(Photo: Mint)
(Photo: Mint)

Opinion | It’s time for India to shed its export pessimism for good

We should not fear signing free trade pacts as these can open up export opportunities for our industry

India’s early post-independence development strategy was marked by export pessimism. To it was added the not-quite misplaced nationalistic approach of import substitution-led industrialization. To top it, there was public-sector control of the commanding heights of the economy. One of the consequences of this approach was an excessive catering to industry. This was done by keeping wage goods cheap and import tariffs very high. This meant food prices were kept very low, hurting farmers, whose predicament was worsened by policies such as compulsory monopoly procurement and control on movement of produce. High import tariffs on industrial goods shielded domestic industry from competition, and hence from the pressure to innovate and be cost efficient. One more consequence of this inward-looking strategy was the neglect of labour-intensive manufacturing. Much later, the value of export-led growth based on the innate advantage of low labour costs was starkly revealed by the eye-popping growth of East Asian “tiger" economies, followed by China’s three decade-long growth run. By now, all this is conventional wisdom, but it still does not seem to be leading to the dropping of our age-old export pessimism. At a recent ministerial meeting of the 16 members of the Regional Comprehensive Economic Cooperation (RCEP) in Beijing, a press statement was issued in which an unnamed government official complained about Indian industry’s still-timid approach to free trade agreements. Most of the objections to India’s signing up to RCEP stem from a fear of a flood of duty-free goods from the Association of Southeast Asian Nations or China. So Indian negotiators have been cautioned by industry to be very cautious, as it would hurt domestic producers. The unnamed government official may well wonder why Indian producers don’t eye the large overseas market that will be available duty free for their own products and services if we sign up to RCEP. So why this export pessimism? Naysayers have many reasons. The world is turning protectionist, global demand is sluggish, there are far too many non-tariff barriers, Indian firms face tough regulatory qualification requirements to enter foreign markets, and so on. All these are true, but are still not enough to justify being fearful of embracing RCEP. India’s share of global merchandise trade is less than 2% as against China’s 13%. Going from 2% to 4% is possible, even in a world driven by protectionist forces and a growth slowdown. It would call for a 100% jump in our exports, which is an important engine of domestic growth. Indeed, the other three engines cannot be revved up as easily. Consumption spending is constrained by an excessive burden of retail debt, the drying up of non-bank finance at the retail level, and high job anxiety among households. The second engine, government spending, faces fiscal constraints since our current sovereign borrowing already gobbles up most household financial savings. The third engine, industrial investments, is constrained by a variety of factors ranging from taxation, ease of doing business, risk aversion, lack of equity capital, low capacity utilization and uncertainty on demand growth. Hence, it is imperative to pursue exports aggressively. For more than five years since 2014, the cumulative growth in exports was nearly zero, at a time when the world economy grew 23%. In garment exports, India lost out not just in relative but also in absolute terms to Bangladesh and Vietnam. Meat and leather exports suffered, so did gems and jewellery. There were other factors like goods and services tax refunds and currency appreciation that hurt exports. For instance, the rupee has appreciated nearly 20% against the Chinese yuan in the past five years, partly explaining the deteriorating trade deficit, despite growth in trade.

So what would a reversal of export pessimism entail? First, focus on trade facilitation. Exporters still face an “inspector raj" at the border. One recent horror tale was the case of a freshly-cooked foods exporter being asked to open his deep-freeze container, which effectively meant trashing the consignment. The government must allow self-certification, with minimal and statistically sound sampling inspection, and severe penalties for breaches. Second, amend the anomalies that hinder the growth of export-oriented Special Economic Zones. For instance, due to our free trade agreement with Thailand, it makes more sense to produce in Thailand and sell duty free in India, than produce in Aurangabad and face stiff duty barriers to sell in the domestic market. Third, embrace global value chains. The entire production process is made of small steps, each adding a small bit of value but generating large-scale employment. The small value addition should not deter us from allowing duty-free access to and participation in the entire chain. This may require modifying our stance on high-value addition and rules-of-origin in our free trade agreements. Fourth, vigorously promote agriculture and agro-based industrial exports. This is an overdue piece of deregulation. Lastly, learn to play the non-tariff game like some of our savvy neighbours. The objective, ultimately, is to encourage, not thwart, India’s export optimism. One beneficial side effect is that competitive pressure will force domestic belt-tightening and reform. We are a large economy, and it’s time we behaved like one, especially in international trade, unafraid of engaging with canny trade partners.

Ajit Ranade is an economist and a senior fellow at The Takshashila Institution


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