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Trade Policy in India

Learning Objectives​

  • Trace how India's trade policy evolved from import-substitution (pre-1991) to export-led liberalization (post-1991).
  • Explain the purpose and instruments of India's Foreign Trade Policy (formerly EXIM Policy).
  • Distinguish tariff and non-tariff barriers and evaluate why India uses each.
  • Describe how Special Economic Zones (SEZs) are structured to promote exports.
  • Identify India's major Free Trade Agreements and assess their economic impact.
  • Explain India's commitments and disputes as a WTO member.
  • Analyze how Make in India and Production Linked Incentive (PLI) schemes reposition India's trade strategy.
  • Interpret India's trade deficit and current account data in the context of policy choices.

Quick Answer​

India's trade policy is the set of government rules, tariffs, incentives, and agreements that govern how India trades goods and services with the rest of the world. Until 1991, it was inward-looking — high tariffs, import licensing, and a bias against exports (the "License-Permit-Quota Raj"). The 1991 balance-of-payments crisis forced liberalization: tariffs fell sharply, licensing was dismantled, and India shifted to an export-promotion model built around the Foreign Trade Policy, Special Economic Zones, and membership in the WTO (1995). Today, trade policy also includes Free Trade Agreements with partners like the UAE, Australia, Japan, and ASEAN, and newer manufacturing-and-export pushes like Make in India and Production Linked Incentive (PLI) schemes. It matters because it directly shapes India's competitiveness, employment, foreign exchange earnings, and its persistent merchandise trade deficit.

Overview​

Trade policy is the government's strategy for managing what a country buys from and sells to the rest of the world. It covers tariffs (taxes on imports/exports), non-tariff measures (quotas, standards, licensing), export incentives, special zones for export production, and international agreements that bind a country's trade behavior.

For India, trade policy has never been a static rulebook — it has been rewritten in response to crises and opportunities. In the first four decades after Independence (1947–1991), India followed an import-substitution industrialization (ISI) strategy: protect domestic industry with high tariffs and strict import licensing, conserve scarce foreign exchange, and build self-reliance. This kept India's trade-to-GDP ratio low and its industries globally uncompetitive.

The 1991 Balance of Payments crisis — when India's foreign exchange reserves fell to barely two weeks of imports — triggered the New Economic Policy under Finance Minister Manmohan Singh. Trade policy became one pillar of the broader Liberalization-Privatization-Globalization (LPG) reforms: tariffs were cut drastically, import licensing was abolished for most goods, and the rupee was devalued and later made market-determined.

Since then, Indian trade policy has been administered mainly through the Foreign Trade Policy (FTP), issued periodically by the Directorate General of Foreign Trade (DGFT) under the Ministry of Commerce and Industry. Trade policy today is about balancing competing goals: protecting sensitive domestic sectors (agriculture, MSMEs) while chasing export competitiveness, integrating into global value chains through FTAs, meeting WTO obligations, and — increasingly since 2014 — building domestic manufacturing capacity through Make in India and PLI schemes so India relies less on imports for critical goods like electronics, APIs (active pharmaceutical ingredients), and defence equipment.

Why does this matter for a student of Indian economics? Because trade policy touches almost every other topic you study: the balance of payments, exchange rate management, industrial policy, and India's engagement with global institutions like the WTO and IMF. Trade policy decisions — a tariff hike, an FTA signed, an export scheme redesigned — ripple through inflation, employment, and India's position in world affairs.

Core Concepts​

Evolution of India's Trade Policy (Pre-1991 vs Post-1991)​

Definition The evolution of India's trade policy refers to the shift from an inward-looking, protectionist, import-substitution regime (1947–1991) to an outward-oriented, liberalized, export-promoting regime (1991 onward).

