Foreign Trade Policies In India

FTP’s intention is to promote exports of India and to earn foreign currency.

The government majorly aims to protect domestic producers essentially farmers. In some cases, the government has defined a ban on imports to promote the domestic industries and they subsidize those industries to create jobs in India.

But in reality, what happens is the government gives credit to domestic producers in the form of tax benefits. Now, this tax benefit has to be funded by taxpayers like you & I so that exporters can export their goods and services to foreign countries. Often these foreign countries are rich countries so eventually what happens is that we end up subsidizing rich countries like the US or Germany. Now, this sounds absurd because why would a third-world country subsidize the people of a first-world country.

This also leads to a wealth distribution from a citizen of a third world country to a first world country since the citizen of a first world country can get the goods/services cheaply which is funded by the citizen of a third world country.

If the domestic producers are incentivized to sell goods to foreign countries then they are not inclined to sell the goods/services to Indians. Let's say I am producing tea and am incentivized by the government to export the tea in form of a tax credit then why would I be inclined to sell the same tea in my native country where I would be required to pay taxes on my profit plus its far more difficult to do business here as compared to some other developed country.

This creates double taxation for the Indian taxpayers as they have to fund the tax credit provided to domestic producers who in turn export the tea to foreign countries and since the tea producer doesn’t sell his tea here, it creates a shortage of supply thus increasing the prices of tea.

In order to promote the agriculture sector of the country, the government sometimes imposes some bans on the import of certain goods/services or may start a quota of imports,s or may create a ban on certain countries only. And this is aimed at protecting the domestic industry.

However in reality this creates problems for poor people. If the urban poor can buy foreign goods that are available cheaply to him,compared to the domestic counterpart, then he is deprived of the opportunity in the name of protection of domestic industry and growth of exports of the country

And when it comes to farmers these policies keep the farmers poor instead of bringing them prosperity. It is because the farmers instead of diversifying depend upon the government. They know that their yield will always beget them return since if they are not able to sell their crops the government will make sure to either buy the crops from them or incentivize them to sell them to foreign countries. So farmers don’t invest in R&D to improve their techniques.

This also affects our economic growth because if a person was allowed to buy certain goods and services cheaply then the saved amount could be used to buy some other products and services. So the opportunity cost also increases.

We in a way lose a lot of economic gains because we ban the import of cheap goods from first-world countries and countries like the US, Canada and most of the EU provide a lot of subsidiaries to produce wheat, rice, and other basic crops. So in a way, the citizens of the first world countries will be paying for our economic gains. This would also have a positive impact on the consumers as they would get the crops cheaply and the money saved by the consumers could be used elsewhere by them which would create some more economic opportunities for the domestic economy. This will also force farmers to go for a more innovative approach to framing and make them increase their portfolio of crops.

So in a nutshell what the import and export policies do is that they force us to subsidize rich countries and secondly they stop us to reap the benefits of the subsidiary of the rich countries.