Trade Overview of India in 2023
In 2022, merchandise exports from India amounted to US$453.5, showing a significant increase from the pre-pandemic level of US$324.3 billion in 2019. Meanwhile, merchandise imports stood at US$732.4 bilion, leading to a trade deficit of US$278 billion, a widening gap when comparing to pre-pandemic level of US$ 162 billion.
The Ministry of Commerce and Industry (MOCI) reported that in the fiscal year 2022/23, ending March 31st, the top export destinations for India were the US, the UAE, Netherland, China, and Bangladesh. China was the largest source of India’s imports in the same fiscal year. Following China were the UAE, the US, and Russia. Intriguingly, Russia’s contribution to India’s import pool saw a substantial rise, increasing from a mere 1.6% the previous year to 6.4% in 2022/23. Meanwhile, China experienced a slight decline in its import share to India, dropping from 15.4% to 13.8%.
The top merchandise export categories included engineering goods, petroleum products, gems and jewelry, and drugs and pharmaceuticals. On the other hand, the most imported goods were petroleum products, electronic goods, machinery, and gold. Importing and exporting procedures in India remain fairly complex, requiring multiple forms and certificates depending on the scheme or product category. These requirements are outlined in a handbook of trade procedures published by the MOCI.
Foreign Trade Policy 2023
During its foreign-trade policy period of 2015–20, the Indian government aimed to reach an annual export goal of US$900 billion by 2019/20. Unfortunately, this target was missed by a considerable distance. Instead of introducing a new policy for 2020–25, the existing policy was extended until March 2023. Subsequently, the released Foreign Trade Policy of 2023 was designed with a primary aim to facilitate easier business operations for exporters by incorporating process re-engineering and automation.
In addition to making business operations smoother, the 2023 policy encourages the recognition of new towns under the “Towns of Export Excellence Scheme” and acknowledges exporters through the “Status Holder Scheme”. The policy is also forward-thinking in its approach to the growing e-commerce sector, seeking to stimulate e-commerce exports. It revises the existing cap on e-commerce exports carried out through courier services. Another novel feature of the 2023 policy is the introduction of an amnesty scheme. This scheme is designed to assist exporters in closing old pending authorizations, providing them a clean slate to start afresh. To further boost export operations, the FTP 2023 makes provisions for merchanting trade, offers rationalizations of the EPCG scheme, and streamlines the widely-used Advance Authorization scheme. These measures combined are aimed at providing a more favorable environment for exports.
In alignment with its objective to grow India into a US$5 trillion economy by 2025, the Indian government has expressed intentions to raise exports to US$1 trillion by the same year. This strategy also encompasses diversifying the nation’s export basket, promoting the “Make in India” scheme to boost local manufacturing, encouraging value-added and service exports, and simplifying trade procedures. As part of its future approach, the government is likely to gradually shift away from the protectionist stance it has held over the past decade, as it seeks to expand India’s global market share and foster exports as a growth driver.
International Relationships & Partnership
As a member of the World Trade Organization, India is an active participant in global trade. Regionally, India is part of the South Asian Free-Trade Area (SAFTA), an initiative aiming to establish a free-trade zone across eight participating countries. Launched in 2006, SAFTA has been gradually reducing duties across the bloc but has been unsuccessful in implementing a zero-duty regime initially scheduled for 2016. In addition to SAFTA, India is a member of the Commonwealth of Nations, an association of 54 countries, most of which were former territories of the British Empire.
India’s participation in various trade agreements also includes its membership in the eight-nation South Asia Association for Regional Cooperation. As a member, India aligns its regulatory systems with the association’s economic agreements, visa regimes, and investment rules. The country also has free-trade agreements (FTAs) with several countries including Japan and South Korea. In recent years, India has signed FTAs with Mauritius and the UAE, in 2021 and 2022 respectively, with interim agreements with Australia and plans for broader agreements in 2023.
Despite these partnerships, India’s participation in global trade alliances is not without its complications. The nation withdrew from the development of a Regional Comprehensive Economic Partnership (RCEP) between the ten-member Association of South-East Asian Nations (ASEAN) and its six FTA partners, including China, in 2019. India’s concerns regarding its agricultural and domestic industry sectors were insufficiently addressed, leading to its exit. This has hampered the government’s efforts to establish the country as an export-oriented manufacturing hub.
