The rise of the global South is radically reshaping the world and is perhaps the most significant development of recent times. As one of the fastest growing economies, India has emerged as the seventh largest economy globally. Moreover, India’s 16-rung leap in the recently released Global Competitiveness ranking by the World Economic Forum points towards its sharp focus on improving competitiveness. As India began to enhance its competitiveness journey and given the new direction of its economic and political diplomacy, it has signed FTAs with some of the most important economies like Japan, Korea, Malaysia and the ASEAN countries in the last few years. It is also in the process of negotiating comprehensive trade agreements with EU, Australia, Canada and New Zealand. It has made its presence felt in alliances like the G-20, IBA, and BRICS and has also deepened relations with the East Asian countries. All this points towards India’s growing integration into the Global Economy. While Indian industry has adapted well to the changing global dynamics, it needs to work hard to integrate itself into the global value chains (GVCs) to boost its global trade, and the country’s economic development. This edition of Policy Watch looks at some of the important issues that continue to impact the overall trade performance of India and highlights key policy interventions that need to be taken up on priority.

1. 1policy watch
this IssueInside
Message From the
Director General............ 1
Chandrajit Banerjee,
Director General, CII
Policy Barometer.......... 4
Industry Voices............. 7
Fact File....................... 8
CEO Speak............................................................................................2
September 2016, Volume 5, Issue 3
Policy
T
h e w o r l d e c o n o m y
has undergone tremendous
structural shifts in the last few
years due to rising influence and role
of the emerging economies across the
globe. This has led to a shift of balance
of powers between the global north and
the global south. This is perhaps the most
significant geo-political development of
the recent times.
The emerging economies including
countries like India, China and Brazil
has evolved from being policy takers
to policy makers. This development
has brought the emerging economies
to the forefront where they actively
participate in the trade negotiations and
global economic governance at various
international fora.
India has already marked its presence as
one of the fastest growing economies of
the world. As per the IMF forecast, the
Indian economy is projected to grow at
7.5 per cent for fiscal year 2016-17. It has
emerged as the fourth largest economy
globally with a high growth rate and also
improved its global ranking in terms of
per capita income.
Over the years, India has given a
new direction to its economic and
political diplomacy. It has negotiated
comprehensive free trade agreements
with some of the important economies
of the world which include Japan, Korea
and ASEAN. Currently, India is negotiating
comprehensive trade agreements with EU,
Australia, Canada and New Zealand.
One of distinct features of India’s growing
integration with the world is its deepening
economic engagement with East Asian
countries. Following the ’Look East
Policy’, adopted in early 1990 and under
its new phrase ’Act East Policy’, India’s
economic and political engagements
are being renewed with a series of pro-
active measures. Today, while China is
India’s major trading partner, Japan and
Korea are major sources of foreign direct
investment into India.
India has been playing a more pro-active
role in multilateral trade and climate
change negotiations. It has emerged
as an important voice in G-20. It is a
member of formidable alliances such as
IBSA and BRICS to champion the cause
of South-South cooperation.
In the run-up to the 2015 APEC Summit
in Manila, a debate started on the
possible accession of India into Asia-
Pacific Economic Cooperation (APEC).
APEC is of major economic significance
as it includes the largest and most
dynamic economies, namely - USA, China,
Japan, Canada, Australia, Taiwan, Russia,
Indonesia, Mexico and South Korea. Most
of these economies are important trade
and investment partners to India.
While Indian industry has responded very
well to this new emerging dynamics of
global economy, one of the areas where
industry has to work hard is integrating
itself into the Global Value Chains
(GVCs). Building production value chain
is very important. Globally, value chains
are important drivers of both trade and
investment. More than fifty per cent
of global trade is currently happening
within GVCs.
India, at present, has limited number
of products where it owns GVCs. As a
result, its’ share in total value added
created by global trade is not more than
1 per cent. India’s exports and imports
of intermediates, one of the important
indicators of integration into GVCs, are
much smaller than countries like China.