Explanation Pre-1991, India's trade policy rested on three pillars: (1) high tariffs — average tariffs exceeded 200% on many manufactured goods by the late 1980s; (2) quantitative restrictions and import licensing, where importing almost anything required government permission (the "License-Permit-Quota Raj"); and (3) an overvalued, non-convertible rupee that discouraged exports. The goal was self-sufficiency (swadeshi-inspired import substitution), not global competitiveness.

The 1991 crisis changed this overnight. Facing default risk, India pledged gold reserves to the Bank of England and the IMF, and in return agreed to structural adjustment. Key trade reforms included: abolishing import licensing for most capital goods and intermediates, slashing the peak tariff rate from around 300% in 1991 to about 150% by 1993 and progressively down to roughly 10-18% average applied tariffs by the 2020s, and moving the rupee toward market-based convertibility (current account convertibility achieved in 1994).

Example Before 1991, importing a car component required a government license that could take months and was often denied to protect domestic producers like Hindustan Motors and Premier Automobiles. After liberalization, automakers like Maruti Suzuki (already a 1981 joint venture, itself a sign of gradual opening) could import components more freely, and by the 2000s global carmakers like Hyundai and Toyota set up full manufacturing bases in India.

Real-World Example The peak customs duty on non-agricultural goods fell from 150% in 1991-92 to 10% by 2007-08, then crept back up slightly in some sectors (like electronics and toys) after 2018 as part of a calibrated protectionist push to support Make in India.

Why It Matters This shift explains why India's trade-to-GDP ratio rose from about 15% in 1990 to over 45% by the early 2020s, and why sectors like IT services, pharmaceuticals, and textiles became globally competitive only after the 1991 opening.

Common Misunderstanding Students often think 1991 reforms made India a "free trade" economy overnight. In reality, liberalization was gradual and calibrated — agriculture, and later "sensitive" manufacturing sectors, retained significant protection, and some tariffs were raised again post-2018 (e.g., on mobile phone components, furniture) to support domestic manufacturing.

Foreign Trade Policy (FTP) & Export Promotion​

Definition The Foreign Trade Policy (formerly called the EXIM Policy — Export-Import Policy) is the government's five-yearly (now dynamic, ongoing) policy document, issued by the DGFT, that lays out rules, schemes, and incentives to promote India's exports and regulate imports.

Explanation The EXIM Policy was first introduced in 1992 as part of the post-liberalization reset, replacing the earlier restrictive import-export control regime. It was renamed the Foreign Trade Policy in 2004. Successive FTPs (2004-09, 2009-14, 2015-20, and FTP 2023) have progressively simplified procedures, digitized trade documentation, and shifted the incentive structure.

Major export promotion instruments have included:

  • Merchandise Exports from India Scheme (MEIS) and Services Exports from India Scheme (SEIS) — under FTP 2015-20, exporters received duty credit scrips worth 2-7% of export value.
  • RoDTEP (Remission of Duties and Taxes on Exported Products) — replaced MEIS from January 2021 after MEIS was challenged at the WTO by the US as an illegal export subsidy (WTO panel ruled against India in 2019). RoDTEP is WTO-compliant because it only refunds embedded taxes/duties not otherwise rebated, rather than being a blanket subsidy.
  • Duty Drawback Scheme — refunds customs duty paid on imported inputs used in exported goods.
  • Advance Authorisation and EPCG (Export Promotion Capital Goods) Scheme — allow duty-free import of inputs/capital goods used for export production.
  • Interest Equalisation Scheme — subsidizes pre- and post-shipment export credit for MSME exporters.

FTP 2023, unlike earlier policies, has no fixed end date — it's designed to be a continuously updated, dynamic document, reflecting a shift toward agility given how fast global trade conditions change (COVID-19 disruption, Red Sea shipping crisis, etc.).

Example A textile exporter in Tiruppur importing Australian cotton duty-free under Advance Authorisation, manufacturing garments, and exporting them while claiming RoDTEP credits for embedded state and central taxes (like electricity duty and mandi tax) that aren't otherwise refunded.

