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RECOMMENDATIONS TO THE MINISTRY OF FINANCE
SUGGESTIONS TO INCREASE EXPORTS IN INDIA
SUBMITTED BY: THE ‘A’ TEAM
PGPMX – MUMBAI 2015-17
AMOL DANDEKAR
AMIT JAITLY
MICHELLE DSOUZA
MANDAR RISBUD
SANMEET DHOKAY
VINOD MALIYEKAL
CURRENT SCENARIO AND CONTEXT:China’s share in global GDP tripled from 3.6% in 2000 to 19.5% in 2015 mainly through exports, whereas India’s share in global GDP doubled from 1.4% to 3%. India’s service exports account for 50% of overall exports. To get closer to China’s performance, India’s merchandise exports have to increase much faster. But instead of rising they have fallen by 16.73% in value in the April 2015-Februrary 2016 period. Table 1 below of India’s foreign trade from 2010-11 to 2014-15 reveals a stagnation in the dollar value of exports, around $300 bn per annum, in the past four years. Also, exports were able to finance just two-thirds of imports. During 2010-14, India’s export performance conformed to the average. Its share in world exports stayed in the range of 1.5%, while its share in developing countries’ exports remained unchanged at 4%. Yet, in the same period, some Asian economies, such as China and Vietnam, increased their share in world exports. India fared worse than the average in 2015.Its performance in exports of manufactured goods was below par throughout the period, as its share in world manufactured exports (1.3%) was significantly less than its share in world manufacturing value-added (2.3%).
The slow growth in world trade does impose a demand constraint on total exports from developing countries. But this demand constraint is not binding for single countries such as India, particularly if their share in world exports is small. After all, in the same world economy, several Asian countries boosted their export performance by increasing their share in global exports.India’s exports have been falling in dollar terms for the past 17 months in a row (to May16). Falling exports can be attributed to weak global demand and hence beyond the control of Indian policy makers. A significant part of India’s exports consists of refined petro products, iron ore and minerals, whose prices have fallen sharply, even though volumes may have risen. But that is not the case for all exports. Also, countries such as Bangladesh and Vietnam have been able to increase their exports in dollar terms during the same period. So, deteriorating global demand or falling prices are not the only reasons.Nor is an overvalued currency the reason.From Jan15 to Mar16, the rupee marginally depreciated against the yuan and yet our exports were falling. The currencies of some countries (South Africa, Brazil, Russia, Malaysia, Turkey, Canada, the Eurozone) depreciated by much more, relative to US dollar, while the exports of several of them declined. The real exchange rate or REER which better captures the average price competitiveness of India’s exports relative to its competitors — has remained flat over the period of falling exports. These imply that the exchange rate was not the primary reason for the fall in Indian exports.
For the same reasons, Devaluation to make exports competitive, is not a real option. Investments made in India based on an artificially low exchange rate will turn out to be uncompetitive when the exchange rate normalises. Orderly movement of the rupee is more important and should be driven by macroeconomic stability, stable capital flows (long term capital flows and FDI money) and foreign exchange reserves.
Falling exports could be the result of factors specific to individual products and markets. This may also explain why exports from Bangladesh and Vietnam, whose commodity compositions, markets and integration with global supply chains are different from India’s, could be rising while Indian exports were falling. We believe that to boost exports, certain structural/institutional changes in the economy need to be made to improve our international competitiveness such as remove infrastructural bottlenecks, enhance productivity and access to finance, increase domestic competition, keep inflation in check and improve the ease of doing business in India.
A country’s export performance also depends on the credit terms, brands, reputation about reliable product quality and maintenance of delivery schedules, quality of repair and servicing facilities (for consumer durables and machines), linkages with global supply chains, access to global marketing channels, trader networks (note the role of expatriate Chinese traders in expanding Chinese exports), membership of big preferential trading arrangements, labour market flexibility (in the face of sudden rise/fall in export demand), efficiency of storage and transportation facilities, trade facilitation at the customs, and so on. It is important that cohesive and combined efforts of different arms of the government be made so that the overall climate is enhanced.
Some suggestions:[1] IMPROVE INTERNATIONAL COMPETITIVENESS(i) Improve productivity in order to get more competitive in the global markets and push export growth. Productivity can be improved by building infrastructure, simplifying business regulations and taxation, improvement in access to finance, and in creating a good business environment that supports entrepreneurial activity. (ii) Infrastructure: Productivity can improve simply by reducing existing bottlenecks or by adoption of best practices; it improves simply if a better road is built from a factory to the railway junction. Improved domestic infrastructure such as roads, ports and power is critical. India is one of the largest producers milk, fruits and vegetables etc. Yet, our share of the world trade in this is less than 1%. This can be attributed largely to lack of investment in post-harvest technology and infrastructure that can deliver these perishables to the world market.