Furthermore, from 2019, the US removed India from its generalized system of preferences (GSP) programme. The US cited a lack of assurance from India to provide “equitable and reasonable access” to its markets as the reason for this action. India retaliated by imposing tariffs on 28 US goods, including almonds, apples, and walnuts. It is believed that India’s inclusion into the GSP will be restored by 2023–24 based on modest concessions by the country. There also seems to be potential for a limited trade deal focusing on strategically significant sectors such as steel, following talks with the US.
However, India’s economic engagement with the West continues to be selective. The nation is part of the US-led Indo-Pacific Economic Framework for Prosperity, a multinational economic pact aimed at countering China’s growing influence in the Asia-Pacific region. Yet, in September 2022, India chose not to join the “trade” pillar among the four pillars of cooperation outlined under the agreement, the other three being “supply chains”, “clean economy” and “fair economy”.
Tensions escalated between China and India in 2020 following a border clash, resulting in a substantial deterioration in bilateral relations. India retaliated with trade-related measures, such as banning Chinese mobile apps, increasing non-tariff barriers on imports from China, and excluding Chinese-owned vessels from participating in India’s oil trade. It also directed local telecommunication service providers to phase out Chinese equipment and excluded Chinese telecom equipment providers Huawei and ZTE from the country’s 5G trials. Despite the announcement of disengagement of troops along a portion of the border in September 2022, bilateral tensions are unlikely to ease in the medium term. A full resolution of border tensions will be essential for the normalization of ties, a process likely to be protracted, thereby maintaining the risk of renewed military clashes in the foreseeable future.
Tariffs and import taxes
The Customs Act of 1962 forms the backbone of India’s import and export tariffs and outlines the customs valuation rules. India’s tariff structure is built on the Harmonized System of Nomenclature (HSN) of the Customs Co-operation Council. In 2008, the Directorate-General of Commercial Intelligence and Statistics updated the Indian Trade Classification System’s eight-digit codes based on the HSN. Currently, the 2017 version of HSN nomenclature is in use, and most tariffs are levied ad valorem. The annual budget exercises bring changes to tariff rates and other indirect tax rates, with a peak rate of 10% basic customs duty, except for agricultural and dairy products.
Import duties are in addition to the basic customs duty and the integrated goods-and-services tax (GST), introduced in 2017, which replaced most of the previously existing indirect taxes like excise duties and a special additional customs duty. Import duty rates are product-specific and can change mid-year, making it important for companies to verify the current rates for their products from the public relations officer of the Central Board of Indirect Taxes and Customs, which falls under the Ministry of Finance’s Department of Revenue.
Given the broader economic context of a widening trade deficit, a depreciating currency, and the need to limit non-essential imports and promote local manufacturing, the government has raised import tariffs on various goods since 2017. Duties were increased on multiple items in the budgets for fiscal years 2020/21 and 2021/22 but were reduced for some raw materials. Recently, in May 2022, the government lowered import duties on certain raw materials while increasing export duties on iron ore and steel intermediates to augment domestic supply and manage the prices of goods using these materials.
The government has stated that all conditional exemptions will expire by March 31st, 2023, unless specifically extended, with new exemptions being valid for two years unless otherwise specified. The country’s customs valuation legislative and administrative procedures align with World Trade Organization standards. The importer is required to submit an import declaration detailing the value of imported goods accurately, accompanied by any necessary import licenses and documents. Finally, the Directorate-General of Trade Remedies, established in 1998, oversees the enforcement of anti-dumping duties and countervailing duties, providing a regulatory framework to protect domestic industries from unfair trade practices.
Import restrictions
The Foreign Trade Development and Regulation Act of 1992 grants the Indian government the authority to ban, restrict, or otherwise regulate the import or export of goods. The trade policy constructed under this legislation is documented in two segments: the policy statement and a procedural handbook. The Ministry of Commerce and Industry lifted its final quantitative restrictions in 2001, in line with India’s obligations to the World Trade Organization, making most items freely importable without the need for import licenses. However, certain items on a restricted list still necessitate licenses for import, including specific animals, aircraft, weapons, chemicals, communication equipment, explosives, birds, certain fish, marble, certain paper products, nuclear reactors, ozone-depleting substances, some plants, seeds, and meat.
Due to political tensions with Malaysia in 2020, India placed restrictions on refined palm oil imports, a major Malaysian export, but lifted these restrictions between June and December 2021 to stabilize local prices. As part of its drive to encourage domestic manufacturing and limit non-essential imports, the government in mid-2020 mandated licenses for imports of items like television sets, tires, and power tillers. Subsequently, it banned the import of air conditioners with refrigerants. In response to a local vaccine shortage amid the COVID-19 pandemic, the government prohibited vaccine exports from April to September 2021. In May 2022, wheat and sugar exports were banned, and by September 2022, an export levy was introduced on certain rice varieties.