Real-World Example India's merchandise exports crossed $450 billion for the first time in FY2021-22, aided partly by this incentive architecture and a global post-pandemic demand surge; overall exports (goods + services) crossed $770 billion in FY2023-24.

Why It Matters Export promotion schemes directly affect firm-level competitiveness — Indian exporters compete against countries like Vietnam and Bangladesh that offer their own incentive packages, so the design of these schemes affects India's share of global trade.

Common Misunderstanding Many assume MEIS/SEIS and RoDTEP are subsidies that make Indian goods artificially cheap. In WTO law, that's precisely why MEIS was struck down — legitimate schemes must only remit taxes already embedded in the cost of production, not hand out extra cash; RoDTEP was redesigned specifically to stay on the right side of that line.

Special Economic Zones (SEZs)​

Definition A Special Economic Zone is a geographically delimited area within India that is treated as "foreign territory" for trade and tariff purposes, offering tax holidays, duty-free imports, and simplified regulations to attract export-oriented investment.

Explanation India's SEZ story began with Asia's first Export Processing Zone (EPZ) at Kandla, Gujarat, in 1965. The dedicated SEZ Act was passed in 2005 (effective 2006), converting existing EPZs into SEZs and creating a formal legal framework. SEZ units enjoy: 100% income tax exemption on export profits for the first 5 years, 50% for the next 5 years (though this tax benefit was phased out for new units after 2020 under the new corporate tax regime), duty-free import of capital goods and raw materials, and single-window clearances.

Example The Mundra SEZ in Gujarat (developed by Adani Ports) integrates a port with manufacturing and processing units, letting companies import inputs and export finished goods without the usual customs friction, since goods crossing the SEZ boundary into India are treated as imports and vice versa.

Real-World Example As of the early 2020s, India had over 260 operational SEZs (out of ~425 notified), contributing roughly 25-30% of India's total exports in several recent years, with IT/ITeS SEZs (like those in Bengaluru and Hyderabad) dominating.

Why It Matters SEZs are a policy tool to compensate for weaknesses in the broader business environment (land acquisition delays, inconsistent power supply, complex tax rules) by creating "islands" of ease-of-doing-business, similar to China's Shenzhen model that inspired much of the SEZ push.

Common Misunderstanding A common mix-up is treating SEZs as tax havens for the whole economy. Their tax and duty benefits apply only to units physically located in the notified zone and only to their export-oriented activity — not to sales they make within the rest of India (Domestic Tariff Area), which attract full customs duty as if imported.

Tariff Structure & Protectionism​

Definition A tariff is a tax imposed on imported (or occasionally exported) goods; non-tariff barriers (NTBs) are non-tax restrictions like quotas, import licensing, technical/safety standards (BIS certification), and anti-dumping duties.

Explanation India's applied tariffs fell dramatically after 1991 but have never reached the near-zero levels of many East Asian export economies. India's trade-weighted average applied tariff has hovered around 10-18% in recent years — among the highest of major economies — reflecting a continued desire to protect domestic industry and agriculture (where tariffs on some products, like edible oils or certain dairy items, can be much higher).

Since around 2018-19, India has raised tariffs on a range of products (mobile phones and components, furniture, footwear, toys, solar panels) as part of a calibrated protectionist tilt to support domestic manufacturing under Make in India, reversing some of the earlier liberalizing trend. India has also actively used anti-dumping duties (especially against Chinese imports of steel, chemicals, and solar cells) as a non-tariff instrument permitted under WTO rules when dumping causes injury to domestic industry.

Example The Indian government's 2018 decision to raise the Basic Customs Duty on imported solar panels/cells to 25% (later restructured into an Approved List of Models and Manufacturers system plus Basic Customs Duty from April 2022) aimed to boost domestic solar manufacturing rather than rely on cheap Chinese imports.

Real-World Example The 20% customs duty imposed on imported solar panels/modules mentioned in this topic's source material reflects this broader pattern — it was a deliberate trade-off: higher solar equipment costs in the short run, in exchange for building a domestic manufacturing base (later reinforced by the PLI scheme for solar PV modules).

