The new five-year policy that will determine the fortunes of lakhs of Indian exporters and importers will be revealed a couple of weeks later. In a timely, candid conversation, Rajeev Kher, Commerce Secretary, Ministry of Commerce, Government of India, discusses the state of India’s foreign trade, issues that it is faced with, steps being taken by the Centre to improve export volume and value, and most critically, what the nation can expect from the yet-to-be-revealed Foreign Trade Policy 2014-19. This exclusive, hour-long conversation with The Dollar Business will give readers an idea of what they can expect from India’s new Foreign Trade Policy.

Steven Philip Warner and Neha Dewan | @TheDollarBiz

TDB: You have an impeccably solid background – from an LLB degree to a double post-graduation, from having served in several departments including sports, administration, planning board, finance, science and technology etc. in the state of Uttar Pradesh during the 1980s to having worked in the Ministry of Commerce since the 1990s. In all these decades, how have you seen India progress on the foreign trade front? Rajeev Kher (RK): The canvas of international trade in India has changed phenomenally and particularly so in the last 10 years. In 1991 international trade was an extremely restrained and restricted activity, a task that was not of much importance to policymakers. It was because of this reason the country didn’t have a Director General of Foreign Trade, but a controller of imports and exports. Both the focus and the approach was different. But once we opened up our economy in 1991, things started looking up. However, the real growth only began in early 2000 when the global economy started gaining momentum. I think the period between 2000 and 2008 (the year when the great recession started) was the golden period for international trade so far. While in FY2003-04 our exports stood at $63.8 billion, in FY2013-14 they crossed the $300-billion mark. That’s an increase of about 5 times in just 10 years. Similar is the case with imports. India’s imports increased 6 times during the same period, from $78.1 billion in FY2003-04 to $450 billion in FY2013-14. This clearly shows that both imports and exports have come to occupy a very significant position in our list of economic activities. Interestingly, in mid 90s exports were considered a function of surplus. It was hard to believe that a company or an entrepreneur will set up a business to just export. He was supposed to cater to the domestic market. It was only after meeting the domestic demand, the surplus could be made available to external markets. Today, the scenario is totally different. People set up businesses to just export. It’s a paradigm shift. The energy levels too have changed phenomenally. Even the kind of interest that business houses and individuals are showing is truly amazing. For a long time international trade was often taken as an activity for two kinds of entities: one would be the large companies for whom exporting was an inherent part of their business. And two, for an individual who wants to get rich quickly. So very often fly-by-night kind of operators used to make big money by exporting or importing a consignment or two and then relax until next opportunity. But now things have completely changed. Today export import is a business activity which is not just respected, but also requires a tremendous amount of complex planning, strategizing, execution & negotiation capacity, apart from a thorough understanding very complex international laws. Today you need a lawyer, a chartered accountant, an actuarial practitioner and a whole lot of other experts to achieve success in this business. So it’s a completely new ball game.

TDB: Has this change also strengthened India’s position in the global arena?

RK: Absolutely. We were the 19^th largest exporter in the world in FY2013-14, though we still have a long way to cover in merchandise trade. In services, we are the 6^th largest exporter in the world. Of course, we are one of the biggest importers of both services and merchandise. So, what I exactly want to convey is that India is significantly positioned in the hierarchy of exporting and importing countries. In fact, when it comes to exports we have everything it takes to rise up the ladder. What is missing currently is the energy. And that energy will come from our manufacturing competitiveness.

TDB: How do you see India growing as both a manufacturing hub and exporting nation in the years to come?

RK: Coming back to the same figures, in FY2011-12 we exported $306 billion worth of goods. While in FY2012-13 we exported goods worth $300 billion, in FY2013-14 our merchandise exports stood at $312 billion. You can clearly see that in the last 3 years we have been more or less consistent, though it is a flat growth. Now why is it? One reason, of course, is that the global demands have gone down. But this is a universal phenomenon and not just true for us. The real big thing however is that the manufacturing competitiveness that we had has been affected because of supply side constraints and relatively slow decision-making on the policy front in the last few years. Second, there are huge infrastructural bottlenecks. So, if we want to be a big exporting nation, we certainly need to take care of the backend, which is manufacturing. Until we really work hard on being a reliable supplier of manufactured products we cannot make it to the big league. And there are two dimensions to it. One is your own capacity to manufacture and the other is your character as a consistent supplier of a product, which means your behaviour as an exporter i.e. timely delivery, sticking to your commercial terms, enforcing the contract and, of course, ease of doing business. We need to make ourselves competitive in terms of infrastructure, in terms of processes, in terms of technologies and in terms of a variety of efficiency and consistency related aspects. That’s what we need to do if we want to play a significant role in the world trade.