Specific state agencies are exclusively allowed to import certain items, including some petroleum products, rice, wheat, and urea. Approximately 80 items, primarily within categories such as animal fat, oils, wild animals (and their parts), specific meat products, and ivory, are prohibited for import. To shield consumers from inferior imports, the government insists on compliance with mandatory quality standards equivalent to those imposed on domestic products and requires registration with the Bureau of Indian Standards for various imported products.
Starting from late 2020, India enforced new customs rules mandating importers to present certificates of origin to claim preferential customs duty rates on goods imported under free-trade agreements (FTAs). These rules aim to ensure that FTA goods have at least 30% value addition from the country with which India has an FTA, thereby confirming the country of origin requirement. This regulation helps prevent non-FTA countries, notably China, from exporting to India via FTA member nations to exploit lower duty rates. Lastly, India abides by all embargoes instituted by the UN.
Export
Export Tax
The 1975 Customs Act empowers the government to institute or escalate export duties. As of the end of October 2022, numerous products had an export tax, including hides, skins, and leathers at 60%; certain ores such as iron ore at 30%; and several iron and steel products at 20%.
In May 2022, to enhance domestic supply, the government augmented export duties on iron ore and steel intermediates. Additionally, in September 2022, a 20% export levy was implemented on certain rice varieties, excluding the high-end basmati variety, which makes up 45% of India’s total rice exports. This export levy is designed to increase rice availability domestically and it’s unlikely that the government will revoke this decision in the near future.
In early July 2022, a new windfall gains tax was introduced on crude oil production and the export of gasoline, jet fuel, and diesel. This move aimed to generate revenue from oil refiners and exporters who have profited from a surge in worldwide petroleum prices. Since July 2022, the tax rates have been altered multiple times. Following the most recent adjustment in mid-October 2022, the windfall tax was set at Rs11,000 per tonne for domestically produced crude, Rs12 per liter for diesel exports, and Rs350 per liter for jet fuel exports (the windfall export tax on gasoline was eliminated in mid-July 2022). Furthermore, products may also be subject to a minimum export price, typically indicated in dollars on a free-on-board basis.
Free Port Zones
India’s Special Economic Zones (SEZs) offer full foreign equity rights to investors focused on boosting exports. These SEZs, considered as duty-free enclaves, are regarded as foreign territories for trade operations. Both state governments and corporate entities can propose the formation of SEZs. Moreover, an amendment to the SEZ Act in 2019 allows trusts, including infrastructure investment trusts and real-estate investment trusts, to establish themselves within SEZs. All eight existing export-processing zones have been transformed into SEZs, located in Chennai, Cochin, Kandla, Kolkata, Mumbai, Noida, Surat, and Vishakapatnam. As of the end of October 2022, there were 424 formally approved SEZs, out of which 270 were operational.
These operational sites consist of several multi-product SEZs, although the majority are sector-specific. SEZs are required to have a minimum land area of 50 hectares for multi-service and sector-specific zones, with some exceptions. The government, in 2019, reduced this requirement for multi-product SEZs from 500 hectares to 50 hectares.
Units established in these SEZs can benefit from certain schemes like the Service Exports from India Scheme, which allows duty-free credit entitlements against exports. From 2004 onwards, a specific category of SEZ, termed free-trade and warehousing zones, has been permitted to establish trade-related infrastructure to facilitate the import and export of goods.
The government is eager to develop International Financial Service Centres (IFSCs) within India. These offshore financial centres, allowed under the SEZ Act, are viewed as foreign territories. The aim is to compete with other offshore centres such as Shanghai, London, and Dubai, attract foreign investors and claim a portion of India-related and other financial services currently conducted outside India. Over the years, the government, the central bank, and insurance and capital market regulators have implemented various rules and incentives for IFSC units. For instance, IFSC units are exempted from many domestic laws, and their transactions are not subject to goods-and-services tax, stamp duties, and securities and commodities transaction taxes. The IFSC Authority was established by the government in 2020 to serve as a unified regulator for IFSCs. Currently, India only has one IFSC located in the Gujarat International Finance Tec-City, a SEZ in Gujarat state, where the local government offers capital, power tariff, and lease rental subsidies to IFSC units establishing in the zone.
