Thanks to the current account deficit (CAD) remaining under control—Q1FY16 CAD was a mere 1.2% of GDP—despite exports contracting for the tenth straight month, India’s policy establishment seems to have been lulled into a false sense of complacency.
According to a news report in Mint this week, the PMO has asked the commerce ministry why it needs to give interest subsidies for exporters when RBI has cut rates and when the rupee has depreciated.
Apart from the fact that what matters is relative depreciation vis-a-vis competitor exporters, the real big worry is that the global export game has changed forever. During 2004-08, when global GDP was growing at around 5% per annum, global trade was growing at roughly double the pace at 9-10%; now exports are growing slower than GDP—mostly that’s a China phenomenon since, with more backward integration, China imports less per unit of export, and now even its exports are collapsing.
The picture is worse in value terms—this year, while global exports are projected to rise 3%, they are expected to fall 11.2% in value terms; for 2016, while volumes are projected to rise 3.9%, the growth is a mere 2.7% in value terms.
Given this, it’s hardly surprising then that India’s September exports contracted 24.3% yoy and, within this, petroleum fell 60.4%, engineering goods 22.8%, readymade garments 12% and even gems & jewellery 18.8%.
Which is why, in order to adjust to this new reality, India has to ensure exporters get as many WTO-compatible incentives as possible. In the past, engineering goods exporters have complained that the delay in revising duty drawback rates after the hike in steel import duties has made them uncompetitive and caused exports to fall.
Also, with countries like Vietnam likely to benefit greatly from the Trans-Pacific Partnership (TPP) pact, India could well lose another chunk of its exports, in the textiles business. Indeed, a study last month by C Fred Bergsten of the Peterson Institute for International Economics argues that India could lose $50 billion of exports if it gets excluded from the second leg of the TPP while China and other APEC countries join it.
By contrast, the study says, India could gain more than $500 billion a year if it joined an expanded TPP; further gains could be got if India participated meaningfully in major plurilateral negotiations on services and government procurement. But to be part of these arrangements, India has to be prepared to open up areas of interest to other countries, including strengthening its IPR regime—this makes more sense today since India is now also producing its own IPR. But with the country showing no sign of having the necessary will to do so far, it is safe to assume it will be quite some time before India’s exports—and the boost to manufacturing that will result—pick up.