After a long period of indecisiveness, following Brexit, UK has finally revealed an outline of what could be its international trade strategy for regions outside the European Union (EU). In a white paper released in February, the UK Government has confirmed that it is “preparing the groundwork” for new trade deals with a number of countries. UK, unshackled from EU, is reportedly seeking to develop stronger trade ties with India, Australia and New Zealand.
As far as India is concerned, UK had started negotiations with India in November 2016 when British Prime Minister Theresa May was on a three-day India visit. State broadcaster BBC had then reported that the May administration expressed great satisfaction with its India visit, which apparently resulted in the signing of deals worth £1 billion apart from laying out the ground to save over 1,000 jobs. At the same time, both sides even hoped to reach an agreement on issues pertaining to student visas.
This white paper comes at a time when the much-anticipated India-EU FTA has reached almost a stalemate. UK is expected to soon release another white paper detailing its trade strategies and the trade talks are likely to take place after March 2017.
Additionally, recently there has been an agreement between India and UK to ease restrictions on the number of flights between the two countries to promote trade and tourism “before UK leaves EU.” It’s worth noting that the total merchandised trade between India and UK in FY2016 totalled $14.02 billion, almost unchanged from $14.33 billion reported in FY2015. While India’s exports to UK decreased 5.27% year-on-year to $8.82 billion in FY2016, imports from UK grew 3.47% year-on-year to $5.19 billion in FY2016. It’s about time the two countries take their bilateral trade relationship to the next level.
DEFENCE trade
Just as Donald Trump took the oath as the 45th US President, his frequent morning tweets and rather dramatic soundbites on import tariffs have had the whole world trade community on its toes. However, amid this histrionic phase, there comes a good news, particularly for countries that are importing defence products from US, such as India that have been recognised as a ‘Major Defence Partner’. Emerging news reports indicate that the Trump administration has adjusted export control laws to “facilitate a smoother transfer of technology and arms”. This relaxation is considered good for Indian companies interested in importing defence-related military products that come under the control of United States Department of Commerce. However, weapons of mass destruction are excluded from this facilitation.
Interestingly, in December last year, the outgoing Obama administration had accorded India with the “major defence partner status”, wherein over 810 licenses pertaining to aerospace systems and ground vehicles were granted. And the Trump administration seems no different on that front. For, India continues to top the charts as the world’s largest defence importer, accounting for over 13% share in world defence imports between CY2012 and CY2016.
OCEAN FREIGHT
Nepalese importers will end up paying more for the goods imported via India as the latter has recently imposed a 4.5% service tax on ocean freight. The move has drawn criticism from all sections of the Nepalese industry.
Although the government has imposed the new tax on Indian importers, it has affected Nepalese traders as well. For, Indian clearing agents have started passing it in full to their Nepalese clients who rely on them for handling shipments from other countries unloaded at Indian ports. Interestingly, Nepal not only relies on India for 65-70% of its imports, but is also totally dependent on Indian ports for third-country trade through sea. Hence, it’s but natural that Nepal is objecting the imposition of the new tax. In fact, the Government of Nepal has urged its Indian counterpart to remove the said service tax on an urgent basis as it goes against the spirit of the transit treaty signed between the two neighbours.
This move, however, may benefit Indian manufacturers as Nepalese importers might start looking at India-made products to avoid the service tax that is imposed on ocean freight.
PORT DEVELOPMENT
India’s plan to build Chabahar Port in collaboration with Iran seems to be going nowhere. The Government of India in the Union Budget 2016 had allotted an additional Rs.100 crore for the port. However, no progress has been made so far as funds for the construction are yet to be released, reportedly due to the absence of paperwork from Iran. Meanwhile, an Indian daily has reported that Iranian officials are blaming the Indian side for the delay “with no apparent reason”.
The Chabahar Port is considered an important step for India to improve trade not only with Iran, but also with Afghanistan and other countries in the region. Currently, trade between India and Afghanistan is conducted through Pakistan. Once the port becomes operational, it will give India an easy access to Afghanistan and other Central Asian countries via Iran.
In 2015, India and Iran had signed an MoU for the development of Chabahar Port. The Port is reportedly expected to transport crude oil via sea, which is expected to further reduce the cost for exporters. India had agreed to release a line of credit to Iran for Rs.150 crore. The first part of the credit was expected to be released once plans and all the prerequisite paperwork were available from Iran.
Exports
Finance Minister Arun Jaitely recently announced the creation of Trade Infrastructure Export Scheme (TIES). “A new and restructured central scheme with a focus on export infrastructure, namely, TIES will be launched in FY2018,” Finance Minister said in his Budget speech. The new scheme is said to replace Assistance to States for Development of Export Infrastructure and Allied Activities (ASIDE), a scheme which provided assistance to states to develop export infrastructure.
TIES will concentrate on building infrastructure for exports, a move aimed at reducing costs in exim transactions. The states and the Centre will bear the costs incurred equally under TIES, except for “north eastern and Himalayan region states” where the ratio will be 80:20, with Centre taking the major burden. As of November 2016, India’s total trade for FY2017 was $416.41 billion. India aims to increase its share in global trade by 2% to 5.5% by the year 2029. And, exporters across sectors agree that infrastructure at the state level needs improvement if exports are to really flourish. Most states till date have no export focussed strategy, and state a lack of funds as the reason for having inadequate export infrastructure. TIES is expected to change this. But will it be enough to boost exports?
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REPO RATES
The six-member Monetary Policy Committee led by RBI Governor Urjit Patel decided to leave the benchmark policy rate unchanged at 6.25%. The immediate impact of the announcement was seen on the Sensex, which closed 45.24 points lower on the day of announcement as stock markets were broadly expecting at least a 25 bps rate cut.
Recently, major world bodies revised the Indian GDP growth forecast downwards for FY2018. The apex bank though has said it expects a sharp recovery in India’s GDP growth rate to 7.4% in FY2018. As per a Nomura research report, the decision to leave the policy rates unchanged is expected to have a negative impact on Indian equities and the Indian rupee in the short term.
The RBI, in addition, said it is concerned about constant inflation since September last year and any changes in international politics, etc
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WHEAT
While the government is predicting a bountiful crop this season, the granaries it seems are empty. As per reports, India’s imports of wheat in CY2016 was the highest in the last 10 years. It is estimated that since March 2016 India has imported more than 5 MMT of wheat. What is more astonishing is that India is very likely to import more wheat in the coming months, although the orders may slow down during the harvest season.
Currently, India’s largest sourcing destinations are Australia, France and Ukraine. In FY2017, as of November 2016, India had imported wheat worth $141.77 million from Ukraine, while imports from Australia totalled $120.21 million.
Consecutive bad monsoons hit India’s wheat output and a decline in production has now started to impact the country’s exports as countries like Bangladesh, which has been a big importer from India, is now seeking to import 200,000 MT of wheat from Russia.
The wheat harvest this year is expected to make up for any deficit, which “should not be more than 200,000-300,000 MT.” For 2017 crop year, the government expects wheat production to hit a record high of 96.64 MMT.
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