Will the combination of PLI and FTAs make Indian ports attractive bets?
We often hear about de-globalization nowadays with a number of countries promoting domestic manufacturing and renegotiating terms with their overseas trade partners. But does that mean overall global trade is going to drop? Well, new bi-lateral and multi-lateral trade equations are emerging in this process.
India is also repositioning itself as a major manufacturing hub. The government seems to have devised a two-prong strategy to promote manufacturing growth in India—launching Production-Linked Incentive (PLI) schemes and inking Free-Trade-Agreements (FTAs) with major nations and trade blocks.
India has been aiming to grow the contribution of the manufacturing sector in GDP from ~17% at present to 20%-25% in the foreseeable future. The basic premise is, when the manufacturing sector is incentivised, achieving higher exports becomes easier with improving quality from domestic manufacturers.
If you think the combination of PLI and FTA would work in India’s favour, then you must read our latest research report Gujarat Pipavav Ports Limited—Decadal growth opportunity with significant margin of safety.
India is aiming to increase its merchandise exports by nearly 3.5 times over the next 7-8 years—from USD ~290 billion at present to USD 1 trillion by FY28. The target for services exports is USD 700 billion. You see, PLI and FTAs go hand in hand.
The government has launched PLI schemes aggregating to USD 26 billion for 13 sectors. The list includes some crucial sectors such as automotive, pharmaceuticals, textiles and electronics goods amongst others. Incentivising these sectors can potentially create large-scale jobs besides helping India grow its per capita income.
Moreover, according to the Commerce Ministry, India has been negotiating 20 FTAs at present. Of these 6 are on fast-track mode and involve major countries such as UK, UAE, Australia, Canada and European Union to name a few.
What is FTA and why are they so crucial?
In simple words, FTA between two or more countries/trade blocks is an understanding to reduce or even completely eliminate tariff and non-tariff barriers to strengthen and deepen trade relations.
If India manages to ink a FTA with EU, it might be a big positive for Gujarat Pipavav Ports Limited (GPPL). GPPL is backed by AP Moller Maersk (APMM) group of Netherlands and scores high on ESG.
Some key benefits of FTAs
- FTAs offer easier market access to countries entering the agreement. For instance, if India enters a FTA with UAE, exporters and importers from both the countries can benefit.
- FTAs can offer the advantage of preferential treatment to countries inking the agreements over non-FTA countries. Suppose India and Australia sign an FTA, India will have an edge over non-FTA exporters to Australia and vice-versa.
- Free-Trade-Agreements help attract investments from non-FTA countries having export potential. For example, if India manages to clinch a FTA with EU, exporters from non-FTA countries can think of setting up manufacturing facilities in India to tap the EU markets.
FTAs have been a mixed-bag for India so far. According to NITI Aayog, key FTAs such as those with Japan, Korea, Sri Lanka and ASEAN (Association of Southeast Asian Nations) failed to shore up India’s exports. In fact, India’s trade deficit increased after the agreements were signed with respective countries. Other trade pacts such as The South Asian Free Trade Area (SAFTA) have worked well for India though.
Can India turn the tide in its favour this time with a low tax regime on new manufacturing facilities and various incentives offered under PLI schemes?
Indian ports: beneficiaries of a potential rise in trade volumes?
If India’s merchandise exports grow as envisaged over the next 7-8 years then Indian ports might emerge as some of the biggest beneficiaries of the potential growth in India’s external trade.
Our research team recently initiated coverage on Gujarat Pipavav Ports Limited (GPPL). At the recommended price of Rs 101, GPPL has an upside potential of 74% which might be achieved over the next 18-24 months, our research team noted.
You may also like to read: Dedicated Freight Corridors: a real game changer for the Indian economy?
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