TDB: Can India ever become a hot spot for High Tech product manufacturing?

RK: Well, I won’t jump the gun and say that we can become a high-tech product manufacturing hub in the near future, but surely we are capable and we have the right capacities to become a significant high-tech manufacturing country. If you study the numbers, you will find that first of all it is very difficult to figure out what is high-tech and what is not. Nevertheless, taking a general understanding of the subject, even today if you look at our export basket there is a reasonable amount of product area that can be termed as high-tech. For example, pharmaceuticals are termed as high-tech. We are also present in the higher levels of engineering value chains. Then there are defence exports. So, once we get into manufacturing in a major way and once we institutionalize a good reward system for high-tech exports, we are bound to become a major player. I think it is the focus and sustained efforts that are required.

TDB: There have been delays in release of duty drawbacks. Shouldn’t there be a twist in the policy which ensures that it’s done double time so that everybody is encouraged?

RK: Well, in a generic sense, I would agree that we need to have a more predictable environment for policy execution. It could be nuanced by timelines, by commitments, by various instruments for offering that kind of benefit. Very often you would see that at the end of a financial year duty drawbacks are not paid by the revenue department. The reason is that there is a constraint on the treasury and therefore the government prefers to keep it for a tight spot. But as the situation improves, it is carried forward. I think the more important point is that an exporter will feel much more comfortable if he has a predictable regime and if he has a certainty about the course in which his issues will be addressed – in a sense the same thing about the ease of doing business. If I know that this is the manner in which my issues will be sorted out, then I will be much more competent and efficient in delivering services.

TDB: What are the products and services that the Indian government would like to encourage as far as exports is concerned?

RK: Any policy on this will have to be informed of a major reality. The major reality is the 1.3 billion population of this country. Further, a large workforce is added every year to this population. So, employment creation is the major parameter for pushing our exports. In fact, it should a priority for any government. Number two should be, in my opinion, the high-technology content. Because when you talk of high technology export, you talk about technology transfer, you talk about technology fusion, you talk about a better quality of manufacturing and you talk about a higher value addition, a higher value realization. If I manufacture 1 unit of product of a very routine kind and if it is 1 unit of high technology, then I will get much more out of the second kind. So keeping this in mind, we have to look at the sectors. And I don’t want to call one sector a favourite over the other. But still I would like to say that the textile and apparel, automobiles and auto components, chemicals particularly pharmaceuticals and drugs, agro processed food, and high-end engineering sectors will continue to be some important sectors. Broadly these are the product areas which will have, in my opinion, very good future for the next few years. In services, our real strength is ITes. Any service which rides over our capacity in IT will do well. Apart from ITes, some other professional services like chartered accountancy, legal, management consultancy, healthcare certainly have a bright future. Tourism too has a major multiplier effect and can play a major role. Then there are education services. We need to realize that we are sitting somewhere in the middle of an economic ladder. And as such we have a lot to offer to those who are below us. So tomorrow, if I were to offer education to other countries in South Asia, Africa, South East Asia, I will have a good market. I may not have much to offer much to US and EU, but I definitely have a lot to offer to others who are below us in the value chain. These sectors and services, if promoted well, can play a significant role boosting in India’s trade with the world.

TDB: So far, do you feel the Export Promotion Councils have played their part to promote India’s exports?

RK: I think EPCs as an institutional mechanism are really good. The whole idea was that the stakeholder community in the industry gets together and works together for the benefit of their own community. And government in that process supports them through various market initiatives or various other programmes. That is how it was expected to work. I would say I am half satisfied and half unsatisfied. A lot still needs to be done. The most important thing that needs to be done in the EPCs today is enhancing their capacities. Very few of them are in a position to actually come up with major analysis whether it is product analysis or market analysis and provide the right kind of customized solutions to their members. See it is very easy to say that our exports are rising in a country or falling in some other country, but being able to say that at what point you should price your product to a new exporter is what is required. And that comes out of an experience in the external markets and huge analytical capacities domestically. Now unfortunately, most of these councils have done precious little in this area. They need to improve their capacities and enlarge their technical manpower. They need to be more outcome oriented and more committed. They have constraints, but that is another story. I think councils which have a good amount of resources available to them don’t have those constraints. And government is always ready to help.

TDB: It has been observed that in recent years, unlike many other exporting nations, India has become growingly dependent on Africa as an exports destination. Is that good news? If yes, what can be done to educate exporters more about Africa?