Government and industry together,
therefore, need to seriously think and
discuss the whole dimension of value
chain. This would require initiating
several policy measures such as import
duty structure across the entire value
chain, improving trade infrastructure
and upgrading the existing standards for
goods and services. n
Chandrajit Banerjee
Director General
Confederation of Indian Industry
Sanjay Budhia, Co-Chairman, CII National Committee on International Trade Policy
& Exports and Managing Director, Patton Group
Focus: India’s Integration into the Global Economy

2. 2 policy watch
CEOSpeak
India has signed and operationalised
FTAs with some of the important
economies like Japan, Korea,
ASEAN, and Malaysia in the last
few years. But their implementation
has also coincided with continued
stagnation and slowdown in
exports. Do you think the FTAs
have not helped India to achieve
its export target and are also
responsible for the trade deficit?
It is true that the export slowdown and the
worsening trade balance with FTA partners
contributed to a general perception that
the FTAs are largely responsible for this
deteriorating trade position. There is a
rising trade deficit with all the FTA partner
countries except Singapore. The trade data
indicates that trade deficit in all the three
cases –Japan, Korea and ASEAN – has
worsened post FTA implementation but not
significantly. India’s worsening trade deficit
is largely because of the massive import
surge from China, a non-FTA trading partner.
India’s lack of competitiveness in the chosen
FTA countries and growing competition
from third world countries like China in
these FTA partner country markets are the
more important factors responsible for these
bilateral deficits, rather than the FTAs.
In all its FTAs negotiations, India
has been more aggressive on
Services. However, in Services too
India’s exports to its FTA partners
have not increased much. What,
according to you, are the major
reasons?
India has pursued aggressive market access
interests in most of its FTAs. But has not
gained much in Services trade even though
India has secured good market access on
movement of professionals from countries
like Singapore, Japan and Korea. What has
been seen is that effective market access
in the Services sectors is undermined
by the domestic regulatory barriers in
these markets. These are in the form of
immigration, recognition and Standards
related restrictions on mobility of service
providers or by data protection related
challenges to IT-enabled services exports.
Moreover, India’s Services export basket is
also not diversified. IT-enabled services (ITeS)
dominate India’s Services export. At present
the ITeS sector is still able to secure good
business from USA and Europe. India’s IT
services export is largely driven by movement
of professionals, which is always difficult in
a new territory because of several challenges
like language, culture, food etc.
The third important component of
new-age FTAs is investment. Do
you think an FTA can be utilized
as an instrument to attract inward
investment which helps expand
exports?
Leveraging FTA to Integrate with the World
Sanjay Budhia
Co-Chairman, CII National Committee on
International Trade Policy & Exports and
Managing Director, Patton Group
Source: Stephen Marquesshutterstock.com
FTAs can be of help to generate
investment between trading
partners. Many countries
have successfully used FTAs
to attract FDI. Korea, Mexico,
Chile have leveraged FTAs to
attract high quality investment.
The idea behind signing the
Comprehensive Economic
Partnership Agreement (CEPA)
with Japan and Korea was
to enable these countries to
invest more in India. Three of
the partner countries, namely
Singapore, Japan and South
Korea feature among the
leading sources of FDI inflows
for India. But poor business
climate and slow progress
on key domestic reforms

3. 3policy watch
CEOSpeak
have restricted FDI inflow. The gains would
have definitely been much more had India
succeeded in attracting FDI and technology
and knowledge transfer from these partners
in both Services and the Manufacturing
sectors. These FDI could have helped India
in creating more jobs and exportable surplus.
In addition, it would help the downstream
industries as well.
It appears that on all three key
components of FTAs – goods,
services and investment – we
have not been able to achieve the
desired outcomes. What, according
to you, are the major factors?
There are both internal and external
factors. Internally, on the domestic front,
the declining competitiveness of Indian
manufacturing and various constraints faced
by Indian manufacturing have made it
difficult to compete in these countries vis-à-
vis other competitors. Further, India’s difficult
business environment makes it difficult to
attract FDI and leverage this for trade flows
though there is a significant improvement
on this in the last two years. Then there is
lack of information and capacity amongst
MSMEs to understand and leverage FTAs
for market gains.