Why It Matters Tariffs are a double-edged tool: they can nurture "infant industries" but also raise input costs for downstream manufacturers (e.g., high tariffs on steel raise costs for automakers and construction), and inviting retaliation can hurt exporters in unrelated sectors.

Common Misunderstanding Students often assume tariffs only hurt consumers/importers. In practice, tariffs on intermediate goods (like steel, aluminium, or electronic components) can hurt Indian exporters of finished goods that use those inputs — this is called the "tariff escalation" or "inverted duty structure" problem, and it's a live policy debate in India's textile and electronics sectors.

Free Trade Agreements (FTAs)​

Definition A Free Trade Agreement is a treaty between two or more countries to reduce or eliminate tariffs and other trade barriers on goods (and often services and investment) traded between them.

Explanation India has pursued FTAs (also called Comprehensive Economic Cooperation/Partnership Agreements, CECA/CEPA) since the early 2000s. Key agreements include: India-Sri Lanka FTA (1998, India's first modern FTA), India-Singapore CECA (2005), India-ASEAN FTA (2010, goods; extended to services/investment in 2014-15), India-South Korea CEPA (2010), India-Japan CEPA (2011), India-Mauritius CECPA (2021), India-UAE CEPA (2022, India's first major trade deal in over a decade), and India-Australia Economic Cooperation and Trade Agreement (ECTA, 2022, later upgraded toward a full CECA). India also has an FTA with EFTA (Iceland, Liechtenstein, Norway, Switzerland) signed in 2024. Negotiations with the UK and the EU have been ongoing for years, with a landmark India-UK FTA concluded in 2025 after nearly three years of talks.

India notably chose not to join the Regional Comprehensive Economic Partnership (RCPP/RCEP) in 2019, walking out due to concerns about a flood of Chinese imports and inadequate safeguards for its dairy and agriculture sectors — a decision still debated among economists as either prudent caution or a missed opportunity to integrate into Asian value chains.

Example Under the India-UAE CEPA, Indian gems and jewellery exports to the UAE benefit from zero duty on most items, helping Surat's diamond-cutting industry directly.

Real-World Example The India-Singapore CECA, cited in the topic's original notes, materially helped IT services trade and made Singapore a preferred base for Indian companies expanding into Southeast Asia, alongside reduced tariffs on pharmaceuticals.

Why It Matters FTAs shape which countries India's exporters can compete in profitably; a well-negotiated FTA opens markets, while a poorly negotiated one (critics say some early ASEAN goods concessions) can widen the trade deficit if imports rise faster than exports.

Common Misunderstanding People often assume FTAs are purely beneficial. In reality, India runs trade deficits with several FTA partners (notably ASEAN and South Korea) partly because of asymmetric competitiveness and utilization gaps — many Indian exporters don't even use FTA preferential rates due to complex rules-of-origin paperwork, a phenomenon called low "FTA utilization rate."

India & the WTO​

Definition The World Trade Organization (WTO), established in 1995 as successor to GATT (General Agreement on Tariffs and Trade, 1948), is the multilateral body that sets rules for international trade among its member countries; India is a founding GATT member (1948) and founding WTO member (1995).

Explanation India's WTO commitments include binding tariff ceilings (bound rates, which are often higher than the actually "applied" rates, giving India policy flexibility), following the Agreement on Agriculture (AoA), TRIPS (Trade-Related Aspects of Intellectual Property Rights, which forced India to move from a process patent to a product patent regime by 2005, affecting its pharmaceutical industry), and the Trade Facilitation Agreement (TFA, ratified by India in 2016) to simplify customs procedures.