RK: Today about 10% of our total exports are directed to Africa and there has been a very significant growth over the last 10 years. We are present in almost every African country. Our exports to Africa may be pushed by two factors – one is the clear growth in Africa which is a great sign, a good thing and a natural flow. And secondly, Africa is still evolving. It does not have technical regulatory frameworks or maybe it has technical regulations that are still at a lower level and therefore it’s easier to access. But my advice to all my industry friends who see it as a price sensitive destination is that this can only be for a short time. Because ultimately all of us graduate to higher levels of technical standards. So don’t feel that Africa is being a little less discerning and more price driven. It is accepting your product today and will continue to do so. Therefore, in order to build a sustainable relationship with Africa, you must talk of good quality products, you must focus on specific countries. It may just not be physically possible to focus on all the countries and hence it may be more worthwhile for us to do an ABC analysis and identify the top 15 markets and focus on them, and then develop relationships. We will be very keen to develop long-term relationships, institutional relationships with Africa and go for comprehensive trade agreements. We have the duty free, quota free scheme which India offers to least developed countries (LDCs). And Africa, as you know has the largest number of LDCs. In fact, African countries have the most to gain out of this market access that has been given to them. We have been promoting it and have been welcoming it since long now. Today 98.4% of India’s imports from Africa are duty free. So you can say that almost 100% of imports from LDCs whether they are in Africa, South Asia or anywhere can come to India duty free. Africa-India trade relationship has a very long-term sustainability prospect and that is what we are working towards. Another area is project exports where a lot can be done. Both the EXIM Bank and the ECGC are working with the Department of Commerce on a blueprint that will promote project exports to not just Africa, but also to other developing nations in West Asia, South Asia and South East Asia.

TDB: In its present form, Served From India Scheme (SFIS) has a certain restriction. We are referring to the non-transferability of credit scrips. Do you think this is an issue that policymakers can look into?

RK: We have reviewed SFIS. It requires some modifications and we will appropriately modify it. We have consulted the industry and other stakeholders. We have received their advice and we will internalize it when we come up with the FTP.

TDB: Will increasing the duty credit script value under the Agri Infrastructure Incentive Scrip scheme solve the infrastructure – transportation and storage – problems of exporters and importers?

RK: Increasing incentives on agri products can have two benefits. One, it will incentivize agri exports which in turn will improve capacity of agri industry to re-invest. The second, it will help in building a backend or rather have the back-stream developmental effect on our agricultural post-harvest management. This again has its advantages. For example, if I am able to provide a cold storage or a normal storage facility, the possibility of my horticultural produce going waste because of spoilage or weather reasons is substantially reduced. So what I am doing is giving that additional income in the hands of the farmer post-harvest. I think agricultural exports have a very strong developmental spin off and the whole focus is to improve the reward system so that they are able to re-invest and at the same time avail the back-end infrastructure advantage through programmes run by APEDA, National Horticultural Board and the Ministry of Agriculture.

TDB: There is a lot of investment that has to be made in agriculture to bring a strong delivery mechanism in place. Does the government really have that bandwidth?

RK: Investment, of course, is one aspect. But I think this is one thing that has to be looked into the larger context of the whole activity of agriculture. For example, if you want to be a big agri proceeds exporting country, then the present manner of agricultural production may not be the best prescription. You may have to look at, for example, contract farming or capital agriculture. As you know, in India the small and marginal holdings range upto 90%. But to become a big player in agri exports, the government clearly needs to provide the farmer a possibility of being part of an aggregation exercise which allows contractual farming.

TDB: Exclusion of Service Exports in the FMS scheme – is that encouraging for a nation that thrives on services exports?

RK: I think this question will be answered when we have a new FTP. So let’s wait and see.

TDB: Expectation is that India’s exports in FY2015 will show a definite jump. What do you foresee?

RK: I will prefer to be a little circumspect. But yes, the indications in the last few months have been extremely heartwarming. In April, May, June, July, all months our growth in exports have been double digit. That’s a clear indication that things have started looking up and that we will do reasonably well. This will be a good base for the next year to show much better performance.

TDB: We treat merchandise as exports, but somehow there is step motherly treatment still given to services.

RK: You will be surprised to know that until about 6 years ago people in the government didn’t understand the concept of services exports. I remember sitting in a meeting where a representative of a department couldn’t explain how one can export a service. However, I don’t blame her. It just shows that we haven’t really started. Information technology (IT) is one area where we have really catapulted, reached really high but other areas require major domestic reforms. For example, we have some of the best CAs, lawyers and economists, but do you know we don’t have a system of multi-disciplinary practice under the Indian law. All over the world, at least in the developed and some developing countries, you have a multi-disciplinary practice of lawyers. That means a law firm will have an X number of lawyers, there will also be economists, CAs, and professionals from other disciplines. The reason is simple. Today there is nothing like pure law, there is no problem which is a pure legal problem. Problems are economic, legal, social, etc in nature. So you need to have multiple disciplines. In India, you can’t do that. A law firm cannot employ an economist in India. Similarly, a chartered accountancy firm cannot hire an economist. This is just one example to give you an idea of the kind of reforms are required. Further, in India, if you have to practice medicine you need to be a person of Indian origin. No foreign citizen can practice medicine in India. If a foreign citizen cannot practice in India, why would someone allow Indian citizen to practice outside India? It’s the concept of reciprocity. So if I want my nurses or doctors to practice abroad, I should allow others to do so in India. In fact, there are a whole lot of reforms that are required and this is the time to do them. We have a very ambitious programme for services reforms.