With regard to external factors, one has
to understand that these FTAs, practically
speaking, do not provide preference as
most of our competitors too have the
same preference in those markets. Hence,
competition from countries like China which
are more competitive than India in these
FTA countries is eroding our preference.
Further, the more competitive countries are
able to negotiate a much deeper concession
agreement such as ‘zero-for-zero’. Indian
industry is not yet ready for a ‘zero-for-zero’
type trade agreement.
Can we identify few focus sectors/
products and push for exports in
these FTA countries?
In order to ensure gains from FTAs, it is
important to push exports of those products
where India has comparative advantage
and complementarity with FTA partners.
Various studies done post-FTA reveal areas
of complementarity between India and
their FTA partners where India could be
a competitive exporter to these markets.
However, the export data indicates that India
has not exploited these complementarities
effectively as its export performance in these
sectors in the FTA partner markets has not
been strong. For instance, Pharmaceuticals
has a huge market potential in Japan.
Japan’s market is worth US$50 billion. But
because of stringent regulatory process, the
Indian Pharma industry is not able to expand
/ grow in this market. Similarly, Japan’s food
market is also big but Indian exporters face
stringent SPS standards. Many food additives
are banned in Japan. Likewise, there is huge
potential for engineering and electronics
equipment as Korea has many big MNCs
sourcing components from several countries.
In ASEAN there is good potential for exports
of capital goods and chemicals.
Global Value Chains (GVCs) are a
point of discussion these days. FTAs
are also considered as effective
means to integrate with GVCs. How
could Indian industry leverage FTAs
to integrate into GVCs?
India has limited number of products where
it owns GVCs. As a result, its share in total
value added created by global trade is not
more than 1 per cent. India’s exports and
imports of intermediates are much smaller
than countries like China. In 2014 India
imported intermediates worth US$213 billion
(US$1147 billion for China) and exported
only US$140 billion (US$963 billion for
China). One of the ways to achieve this is
if India initiates its own GVCs in sectors
like Automotive, Textiles, IT hardware and
Pharmaceuticals. ‘Make in India’ and FTAs
could be leveraged to attract more FDI
and use them to connect Indian SMEs to
large firms. For that India needs to improve
Standards compliance which is a problem
for a large number of MSMEs. It needs to
improve trade facilitation infrastructure for
faster movement of imports and exports.
Going forward, Standards are
going to play a major role in trade
as tariffs are being liberalised
continuously. Now with mega-
FTAs like Trans-Pacific Partnership,
the importance of Standards in
influencing trade is further going
to be critical. What should India
do to improve the Standards
infrastructure and compliance by
industry?
Understanding the implications of Standards
in international trade is very important for
Government, Standard setting agencies
and Industry. Upgrading and harmonising
with international Standards, making them
mandatory, requisite infrastructural facilities
like testing, certification, packaging and
labelling as well as schemes for promoting
compliance to international Standards can go
a long way in enhancing our competitiveness.
The Department of Commerce, in partnership
with CII and Standard setting bodies of India,
has in recent years taken several important
initiatives to create a robust Standards
ecosystem in India. I think a momentum
has been created and industry has also
realised that Standards compliance is a must
to access the global market.
What recommendations would you
like to make for better utiliziation
and leveraging of FTAs for larger
economic gains?
We can take immediate as well as medium
to long-term measures. In the immediate
term, the Government needs to devise
mechanisms to offset some of the inherent
disadvantages faced by Indian Industry till
they are removed through long term reform
measures. Inter-Ministerial coordination
needs to be enhanced to decide on incentives
that may be needed to offset disadvantages
created by FTAs. FTAs have provisions
of formation of specific sub-committees.
In most cases sub-committees have not
been constituted. These can be effective
mechanism to address several problems like
NTBs and regulations. Industry also needs to
help Government in identifying high export
potential products and seek fiscal incentives.