(iii) Reduce costs: India must compete with every other nation on earth in selling (exporting) goods & services. To improve India’s global competitiveness, we must reduce costs imposed on the production and distribution of goods & services. That would include taxes, bribes, unnecessary or inefficient government regulation, lack of or bad infrastructure (that imposes costs of both time & materials on all users), costs of inputs to production, transportation, etc.
(iv) Improve quality: If India makes higher quality goods & services than its competitors in the rest of the world, it can command a higher price for them. The government can play its part by improving its programmes and institutes that provide employable skills.
(v) The cost of Finance: Since 45% of exports come from the small and medium scale sectors, the impact of falling exports is more severely felt on this sector. Provision of better credit terms and cheaper finance schemes are very important to boost this sector. There are many reasons for their lack of competitiveness vis-à-vis China and one of them is credit and finance. Although the government has implements schemes such as Micro Units Development Finance (MUDRA) it is not yet effectively reaching this sector.
[2] REGIONAL ENGAGEMENT: Get our regional engagement strategy/ regional FTA’s right; that’s our best market given closer destinations means cheaper transport costs, cultural affinity and goods made for the region which have the same characteristics. Example: our regional neighbors have natural resources which can be harnessed for power generation; we have some of the finest power equipment manufacturers in India both in the private and public sectors this is another area of huge export potential. IRCON, Border Roads Authority are some of the good PSU’s who have a good track record of that can leveraged by our neighbors. Look at trade with Africa our oldest trading partner; similar market conditions and product needs like India.
[3] INCREASE EFFECTIVENESS OF EXPORTS THROUGH TRADE AGREEMENTS/PACTS In order to provide Indian exporters better access to various markets, the government should improve its regional, bilateral and multilateral trade negotiations with various countries and trade blocks. In the past, India has had poor trade performance in the free trade agreements (FTA)/comprehensive economic partnership agreements (CEPA) it has entered into so far. In a paper published in the Economic and Political Weekly (EPW) in 2014, Biswajit Dhar and K.S. Chalapati Rao, professors of economics at Jawaharlal Nehru University and Institute for Studies in Industrial Development, showed that unfortunately, barring Singapore, India’s imports had increased at a much faster rate than exports with all FTA/CEPA partners between 2005 and 2012. (Chart 4)
[4] IDENTITY NEW MARKETS (countries and sectors) to trade with. For example, the infographic in Table 2 below shows India's goods exports. You can see several countries, trading blocks and industries that are under-represented. There are similar gaps in the Services export center. Manufacturing exports are a tremendous area of opportunity.
[4] INCREASE SHARE OF TECHNOLOGICAL CONTENT OF EXPORTS India’s poor export performance is best captured in the country’s failure to make a mark in export of technologically advanced goods. World Bank’s World Integrated Trade Solution (WITS) database classifies exports into five mutually exclusive categories: primary, resource-based, low technology, medium technology and high technology products. Mapping India’s performance on this indicator (Chart 3) shows that although there was not much difference between India and China in terms of technological classification of exports in 1992, the gap has increased considerably by 2014. Not only did India fall behind China, it has also fallen behind Vietnam, which had a smaller share of high technology and medium products in 2000 (earliest year for which Vietnam data is available) than India had in 1992. The government should clearly enable this sector so that the value of the exports goes up. [5] CREATE INDIGENOUS SOURCES OF SUPPLY, where possible, for imports that form parts of exports to provide a cost advantage, or at least reduce the cost disadvantage. Many of India's exports today have significant import components.
[6] ENCOURAGE STATE GOVTS TO FOCUS ON EXPORT PROMOTION MEASURES: The Centre should push the State governments to develop more supportive export strategies. These can include the setting up of Special Economic Zones (SEZ’s), pinning accountability to the relevant government department with strict target improvements, address infrastructure constraints, reduced regulatory red tape, single window clearances etc.
[7] EXIM: Recapitalizing EXIM India to play the same role EXIM USA and EXIM China have played.
India’s merchandise Exports, Imports as well as Trade Deficit during the last three years have shown a mixed trend as evident from the table below:-
Values in US $ Billion
Export Growth %
Import Growth
%
Trade Deficit
Growth
%
* GDP Trade Deficit as % of GDP
2012-13 300.4 -1.8 490.7 0.3 190.3 3.8 1835.8
10.4
2013-14 314.4 4.7 450.2 -8.3 135.8 -28.6 1875.2
7.2
2014-15 310.5 -1.2 447.6 -0.6 137.1 1.0 2051.1 6.7
*Source: CSO, New Series Estimates( 2012-13, 2013-14), DGCI&S
CHART OF INDIA’S IMPORTS AND EXPORTS