TDB: There is a growing concern that the individual States in India are neither being made accountable for nor being encouraged enough to contribute to India’s overall exports growth. Does the Centre have some plan in mind to solve this issue? Or should the States be left alone?

RK: It’s a very important area. What we call it is mainstreaming the States in international trade. There is a strong need for us to make the States understand this concept as ultimately everything is happening in the States. Government of India is just at the top. We need to make the States understand that in imports and exports, they have an important role to play. What we are doing is that we are now making all States prepare their exports strategies and plans. We are giving them whatever assistance that they may need by way of capacities. When they do that they will not just be looking at exports, but will also look at how their domestic policies relating to taxation etc are adversely affecting exports. For instance, the APMC Act. We know that the APMC Act doesn’t allow the farmer to sell to anyone outside the mandi (local market place). It also has an effect on the availability of the particular product in the market and consequently the price at which we can offer the product is adversely affected. If you carry out the much-needed APMC reforms, the farmer is free to find a buyer. And if that buyer is an exporter, you are connecting that farmer with exports. Further, look at taxation policies and at States’ policies towards SEZs. The SEZ developer has to go to the labour department to get a labour clearance. He has to go separately to Environment Department to get a separate clearance. Although SEZ is a single window system, yet he has to go to one, two and many others. So the export strategy will force the State to look at these situations and if not in the first instance, then maybe in the second instance. It will help the States bring all this policy act together to improve their exporting capacity. Then accordingly they can reward their exporters. Today very few States actually reward their exporters as they think that exporting is Government of India’s business and why should we do it. But if the States start a system when all exports are registered in some way, it will be of great help in framing right foreign trade policies.

TDB: Expectations are high that the new FTP will have provisions incorporated that will boost India’s share in world merchandise and commercial services exports. What can India’s exporters expect from the policy?

RK: The manner in which we made the FTP so far, it was an agglomeration of instruments, of rewards. It was essentially some kind of congregation of several instruments. But in what context are these instruments being used has never been identified. For example, there may be something that may not have a fiscal dimension. The people and the stakeholders are within their rights to know what is India’s approach to FTAs, what is the way in which we will support branding, what is the role of packaging, how will we support packaging, what is the role of services and why are they important, etc. So our effort will be to capture this in Part A. Part B will be what you and I have been calling policy till now. This is the reason it has taken some time. We will also be selective. We will not be in a position to give incentives to all sectors because there are some sectors that have winning potential, while some don’t. Our kitty is very small and there is no point in spending money on sectors where we feel don’t have much prospects. I cannot rule out disappointments.

TDB: Talking about Special Focus Initiatives, do you think there is a need to encourage exports by making incentive schemes substantially generous, and making exemption schemes more attractive?

RK: You can always be generous but then generosity comes out of the resources that you have. And the resources we have are very limited. So, if the Department of Revenue is generous to us, we will be generous to everyone else!

TDB: Restrictions on gold imports have made life difficult for India’s jewellery exporters. Should the new FTP consider this issue?

RK: This will not be covered in the FTP because this restriction has come from the Reserve Bank. They have already addressed it to some extent and things have improved. There is scope for further improvement, but I feel this will be corrected over a period of few months.

TDB: There is a lot of talk about MAT in SEZs. Do you think the Commerce Ministry will look into this matter?

RK: We have strongly pitched for the withdrawal of MAT and have got positive reactions from the Ministry of Finance. They fully understand our point of view and I think at some point in time they will take a call on it. We know that if SEZ has to be revived then DTT and MAT have to go.

TDB: Now that a large part of the responsibility of driving forward India’s exports growth has been placed on your strong shoulders with you taking over as the Commerce Secretary, what is the feeling like?

RK: You have to be prepared for both criticism and praise. We try to balance both and say ‘pathar na mare, phool pheken’ (please don’t throw stones at us, throw flowers!). But then you cannot rule out the possibility. It’s a highly challenging job. Every day I feel I have not achieved even 5% of what I want to do and that’s what keeps me going. I feel that there is a lot to do, particularly at this time in the country when there is so much hope around. When I start the day, I start like a philosopher because I have so many things in my mind. But when I end the day, I feel a little disappointed that I could not complete something. And that’s what keeps my spirits up!