Home / Budget 2019 / News /  Priority should be to boost exports

The government could devise ways to revive domestic manufacturing and support infrastructure creation in the upcoming Union Budget for FY22, but ought to be selective and strategic in discouraging imports in favour of locally-produced goods, experts said at the first Mint Budget 2021 live panel discussion on Atmanirbhar Bharat.

Experts also said the execution of the production-linked incentive scheme to promote manufacturing and financial backing will be crucial in its success.

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Ajit Ranade, chief economist, Aditya Birla Group, said exports need to grow considerably if the government plans to scale up manufacturing to reach up to 25% of gross domestic product (GDP) in the next 5-8 years, from the existing 17%.

While manufacturing growth in India has been sluggish over the past few years, according a McKinsey report, manufacturing generated 17.4% of India’s GDP in the current fiscal year, a little more than the 15.3% it had contributed in 2000.

Meanwhile, emerging market peers such as Vietnam’s manufacturing sector more than doubled its share of GDP during the same period.

“We need to do whatever it takes to improve exports and that should be a high-priority mission," Ranade said, adding that there was a need to look at India’s currency policy. “One across-the-board instrument that works well is to ensure that exchange rate has to be competitive. Our exchange rate has been overvalued. A 5% depreciation in exchange rate across the board is equivalent to tariff protection of 5%. We have ignored one important instrument of contributing competitiveness," he explained.

Samiran Chakraborty, chief economist, Citibank India, said he hopes to see higher allocation for all industry-related ministries and more support for infrastructure creation, which is just not restricted to the key infrastructure departments of railways and highways.

Besides, the allocation towards the recently announced production-linked incentive scheme is crucial, he said. “Effective implementation will depend on granularity of scheme," he added.

Santosh Pai, partner, Link Legal India Law Services, said how India prioritizes its economic growth and political tensions with China will be an important signal to watch out for in the budget for FY21-22.

“That is a very careful balancing act. We cannot be inward looking and protectionist because that is not going to help us with the rest of the world. At the same time, we have to reduce our dependence on China, which is a real requirement…The whole world will be watching this balancing act," said Pai, referring to the U-turn India has taken on trade with China.

Ranade said rising import tariffs was worrisome, and the long journey of steadily decreasing tariffs from 1991 saw a kind of reversal since 2013.

“If you look at the last five-six years, overall average tariffs have gone up by five percentage points. That is a little worrying because all said and done, India’s exports also have an import content," Ranade said. “We have to be selective and strategic about protectionist actions."

Saon Ray, senior fellow, Indian Council for Research on International Economic Relations (ICRIER), who also took part in the discussion, said the textiles sector may be in for tariff protection. “If you look at the production-linked incentive scheme, it has already spoken about protecting 10 sectors. Of all the sectors that have been identified, textiles stand out as there is a need for some protection there as we make more and more of personal protection gear and those kind of items," said Ray.

Ranade said given the high import dependence India has on China on items like electronic goods, organic chemicals, automotive parts, pharmaceutical ingredients and compressors for air conditioners, building local capacity may take time.

“There is no way we can build this capability overnight," he added.

According to Pai, the government’s commitment to go full swing on reforms is of great importance to global investors who find it hard to scale up their presence in India due to various difficulties.

Pai said the stated objective of the government today is to take advantage of the backlash against China and present an alternative manufacturing destination, but at the same time, India is not a part of the global value chain. “We stayed out of the Regional Comprehensive Economic Partnership (RCEP) late last year and there is not likely going to be a rethink on that. So, for global investors who want to come to India, there are three questions: feasibility, profitability and ease of doing business. On ease of doing business, we are doing well, but the real feasibility at the scale at which we need to manufacture to consider ourselves a viable option as a global manufacturing hub, is an area where we are really struggling," said Pai.

He said that even foreign investors who entered India in the past 5-6 years find it hard to scale up. “They either find it difficult to recruit the right kind of talent or acquire land and find logistics solutions."

Ranade said by not being part of RCEP, India has missed the opportunity to attract investments across the value chain of a whole lot of industries, including automobiles, chemicals and petrochemicals. “The door is still open. We can address the concerns. The main concern is about China. We can address that. You don’t look at exports and imports. You look at investment opportunities and employment."

India backed out from talks with 15 other nations last year as it faced an economic slowdown and Opposition parties, including the Congress, and trade unions opposed further opening up of the market. The Narendra Modi administration was keen to have the deal designed in such a way that it does not hurt the local industry and farmers due to a possible surge in imports of goods from China, and dairy and agriculture products from New Zealand and Australia.

India’s economy is currently in a recession, but continued to recover from the blow dealt by the coronavirus crisis and slowed its pace of contraction to a better-than-expected 7.5% in the September quarter.

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