An industry-led core group should help
Government in identifying and pursuing
offensive areas of interest in negotiations. A
closer examination of investment chapters in
FTAs and issues affecting investment flows
from our partners is required. The future
FTAs must be negotiated with utmost care
so that hidden regulatory and NTBs are
properly addressed. n

4. 4 policy watch
Policy Barometer
CII Recommendations for G-20 Summit,
China
On September 4, 2016, the 11th
G-20
Summit was held at Hangzhou, China. CII
has been engaged through B-20 to submit
private sector‘s inputs into the G-20 process.
After considering the success of the pervious
B-20 Task Forces, liaising with G-20 members
and affiliated business representatives and
reviewing the statistics of three rounds of
questionnaire surveys, the B-20 China has
established five Task Forces, one each on
Financing Growth, Trade and Investment,
Infrastructure, SME Development and
Employment. The Task Forces, comprising
senior Industry members, actively participate
and share recommendations highlighting the
Indian perspective on issues in order to boost
exports and overall economic activity.
Some of the issues and key CII
recommendations pertaining to each of
the areas are given below:
I. Financing Growth
Finance is vital to global economic growth
and employment, both of which are G-20
priorities. For the international business
community, the focus is on how to best
utilize finance to stimulate economic growth.
The Financing Growth Task Force proposed
to focus on policy recommendations to G-20
on five key issues.
The issues highlighted by B-20 China are
as follows:
• Improve global financial regulations
by optimizing the domestic regulatory
framework and enhancing international
cooperation and coordination
• Promotethediversificationofinternational
settlement currencies to facilitate global
and regional trade and capital flows
• Explore the means to enhance
international taxation cooperation and
coordination so that taxation collection
can be more transparent and double
taxation can be avoided
• Encourage green finance to pursue
economic growth combined with
significant improvement in environmental
quality and sustainable resource use
• Improve financial infrastructure to
facilitate diversification, fairness and
competition.
CII Recommendations
• There is a need to mobilise low cost debt.
This could be done through multilateral
funding. Funds that are part of the
climate change negotiations (costs of
mitigation which the developed countries
need to pay to the developing countries)
could be deployed to lower the debt
cost
• Need to follow target based approach
to channel finance streams. Disparate
finance streams could be channelled
in a more targeted way. Stakeholders
were of the view that currently local
funding agencies are providing debt at
high interest rates
• A long term tenor (the duration of
lending) is required for infrastructure
projects. Spreading the loan over a 20-
year period will lead to improved cash
flows. The tenor currently tends to be
insufficient in India, typically up to 8
years. This mismatch means there is a
shortage of appropriate debt as investors
seek out alternative assets that fit better
with their investment horizons.
II. Infrastructure
Infrastructure is one of the important
subjects of deliberations at the G-20.
This issue is of primary concern to the
international business community. The
Source: Suwinshutterstock.com

5. 5policy watch
Policy Barometer
global economy is undergoing significant
adjustment and countries need to join
forces to nurture new growth points and
competitive advantages. Conventional
wisdom is that promoting the development
of infrastructure not only helps identify new
growth points but also lays the foundation
for deep, enduring economic development
in each country. The recommendations by
the Task Force are based on the principles
of selecting high impact, G-20 consistent
and ready-for-solution areas.
The issues are as follows:
• Infrastructure investment policy
environment
• Innovation in infrastructure financing
(especially PPP)
• Effectiveness of multilateral development
banks and institutions
CII Recommendations
• Strengthening Project Preparation:
Successful PPP projects require risks to
be accurately estimated, appropriately
provisioned in the contract and
proactively managed during execution
by the respective parties. The success
or failure of the project is very often
determined by the way the contracts
have been structured by the parties.
