Importing and exporting by MSMEs: Due to a number of variables, India has recently shifted gears to go into overdrive when it comes to trade agreements in an effort to fuel its aim to overtake China as the world’s leading exporter. After years of being disillusioned by the results of prior trade treaties, the government rekindled its focus on free trade agreements (FTAs), commencing with an agreement with Mauritius in 2021. Nearly 50% of its exports originate from the MSME sector.
MSMEs and new FTAs
India signed two ambitious agreements last February to reduce or eliminate trade barriers, particularly import tariffs for MSMEs and other businesses. The Comprehensive Economic Partnership Agreement (CEPA) with the UAE, one of India’s top export destinations, and the Economic Cooperation and Trade Agreement (ECTA) with Australia were both signed recently. Similar agreements are being discussed with the UK, the EU, Canada, Israel, and the Gulf Cooperation Council (GCC), a political and economic coalition of six Middle Eastern nations, including Saudi Arabia, Kuwait, Bahrain, Oman, Qatar, and the UAE. MSMEs are anticipated to be the main winners from India’s rekindled confidence in trade agreements as they are “the ones to create jobs and use the benefit of the duty becoming zero as MSME accounts for the majority of our exports,” Commerce Minister Piyush Goyal had said last month during the trade pact launch between India and Australia. Given that both nations are among India’s top export destinations, the FTAs with Australia and the UAE represent a turning point in the country’s new approach to international commerce. According to the FY22 Economic Survey, China was India’s third-largest export market in the fiscal year 2021–2022 after the US. The UAE was India’s second-largest export market. India sends over $26 billion to the UAE each year. However, exports to Australia increased by 20% to $4.7 billion between April and October, becoming Australia India’s 10th-largest trade partner during that time. The two FTAs are significant since they are some of the first in the post-Covid world, said to SP Sharma, Chief Economist of the business organization PHD Chamber of Commerce. Additionally, “India’s improved ease of doing business situation over the years with numerous business reforms for exporters along with its focus to integrate itself in the global supply chain amid supply chain disruption, need for self-reliance, and overcome trade imbalance, it is the right time for the country to sign trade agreements with promising trade partners. Engagement with Australia and the UAE is urgently needed because of their significant economic contributions to the world, according to Sharma, who spoke to FE Aspire.
Also read: MSMEs’ share in India’s exports till August in current fiscal nears FY22 level: Govt data
India enters FTAs for geopolitical reasons as well. Rajendra Prasad, professor of marketing at the Indian Institute of Foreign Trade (IIFT), claims that India’s rise to become the fifth-largest economy in the world in September of last year, along with China’s economic slowdown, India’s vaccine diplomacy, and other factors, have helped the nation to negotiate trade agreements with other nations’ economies. “India is strategically positioned and is well-known across the world. Therefore, this is the best moment to sign new FTAs since the world trusts India.
The trade agreement between India and Australia grants zero-duty access to all tariff lines for exports from India in labor-intensive industries like engineering, textiles and apparel, gems and jewelry, leather and footwear, furniture, select pharmaceutical products, and medical devices, among others, where small businesses are highly prevalent.
A tariff line is a good or service mentioned in a nation’s tariff schedule, which is a thorough list of goods with corresponding duty rates to be paid as the goods enter or depart a nation.
In the past, Australia imposed an import tax of 4%–5% on certain goods in comparison to rivals with which it has free trade agreements (FTAs), including China, Thailand, Vietnam, South Korea, Indonesia, Malaysia, and Japan.
For instance, there are duties on export to Australia for 70% of India’s textile items and 90% of its garment products, which reached its overall greatest export level in FY22, hitting $44.4 billion, up 41% over FY21. According to ECTA, India’s exports of textiles and apparel are now anticipated to increase from $392 million to $1100 million over the following three years as a result of the removal of the tariff. This will result in the creation of new manufacturing facilities in Tier 2 and Tier 3 cities as well as rural regions, creating an extra 40,000 jobs yearly.
In contrast to China’s exports, India has been exporting to Australia, although its exports haven’t increased significantly. In spite of political concerns with China, Australia awaited the trade agreement with India. With import duties waived, exports of clothing and textiles to Australia and the UAE — which also serves as a gateway to the GCC — are anticipated to rise dramatically, according to Narendra Goenka, chairman of the apparel export promotion council (AEPC).
Also read: Centre may consider raising interest equalization subsidy for MSME exporters
The export of gems and jewellery from India to Australia is anticipated to increase from its present level of about $350 million to $800 million over the next three years. The trade agreement predicts that the removal of duties would lead to an increase in jewellery exports, which formerly had a 5 percent tariff effect in Australia. According to the ECTA, immediate duty-free access will ultimately enable about 10 lakh employment in India and an additional $10 billion in exports from India to Australia over the course of the following five years.
The majority of India’s imports from Australia are made up of raw materials, minerals, and intermediate products. Other than tanning, dyeing extracts, and pigments, 74% of it is coal, and 71% of it is coking coal, which will help Indian MSMEs and others in sectors like steel, aluminium, garments, etc., to become competitive in manufacturing by allowing 90% of the value of imports from Australia to enter the market duty-free in India.