India has been an active, often assertive, voice within the WTO, especially defending the interests of developing countries and its own food security programs. A major recurring flashpoint is India's public stockholding program for food security (under the National Food Security Act and MSP-based procurement) — developed countries argue India's subsidy calculations breach WTO limits, while India argues the WTO's outdated reference price (fixed at 1986-88 prices) unfairly understates the true subsidy level; a "Peace Clause" (since 2013) currently shields India from formal WTO action on this while a permanent solution is negotiated.

India has also used the WTO's Dispute Settlement Mechanism, both as complainant (e.g., against US restrictions on steel/aluminium tariffs under Section 232) and respondent (e.g., the US challenge to India's export subsidy schemes like MEIS, decided against India in 2019).

Example India's decision to maintain the Minimum Support Price (MSP) system for rice and wheat procurement, while technically bumping against WTO subsidy ceilings, continues under the Peace Clause protection India negotiated at the 2013 Bali Ministerial Conference.

Real-World Example The long-stalled Doha Development Round (launched 2001) has effectively failed to produce a comprehensive agreement, partly due to disagreements between India/developing countries and the US/EU over agricultural subsidies — a reminder that WTO negotiations move far more slowly than bilateral FTAs.

Why It Matters WTO membership constrains India's trade policy choices (it cannot simply raise tariffs above bound rates or hand out unrestricted export subsidies) while also giving Indian exporters a rules-based system to challenge unfair trade practices by other countries.

Common Misunderstanding Students often confuse "applied tariff" with "bound tariff." India's bound rates (the WTO ceiling) are frequently much higher than the applied rates it actually charges — for example, agricultural bound tariffs can exceed 100% even though applied rates on most items are far lower — giving India significant unused headroom to raise tariffs if needed without violating WTO rules.

Make in India & PLI Schemes​

Definition Make in India (launched September 2014) is a flagship initiative to transform India into a global manufacturing hub; Production Linked Incentive (PLI) schemes (launched 2020 onward) are a related but distinct set of programs that give direct financial incentives to companies based on incremental production/sales, to boost domestic manufacturing and reduce import dependence.

Explanation Make in India aimed to raise manufacturing's share of GDP to 25% (a target not yet achieved — it has stayed roughly around 13-17% of GDP) and create 100 million manufacturing jobs by 2022. It focused on improving ease of doing business, easing FDI norms across 25 sectors, and building infrastructure.

PLI schemes are more targeted: the government pays companies a percentage (typically 4-6%) of incremental sales of goods manufactured in India, over a base year, for five years. PLI schemes now cover 14 sectors including mobile phones and electronics, pharmaceuticals/APIs, medical devices, automobiles and auto components, textiles (technical textiles/MMF), specialty steel, solar PV modules, telecom equipment, and semiconductors (a separate India Semiconductor Mission was also launched in 2021-22 with incentives up to 50% of project cost). Total outlay across all PLI schemes is around ₹1.97 lakh crore (roughly $26 billion).

Example The PLI scheme for large-scale electronics manufacturing helped Apple's contract manufacturers (Foxconn, Pegatron, Wistron/Tata Electronics) scale up iPhone assembly in India — India's iPhone exports crossed $10 billion in FY2023-24, turning India into a genuine link in Apple's global supply chain rather than just an assembly afterthought.

Real-World Example India's mobile phone imports, which dominated the domestic market before 2014-15, have been largely displaced by domestic assembly — India went from a net importer to a net exporter of mobile phones in value terms during the PLI period, though a large share of components (chips, displays) are still imported, meaning much of the "manufacturing" is still assembly rather than deep value addition.

Why It Matters Make in India and PLI represent a partial policy pivot: rather than relying solely on tariff protection or trade agreements, India is using direct fiscal incentives to build competitive scale in strategic sectors, aiming to plug India into global supply chains that are diversifying away from China ("China+1" strategy).

Common Misunderstanding People often equate "Make in India" success with reduced imports overall. In reality, many PLI-driven manufacturing sectors (electronics assembly in particular) still require large imports of components and capital equipment, so domestic "manufacturing" value addition can be modest even as finished-goods exports rise — the real test of the PLI is whether component-level and semiconductor manufacturing deepens over time.

