Exports: India’s Window Of Opportunity

Business Standard     23rd June 2021     Save    
QEP Pocket Notes

Context: Rising trends in exports and growing global demand requires strengthening of our exports to drive positive growth in the foreseeable future.

Lessons from the export-led growth of the Asian nations: Like Japan, South Korea, China, and Thailand.

  • Stop increasing tariffs on intermediate goods:
    • A large proportion of our imports, 32%, consist of intermediate goods. Almost 70% of all anti-dumping duties are levied on intermediate goods.
    • Increase in the cost of such products indirectly increases production costs and hampers exports.
    • Almost half of China’s imports consisted of intermediate goods, which are instrumental in raising their exports.
  • Imports and exports should grow together:
    • Take the automobile industry - we import $6.1 billion worth of auto components but using these imports, our automobile industry exports $18 billion worth of products.
    • For example, between 2001 and 2010, our trade-to-GDP ratio nearly doubled from 26% to 49%. In nominal terms, both imports and exports grew at rates close to 20% in this decade.
  • Putting an incentive structure in place: To ensure higher relative profitability of exports compared to the rest of the sectors.
    • The incentive structures ranged from subsidised bank credit, export targets linked to long-term credit, export subsidies, and incentives for research & development, amongst others.
    • While import substitution may have been in place, it was gradually phased out.
  • Moving up the manufacturing chain: Asian countries, having developed their capabilities in labour-intensive industries, gradually moved up the manufacturing value chain.
  • Public investment in infrastructure: Public investment in infrastructure to reduce the cost of logistics is another key policy intervention.

Issues with India’ export-led growth: India was unable to replicate Asian model -

  • Small share in global trade: According to the World Trade Organisation, India’s share in global merchandise trade stood at less than 2%, despite having the inherent strength.
    • Even in traditional sectors, like food processing, where we have one of the largest raw material bases in the world, we command a 2% share in global exports.
  • Narrow based exports growth: The result of which has been manufacturing as a share of GDP and employment remained stagnant between 1990 and 2020. Factors responsible are –
    • Lag in credit availability to the private sector: Domestic credit to the private sector, as a percentage of GDP, stood at 50% in India, compared to 165% in China.
    • Low debt to GDP ratio: Our private debt-to-GDP ratio is extremely low, and there is an immense possibility of enhancing it for manufacturing and exports.
    • Cross-subsidisation of power, higher cost of logistics and labour laws have been the other constraints.
  • Lack cutting edge exports: As much as 70% of India’s exports target 30% of world trade comprising items with a declining global share.

Measures taken by the government:

  • Lowering the corporate tax rate - to 22% for all firms and 15% for new manufacturing firms will encourage the domestic manufacturing sector.
  • Introduction of production-linked incentive schemes: In several key sectors, for the first time, incentivise production rather than inputs. These schemes will help domestic manufacturing achieve size and scale.
  • Rationalisation of labour laws - As many as 29 Central labour laws were rationalised into four codes.
  • The definitions of micro, small and medium enterprises (MSMEs) have been raised upwards, allowing them to grow in size whilst maintaining the benefits of MSMEs.

Conclusion: The possibility of a sharp recovery for the economy can only be realised through a strong focus on exports. Fiscal space is constrained, so is private consumption and investment. Exports must be the cylinder on which growth is fired for the foreseeable future.

QEP Pocket Notes