Exports: India’s Window Of Opportunity

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.