Visual Learning​

Key Terms​

TermDefinitionContext/Related Concepts
EXIM Policy / Foreign Trade Policy (FTP)The government's periodic policy statement (via DGFT) governing exports and importsRenamed FTP in 2004; FTP 2023 is open-ended/dynamic
Special Economic Zone (SEZ)A duty-free enclave treated as foreign territory for trade purposes, offering tax and regulatory benefitsGoverned by SEZ Act 2005; contributes ~25-30% of India's exports
Tariff (Customs Duty)A tax on imported or exported goodsApplied tariff vs bound tariff (WTO ceiling)
Non-Tariff Barrier (NTB)Non-tax trade restriction such as quotas, licensing, or standardsAnti-dumping duties are a WTO-permitted NTB
RoDTEPRemission of Duties and Taxes on Exported Products, WTO-compliant export incentive since Jan 2021Replaced MEIS after adverse WTO ruling in 2019
Free Trade Agreement (FTA) / CEPATreaty reducing/eliminating tariffs between signing countriesIndia-UAE CEPA (2022), India-Australia ECTA (2022)
WTO Bound RateMaximum tariff a country has committed not to exceed under WTO rulesOften higher than the "applied rate" actually charged
Trade Facilitation Agreement (TFA)WTO agreement to simplify and speed up customs procedures, ratified by India in 2016Part of India's WTO commitments
Make in India2014 initiative to boost India's manufacturing base and global competitivenessComplements PLI schemes
Production Linked Incentive (PLI)Scheme paying manufacturers a percentage of incremental sales to boost domestic productionCovers 14 sectors incl. electronics, pharma, semiconductors
RCEPRegional Comprehensive Economic Partnership; India opted out in 2019Concerns over Chinese import surge and dairy sector protection
Trade DeficitSituation where the value of imports exceeds the value of exportsIndia runs a persistent merchandise trade deficit, partly offset by services surplus

Common Mistakes​

Mistake 1: Confusing "Trade Policy Liberalization" with "Free Trade"​

Misconception: Since 1991, India has pursued unrestricted free trade.

Why It's Wrong: India retains meaningfully high average tariffs (around 10-18%), protects agriculture heavily, opted out of RCEP, and has actively raised tariffs on select manufactured goods since 2018 to support domestic industry.

Correct Understanding: India's post-1991 policy is best described as "calibrated liberalization" — significant opening compared to the License Raj era, but still selectively protectionist, especially in agriculture and strategically important manufacturing sectors.

Mistake 2: Treating Export Incentive Schemes as Permanent and Interchangeable​

Misconception: MEIS, SEIS, and RoDTEP are just different names for the same export subsidy.

Why It's Wrong: MEIS was ruled WTO-inconsistent in 2019 (a direct export subsidy) and had to be replaced; RoDTEP was specifically redesigned to remit only embedded, un-rebated taxes/duties, which is WTO-legal, unlike a blanket cash incentive tied to export value.

Correct Understanding: The legal basis of export incentives matters — schemes evolve because of binding WTO commitments, not just domestic policy preference, and students should know why RoDTEP replaced MEIS, not just that it did.

Mistake 3: Assuming SEZs and PLI Schemes Solve India's Manufacturing Competitiveness Problem Automatically​

Misconception: Once SEZs are built or PLI incentives are announced, India's manufacturing/export competitiveness is guaranteed to rise proportionally.

Why It's Wrong: Both instruments boost assembly and final-stage output, but much of the underlying components (electronics chips, specialty chemicals, machinery) can still be imported, meaning genuine domestic value addition and technological depth may lag behind headline export numbers.

Correct Understanding: SEZs and PLI schemes are necessary but not sufficient; sustained competitiveness also needs deep supplier ecosystems, logistics infrastructure, skilled labor, and R&D investment, which are longer-term structural challenges beyond fiscal incentives.

