GSP fallout

Trade relations between India and the US have continued to be an issue. The US administration has confirmed that India will be no longer be considered a developing nation for the purpose of benefiting from the Generalised System of Preferences (GSP). The GSP provides tariff-free access to the US market for companies from developing countries in certain sectors. But, the US has removed India from the GSP because it has not assured the US that it will provide reasonable and equitable access from America to its markets. This is an odd reason since the whole point of the GSP is not equity but special status to developing countries, which are deemed worthy of preferential access to US markets. The idea here is essentially that India has failed to convince the US government that it is in fact still a developing country, unlike, say, China. Some compromises, especially on poorly drafted domestic measures such as price caps for medical equipment and e-commerce policy, should have been attempted with the US. This is unquestionably a failure of both regular and economy diplomacy.

New Union Commerce Minister Piyush Goyal has said Indian exporters do not see the GSP withdrawal as a matter of “life and death”. No one can quarrel with his comments that industry and exporters should not depend on government subsidies and instead focus on becoming more competitive. But the effects of this withdrawal of the GSP should not be minimised in any manner. Some senior government and other officials have been almost blasé about the effects, minimising the gains to India under the scheme as “only” $260 million a year. It is true that goods worth “only” $6 billion will be affected of the exports worth $54 billion from India to the US. But that is patently a wrong way of looking at the issue. There are specific sectors that will be hard hit because they operate on tight margins and the removal of tariff-free access to the US market will render them suddenly uncompetitive — they may be, on average, 7 per cent more expensive. Some of the sectors affected include imitation jewellery, leather articles other than footwear, pharmaceuticals and surgical instruments, chemicals, and plastics. Several of these sectors are dominated by small- and medium-sized companies that will have trouble staying competitive. A further fall in exports could not just keep growth from recovering, but also be another big negative for jobs.

The government will now have to work out how another negative shock to exports can be avoided. The first task must be to ensure that not too many exporters go under because of an inability to handle the transition. There must then be efforts to render the exporters in these sectors more competitive and cost-efficient by at least the 7 per cent margin that they have lost, thanks to the removal of tariff-free access. Direct subsidies or tax breaks should be used only as a last resort, such as has been created for the textiles sector under the Rebate of State and Central Levies and Taxes scheme. However, tax breaks cannot be a sustained solution either for textiles or for any other sector.

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