible that the negotiations may restart if the US administration changes. The India-UK FTA has made some progress, but it is unclear if it can be signed now, before elections, or later this year as the UK heads to elections. Oman- FTA is understood to have been finalised, and an announcement is expected soon, or after elections in India. Gulf Cooperation Council 6 nations-FTA has been delayed and there are some considerations of joining with the India UAE FTA. 

Further India’s outbound investments have evolved not only in terms of volume but also in terms of geographic distribution and sectoral makeup.  Indian firms invest in foreign shores primarily through mergers and acquisitions (M&A). A developing nation like India constantly looks for opportunities to invest extensively outside India as it helps the economy as a whole. 

Infrastructure development has also played a part in diversifying India’s exports and in improving the quality and competitiveness of its merchandise in international markets. Finally, India’s economic diplomacy goes hand in hand with rising economic efficiency, competitiveness, improved investment environment, emphasis on regulatory reform, administrative procedural reform, and the changing attitude of industrialists. 

Vaishali Basu Sharma
Author is an analyst on Strategic and Economic Affairs. She has worked as a Consultant with the National Security Council Secretariat (NSCS) for nearly a decade. She tweets at @basu_vaishali

Leave a Reply

Your email address will not be published. Required fields are marked *