India: Shift in focus of trade policy, import substitution and domestic value addition

India: Shift in focus of trade policy

A new government initiative—Atmanirbhar Bharat—aims at making India a self-reliant nation in trade and business.

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The initiative confirms the key focus of the government to “Make in India” and to increase the share of the manufacturing sector in the country’s gross domestic product. While the objective of some of India’s previous trade policies was to protect domestic manufacturers and offer export incentives, the focus is now to increase the gross value addition in the domestic market.

In line with this vision of a self-reliant India, there has been a strategic shift in the ways some of the traditional trade policy tools have been used in India. Prohibition or licensing, tariff rate increase, and increased scrutiny of free trade agreement benefit claims are being deployed in combination with the policy objective of encouraging gross value addition in India. For instance, increases in tariff rates for non-essential goods, licensing restrictions on imports of specified goods, and an embargo on imports of air conditioners with refrigerants are some of the few recent developments that indicate the shift in policy-making.

The introduction of the Customs (Administration of Origin under Trade Agreements) Rules, 2020, to prevent misuse of free trade agreement benefits also indicates the use of a non-tariff barrier to address increased non-essential imports from Association of Southeast Asian Nations (ASEAN) countries. Trade professionals expect more policy tools—such as quality control order for Bureau of Indian Standards certification, anti-dumping duty, production-linked incentives, etc.—to be used collectively for specific products to enable a quick course correction towards manufacturing in India.

These strategic measures may bring a temporary disruption in supply chain, but ultimately are expected to facilitate an increase in domestic production in India. Further, the current environment of emerging geopolitics, trade wars between leading economies and disturbances due to the coronavirus (COVID-19) pandemic offer opportunities to push value addition in India.

Deployment of such trade tools will require swift and smart business response with quick action.


Read a December 2020 report [PDF 741 KB] prepared by the KPMG member firm in India that provides an overview of how trade policy has evolved, with a summary of recent amendments introduced by the government to achieve its objective of a self-reliant India, and how businesses need to be prepared to adapt to these changes.  

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