India needs to fundamentally alter its export strategy
India’s exports for the month of March this year have contracted by 0.7% compared to a year ago. There is need for a fundamental shift in our export strategy
India’s revenue from exports of merchandise over the last four fiscal years was $310 billion, $262 billion, $275 billion and $302 billion, respectively. Thus over the four years from April 2014 till March 2018, the total growth was zero, or, rather, a tad negative. Even the ratio of exports to gross domestic product (GDP), at 11.6%, is at a 14-year low. This at a time when the world is experiencing synchronized income and consumption growth and our Asian peers are clocking decent export numbers.
India’s exports for the month of March this year have contracted by 0.7% compared to a year ago. This slowdown in exports is across all sectors, led by the scandal-plagued gems and jewellery sector, whose exports fell sharply by 16.6% from a year ago. Garment exports too have suffered and have now fallen behind Bangladesh and Vietnam in absolute dollar terms. Vietnam’s garment exports grew by 10% last year and are expected to continue at that pace this year too. Most notably, the Vietnam Textile and Apparel Association (VTAS) has now tapped into newer markets like Russia and China, in addition to traditional markets like the US and European Union (EU). In a telling statement from the VTAS chairman, he said the heat of competition is from China, Bangladesh, Sri Lanka and even Myanmar. The country not mentioned in this list is India.
What happened? Why is India lagging behind in ready-made garment exports? This is one sector where India has had a traditional advantage, and should have raced ahead, due to the low-cost space vacated by China. India is capable of investing in modern machinery and automation, as also in skilling its personnel, just like its competitors. But Bangladesh and Vietnam have now outpaced India even in absolute, not just relative, terms. Of course, a country like Bangladesh has greater labour flexibility, and allows three shifts even with women, who now dominate the garment sector in that country. It may be argued that Bangladesh has special duty-free access to the US and EU, accorded to low-income countries. Even then, however, it does not explain India’s lacklustre performance.
The immediate proximate factors affecting the garment and footwear sectors are as follows. First are the lingering effects of demonetisation. Due to last year’s cash disruption, orders were lost, and these can’t be regained easily from competitor countries. There is a kind of hysteresis as lost orders and jobs are not fully reversible. Second is the delay in getting goods and services tax (GST) refunds, and the burden of the cost of locked capital. The delayed refund does not include the interest cost. We need to urgently zero-rate our exports (goo.gl/kf3XFD). Third is the overvalued exchange rate, which makes India’s exports relatively expensive. Fourth is the continuing unreliability of electricity and other infrastructure facilities. Small and medium enterprises need a common plug and play, seamless hard and soft infrastructure—whether it’s effluent treatment or inspection or logistics.
But why dwell only on ready-made garments or footwear exports, or even on immediate proximate causes? There is need for a fundamental shift in our export strategy. In 2014, the trade policy announced by the Union commerce minister envisaged total exports worth $900 billion by 2020. That looks almost impossible, unless exports grow by 40% per annum from now on. Incidentally, even services exports show zero growth over the past four years.
A 2010 paper of the commerce ministry outlining the strategy to double exports in three years is worth revisiting. Many of those ideas are still relevant. We need to move from merely focusing to becoming obsessed with rejuvenating our exports. For exports create jobs, bring in precious foreign exchange and validate our international competitiveness. The world market is the ultimate test of our strengths. No matter some bit of rising protectionism or an overvalued rupee, both of which are temporary, there is no reason why we shouldn’t be winning a larger market share of world trade. We left our export pessimism behind long ago. We now are entering a phase when China promises to import $24 trillion of goods and services in the next five years. It will hold the world’s first mega import expo (yes, import expo!) in November. China’s consumer market represents a huge opportunity, but India is largely absent.
We only export primary materials like cotton, iron ore and copper to China. Indeed, one-fifth of our goods export is petrol and diesel, whose prices fluctuate with the price of crude. The decline in 2015 is partly explained by the steep fall in the price of crude. But we don’t need to just depend on commodity exports.
The following principles may be useful. Firstly, focus on labour-intensive exports such as agriculture, textiles, footwear and tourism. Secondly, have a zero GST rate for all exports. Thirdly, shun product- and market-specific incentives (which run afoul of World Trade Organization rules), but focus on regional or cluster subsidies, which benefit all producers, small or large, domestic or export oriented. Fourthly, reduce and further reduce inspector raj. Fifth, actively and aggressively promote participation in global value chains. Do not insist on large value addition in India in your trade agreements. Insist instead on large-scale job creation. Lastly, be committed to open borders, notwithstanding the pressure to raise trade barriers. It is not by protection that domestic industry will become world leaders in competitiveness. And that’s an absolute prerequisite to winning in world markets.
Ajit Ranade is an economist and a senior fellow at the Takshashila Institution, an independent centre for research and education in public policy.
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