The importance of clearly laying out
the objective and fair set of conditions
precedent, penalty, compensation and
incentive structure, performance norms
etc. cannot be under estimated. Going
forward, it is extremely important to
create a robust project pipeline which
also needs to be transparent and should
be determined through a comprehensive
assessment of needs. It must be derived
from the integrated infrastructure
country plan addressing socio-economic
objectives. The focus should be on
projects which are financially viable and
have sustainable social and economic
benefits
• Evolve long-term alternate Funding
Mechanism: There is an urgent need to
develop alternate funding mechanisms
for financing long-term infrastructure
needs given the increased exposure
and rising NPAs in banks’ balance
sheets. While Infrastructure Investment
Trusts are the need of the hour, it is
important to modify it to be successful
in the current context
Source: Rawpixel.comshutterstock.com

6. 6 policy watch
Policy Barometer
exports of different services are critical
for the growth of their economies. In the
global services trade, the movement of
natural persons or mode IV of services is
becoming very restrictive.As a result, the
services exporters are finding difficulties
in exporting their services
• As of now, multinational enterprises are
using Global Value Chains (GVC) and are
getting benefits of distributed production
processes. Such benefits should reach
the small and medium sized enterprises
(SMEs) also.Within the existing structure
of trade, they are mostly left out and
they are losing trade competitiveness
• A large number of countries, mainly
developing and least developed
countries, are not participating in any
of the existing negotiations of mega-
FTAs. There is a high chance of trade
diversion from non-partner countries to
partner countries. G-20 should focus on
more inclusive global trade
• Many developing and least developed
countries are losing their exports
because of the changing international
Standards environment. There should
be a mechanism to transfer knowledge
and expertise to help these countries
in reforming their individual domestic
Standards eco-system.
• Long-Term Infrastructure Fund: It is
imperative to develop a dedicated
institutional funding arrangement for
meeting long-term Infrastructure needs.
This fund can be an innovative means
for financing growth and ensure market
penetration. Further, it will enable
greater ability to access funds in the
international market and will also create
in-built flexibility to revise financing
norms depending on the situation in
the industry.
III. Trade and Investment
Trade and Investment which are intimately
linked to the creation of business value
and innovation are important sources of
economic growth and job creation. They
have always been central to both B-20 and
G-20 meetings over the years. Building on
the success of previous B-20s, B-20 China
focuses on global investment and trade
governance system, and implementation
of the Trade Facilitation Agreement (TFA),
among other matters of concern to
the business community. The Trade and
Investment Task Force proposes to focus
policy recommendations on three issues
based on the principle of selecting high
impact, G-20 consistent and ready-for-
solution areas.
The issues are as follows:
• Improve trade co-operation mechanisms
and standstill/roll-back protectionism
• Ratify Trade Facilitation Agreement (TFA)
and take implementation to the next
level
• Build a global investment governance
system to promote favourable foreign
direct investment environments and
improve the safety and fairness of global
investments.
CII Recommendations
• Specific protectionism in the Services
sector should be discussed and
deliberated upon at the G-20. Many
developing countries are building their
economies on the Services sectors and
confronted with even more challenges. For
this reason, promoting SME development
has become an important objective for both
G-20 leaders and business representatives.
B-20 China continues to focus on the
priorities identified by the previous B-20
Task Forces: SME financing, access to
GVCs, improving the regulatory environment
for SMEs and SME innovation. However,
inadequate access to finance, access to
GVCs and the regulatory environment are
major challenges for SMEs, especially in
terms of scaling up their business. B-20
recommendations address the three critical
challenges:
• Access to Finance
• Access to Global Value Chains Powered
by Innovation
• Improving the Regulatory Environment
CII Recommendations
In spite of the cognizance in all quarters
of the importance and contributions of
this sector, MSMEs in India, like many
of their global counterparts, continue to
be enervated by a host of challenges
diminishing their growth potential. Lack of
access to key resources like infrastructure,
finance, etc., complex business environment,
poor technological access, lack of adequate
market linkages, lack of a comprehensive
regulatory framework, etc. are some of the
regular issues faced by the Indian MSMEs.