Comparison and Connections​

  • Foreign Direct Investment (FDI) in India: Trade policy and FDI policy are deeply linked — SEZs and Make in India were designed to simultaneously attract FDI and boost exports; many FTAs also include investment protection provisions that make India more attractive to foreign investors.
  • Balance of Payments: India's trade policy outcomes (the merchandise trade deficit, services surplus) are recorded directly in the current account of the Balance of Payments; trade policy successes or failures show up as BoP pressure.
  • Exchange Rate Policies: A weaker rupee can make exports more competitive without new trade policy tools, so exchange rate management and trade policy often work together (or occasionally at cross purposes) to manage India's external position.
  • International Financial Institutions: The IMF's 1991 conditional lending to India was the direct trigger for opening up trade policy; the World Bank and IMF continue to assess and advise on India's trade and tariff structure.
  • Regional Trade Agreements: India's bilateral FTAs (UAE, Australia, ASEAN) sit within the broader global trend of regional trade agreements substituting for slow-moving multilateral WTO negotiations.
  • Globalization: India's trade policy evolution is a case study in how a large developing economy has managed the pressures and opportunities of globalization since the 1990s.
  • Trade Theories: Concepts like comparative advantage and infant-industry protection directly inform the theoretical justification (and critique) of India's tariff and FTA choices.

Practice Questions​

Recall​

  1. In what year did India face the Balance of Payments crisis that triggered major trade liberalization, and who was the Finance Minister who implemented the reforms? Answer guidance: 1991; Dr. Manmohan Singh (under PM P.V. Narasimha Rao) implemented the New Economic Policy/LPG reforms.

  2. What does RoDTEP stand for, and which scheme did it replace? Answer guidance: Remission of Duties and Taxes on Exported Products; it replaced MEIS (Merchandise Exports from India Scheme) from January 2021.

Understanding​

  1. Explain why India chose not to join the RCEP trade bloc in 2019, and what trade-offs this decision involves. Answer guidance: Concerns about a surge in cheap Chinese imports, inadequate agriculture/dairy safeguards, and existing trade deficits with several RCEP members; trade-off is reduced integration into Asian value chains versus protection of sensitive domestic sectors.

  2. Why was India's MEIS scheme found to be inconsistent with WTO rules, while RoDTEP is considered compliant? Answer guidance: MEIS gave a flat percentage of export value as an incentive regardless of actual embedded taxes — a direct export subsidy prohibited once a country crosses income thresholds; RoDTEP only refunds specific un-rebated taxes/duties already embedded in production costs, which WTO rules permit.

Application​

  1. A domestic electronics manufacturer wants to import capital equipment duty-free to produce goods exclusively for export. Which two policy instruments discussed in this topic could it use, and how do they differ? Answer guidance: EPCG (Export Promotion Capital Goods) Scheme lets it import capital goods duty-free with an export obligation; alternatively, setting up within an SEZ gives duty-free imports plus tax benefits but requires physical location within the notified zone.

  2. If India raises tariffs on imported steel to protect domestic steel producers, predict the likely effect on Indian automobile exporters, and explain the underlying mechanism. Answer guidance: Higher steel tariffs raise input costs for automakers (an "inverted duty" or tariff escalation problem), potentially making Indian-made vehicles less price-competitive in export markets, illustrating the trade-off between protecting one sector and hurting downstream exporters.

Analysis​

  1. India runs trade deficits with several FTA partners such as ASEAN countries despite tariff preferences. Analyze at least two possible explanations for this outcome. Answer guidance: (a) Structural competitiveness gap — partner economies may have cheaper manufacturing (e.g., Vietnam, Indonesia) that outcompetes India even with tariffs removed; (b) low FTA utilization rate — Indian exporters often don't claim preferential rates due to complex rules-of-origin compliance, while partner-country importers use the FTA fully; (c) asymmetric tariff cuts in the original agreement's schedule.