Export Restrictions
The government permits the unrestricted export of all goods, except for certain categories. These include:
Specific types of items that require export licenses, such as select animals and plants, related products, mineral and vegetable oils, and vintage cars and parts; A limited list of items that are banned from export, primarily comprising beef, wild flora and fauna, and tropical wood and wood products; Several items that can only be exported by specific agencies, such as petroleum and petroleum products by Indian Oil, and thorium ore and rare earths by Indian Rare Earths.
Occasionally, the government imposes ad hoc export bans on certain commodities to manage inflation on essential goods. For instance, the government has repeatedly banned and then allowed exports of onions to regulate domestic prices.
In May 2022, to increase domestic supply and control prices, the government prohibited the export of wheat and sugar. The wheat export ban was a response to rising commodity prices following Russia’s invasion of Ukraine (Russia and Ukraine collectively account for about 30% of global wheat trade) and a significant drop in local stocks due to a heatwave. This ban on wheat exports is expected to remain for the foreseeable future, although flour made from imported wheat can still be exported by export-oriented firms and companies in Special Economic Zones (SEZs). As of the end of October 2022, sugar exports were only permitted up to 100,000 tonnes or with special permission from the Directorate of Sugar of the Department of Food and Public Distribution.
Export contracts must be expressed in freely convertible currencies. A trader seeking to export an item on the negative list must hold a registration and membership certificate from the appropriate export-promotion council. Pre-shipment inspection may not be mandatory for export status holders and units in SEZs.
Export Insurance & Credits
The government-owned Export Credit Guarantee Corporation (ECGC), now known as ECGC, provides insurance coverage against commercial and political risks. This includes coverage for buyer insolvency, protracted default, contract violation, war, expropriation, and natural disasters. The ECGC offers many schemes for Indian banks, financial institutions, and exporters. Banks are insured against losses arising from export financing, with coverage potentially increasing to 95% for those holding ECGC policies covering their entire export lending. For exporters, ECGC covers up to 90% of losses resulting from both political and commercial risks.
Whenever banks, including the Export-Import Bank of India (Exim Bank), are involved in financing exports, they are eligible for ECGC guarantees. These guarantees also apply when banks or financial institutions lend directly to buyers or financial institutions in other countries, aiming to promote Indian capital-equipment exports. However, for creditworthy companies, ECGC cover is not a prerequisite for obtaining export finance.
In its 2020/21 fiscal year budget, the government announced a new export-credit insurance scheme via the ECGC. Known as the NIRVIK scheme, it provides insurance cover for both pre- and post-shipment credit. The scheme extends cover to unpaid interest, and thus, the cover can rise up to 90% of combined losses of principal and interest, compared to the ECGC’s average of 60%. The scheme also simplifies claim procedures and offers a lower premium rate to small borrowers.
The Reserve Bank of India (RBI) administers the government’s short-term export-credit program, while the Exim Bank primarily provides long-term export finance. The Exim Bank also offers advisory services and information on export opportunities and grants buyer credits to overseas buyers of Indian exports. The bank directly provides domestic exporters with pre-shipment and post-shipment credit, overseas-investment finance, and specific financing for technology and infrastructure development, small and medium-sized enterprises, and grassroots enterprises such as artisans.
The Exim Bank offers financing programmes for exporters, importers, and companies making overseas investments. To manufacturing, trading and services companies with minimum actual or projected exports of 10% of turnover or exports of Rs50m (whichever is lower), it provides term loans for financing new projects, expansion, modernisation, purchase of equipment, research and development, and overseas investments. It also provides working capital. Financing is available in rupees and in foreign currency at commercial interest rates for 7–10 years with a suitable moratorium.
Under its project-export facilities, Exim Bank extends funded and non-funded facilities for overseas turnkey projects, civil construction contracts, technical and consultancy service contracts, and supplies. Funded facilities for project exports include pre-shipment and post-shipment credit as well as a cashflow deficit-financing facility for Indian companies executing contracts within India. Non-funded facilities for project exports include various guarantees such as advance-payment guarantees of 10–20% of the contract value and performance guarantees of 5–10%.
Private export financing is also an option. The RBI no longer requires commercial banks to charge concessional rates of interest for short-term rupee-denominated export financing, including both pre-shipment and post-shipment finance. Banks are free to set lending rates on such credits, provided the rate is at or above their base lending rate. Exporters can also take export credits in major foreign currencies, and banks are allowed to set their own rates on such credits.
Finally, exporters may choose the least costly financing mix, depending on rates from different banks, forward premiums, and the terms of pre-shipment and post-shipment credit required. Indian commercial banks and foreign lenders with more than 20 branches in the country are required to allocate 40% of their net bank credit to priority sectors, including agriculture, housing and renewable energy.