The key factors to which this can be
attributed include lack of a formal legal
structure of most enterprises in this category,
high risk perception of these enterprises,
unreliable financial evaluation data and
the wide geographical expanse of these
enterprises. There is absence of a suitable
ecosystem for process facilitation between
banks and MSMEs. Further, delay and other
issues related to credit delivery to MSMEs
are primarily due to a lack of understanding
of various schemes offered by the banks
and financial institutions as well as the
procedures and documentation required for
accessing credit from these institutions. n
Source: Tashatuvangoshutterstock.com
SME Development
SMEs are important contributors to economic
growth, taxation revenue, employment and
streamlining of industry structures. With
global economic recovery progressing slowly,
SMEs and especially MSMEs, SMEs are

7. 7policy watch
Industry Voices
Region/country focus is important to further our trade and investment interest. Africa and CLMV (Cambodia,
Laos, Myanmar and Vietnam) as a region must be given adequate importance for promoting our bilateral
trade and investment with these regions. Some of the problems in doing business with these regions could
obviously be addressed by using India’s development cooperation programme. CLMV as a region needs
particular focus as this acts as a gateway to East and South-East Asia. Focus on some specific region is
also important from the strategy point of view to enter third country markets. For instance, investing and
manufacturing in Africa would enable duty free market access into USA and EU as majority of the African
countries enjoy zero duty access to these markets.
Rakesh Bharti Mittal
Vice President, CII and Vice-Chairman, Bharti Enterprises
Building a production value chain is very important. Global Value Chains (GVCs) are important drives of
both trade and investment. More than 50 per cent of global trade is currently happening within GVCs. India
has low participation in GVCs despite the fact that it has improved its exports to GDP ratio. Linking into
GVCs is increasingly being considered as the new development challenge in India. Government and Industry
together need to think seriously and discuss the whole dimension of value chains. This would require initiating
several policy measures such as examining duty structures across the entire value chain, improving trade
infrastructure and upgrading the existing standards regime for goods and services.
Sanjay C Kirloskar
Chairman and Managing Director, Kirloskar Brothers Limited
India is currently facing one of its worst export slowdown of recent years. To overcome this crisis situation,
India needs to address some critical issues like trade infrastructure, export financing and Standards with an
aim to make exports globally competitive. Building productive capacities, market linkages and enhancing
investment attractiveness in selected sectors, particularly export-oriented investments, will have a strong
impact on the export capacity of Indian business. Necessary reforms must be identified, both sector specific
as well as cross-cutting reforms for all sectors, which will help make Indian exports competitive.
Shreekant Somany
Chairman, CII MSME Council and Chairman & Managing Director, Somany Ceramics Limited
Mega-regionals are going to be a reality in a few years’ time. Unlike the existing bilateral FTAs and WTO
agreement, the mega-trading agreements have much broader scope and reach in terms of coverage of
issues and liberalisation. High standards and regulatory harmonisation amongst member countries are likely
to pose a major challenge to countries who are not part of mega-regionals. They will have direct impact on
the economy and subsequent growth and employment generation in participating countries. Mega-regionals
like Trans Pacific Partnership (TPP) can bring considerable potential challenges for Indian Industry too. To face
this emerging challenge, Government can play an important role by connecting trade policy with domestic
policy. This will promote domestic development towards export oriented production.
Deep Kapuria
Chairman, CII Trade Fairs Council and Chairman, The Hi-Tech Gears Limited

8. 8 policy watch
Factfile
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India’s Integration with World Economy:
The Key Indicators
Trade as a Percentage of GDP (%)
Financial Year-wise FDI Outflow (US$ Million) Ease Of Doing Business in India
Source: World Bank Group DatabankSource: Economic Survey, Various issues; Union Budget, RBI Monthly Bulletin,
Annual Report & Weekly Statistical Supplement; Ministry of Finance
Source: Economic Survey, Various issues; Union Budget, RBI Monthly Bulletin,
Annual Report & Weekly Statistical Supplement; Ministry of Finance
Financial Year-wise FDI Inflow (US$ Million)