  2. Evaluate whether Make in India and PLI schemes represent a genuine shift away from India's post-1991 liberalization philosophy, or a continuation of it in a new form. Answer guidance: A strong answer should note the tension — PLI/Make in India use direct fiscal incentives and, in some cases, renewed tariff protection (a partial return to industrial policy/protectionism), which is a shift from pure trade liberalization; but they operate within an otherwise open, FTA-seeking, WTO-compliant framework, so it is best understood as selective, strategic industrial policy layered onto a broadly liberalized trade regime, not a full reversal.

FAQ​

1. What is the difference between the EXIM Policy and the Foreign Trade Policy? They are the same institution under different names — the government's export-import policy document was called the EXIM Policy from 1992 until it was renamed the Foreign Trade Policy in 2004. FTP 2023 is unique in having no fixed expiry date, unlike earlier five-year policies.

2. Why did India's tariffs fall so sharply after 1991 but not to zero? The 1991 reforms dismantled extreme protectionism (peak tariffs above 300%) because it was unsustainable and inefficient, but India retained moderate tariffs, especially in agriculture and select manufacturing, to protect livelihoods, food security, and infant industries — a middle path between total protection and total openness.

3. Are Special Economic Zones still relevant given the SEZ Act's tax benefits were phased out? Yes, though less dominant than before 2020. SEZs still offer duty-free imports, streamlined customs, and infrastructure advantages even without the older income-tax holiday for new units; policymakers have also proposed a new "Development of Enterprise and Service Hubs" (DESH) framework to modernize the SEZ model.

4. How do Make in India and PLI schemes relate to India's trade deficit? By incentivizing domestic production of items India currently imports heavily (electronics, APIs, solar equipment, specialty steel), these schemes aim to reduce import dependence and boost export capacity, which should improve the trade balance over time — though results vary by sector and many inputs are still imported.

5. Why does India still not have a comprehensive trade agreement with the European Union or the United States? India-EU FTA talks have been ongoing since 2007 in fits and starts, stalling over issues like data protection, auto tariffs, and intellectual property (especially on pharmaceuticals); with the US, there is no formal FTA — trade relations are managed through periodic trade policy forums and negotiations, partly due to disagreements over tariffs, digital trade rules, and agricultural market access on both sides.

Quick Revision​

  • Pre-1991: import-substitution, high tariffs (200%+), licensing (License-Permit-Quota Raj), inward-looking.
  • 1991 BoP crisis forced LPG reforms: tariff cuts, licensing removal, rupee devaluation.
  • EXIM Policy (1992) renamed Foreign Trade Policy in 2004; FTP 2023 has no fixed end date.
  • Export promotion tools: Advance Authorisation, EPCG, Duty Drawback, and RoDTEP (since 2021, replacing MEIS after a WTO ruling).
  • SEZ Act 2005 built on India's earlier EPZs (Kandla, 1965); SEZs contribute roughly a quarter of India's exports.
  • India's applied tariffs (~10-18% average) remain among the highest of major economies; some tariffs rose again post-2018 to support domestic manufacturing.
  • India joined GATT in 1948 and is a founding WTO member (1995); it defends its MSP/food-security subsidies under the WTO "Peace Clause."
  • Major FTAs: Singapore CECA (2005), ASEAN FTA (2010), Japan and South Korea CEPAs (2010-11), UAE CEPA and Australia ECTA (2022), EFTA and UK FTAs (2024-25).
  • India opted out of RCEP in 2019 over import-surge and dairy-sector concerns.
  • Make in India (2014) targets manufacturing's GDP share; PLI schemes (2020+) cover 14 sectors with an outlay of about ₹1.97 lakh crore.
  • India runs a persistent merchandise trade deficit, partly offset by a services trade surplus (notably IT/software exports).
  • Key ongoing debate: balancing protectionist industrial policy (tariffs, PLI) against continued trade liberalization and FTA expansion.

Prerequisites​

Next Topics​