What is really slowing India’s exports?2 min read . Updated: 29 May 2015, 01:11 AM IST
Domestic problems such as an electricity shortage continue to hamper export manufacturers
While Prime Minister Narendra Modi has been pitching India as a manufacturing destination globally with the Make in India initiative, export growth has been slowing in the past three years. India’s exports have declined not because of commodity prices falling but because of sluggish demand.
Resource-intensive exports have declined not just in terms of value but also in volume (see chart 1). Interestingly, domestic factors are responsible for half of the export slowdown, according to HSBC Global Markets Research (see chart 2), and the rest can be attributed to sluggish world growth and the exchange rate. That the impact of domestic bottlenecks has remained firm across the two periods since 2008 and 2012 is worrying.
While most economists are of the view that the government has made some efforts such as speeding up clearances and processes and allowing easier availability of credit for exporters, things have moved at a snail’s pace in the past year.
Domestic problems such as an electricity shortage continue to hamper export manufacturers. Sonal Varma, economist from Nomura Financial Advisory and Securities (India) Pvt. Ltd, said, “A textile company could get a large order inflow but if they don’t have power production, then they cannot operate at full capacity."
Over two-thirds of Indian exporters are small producers and are unable to benefit from alternatives such as having a captive power plant. Other infrastructure issues such as rail, road and port connectivity are not keeping up with demands of the day, said HSBC in a research note dated 26 May.
Analysts say despite strong rhetoric, not much has changed on the ground in manufacturing. D.K. Nair, secretary general of lobby group Confederation of Indian Textile Industry, said, “In the capital-intensive segments of the textile industry like spinning, weaving and processing, cost of money is also an issue. Our interest rates are too high and the technology upgradation scheme, which was introduced to address cost of capital, is virtually non-operative now for lack of sufficient budget allocation."
How important is the exchange rate in boosting exports? Chief economic advisor Arvind Subramanian on Tuesday spoke about how India needs a competitive exchange rate for manufactured exports to flourish. But a weak currency alone cannot boost exports. Inflation through increases in imported input costs and higher wages can easily offset the benefits gained from currency depreciation.
“Improving competitiveness by investing in infrastructure such as better connectivity through roads and ports, coal availability, labour reforms and flexibility in factor markets will aid in sustainable export growth," said Nomura’s Varma.