1. India’s foreign trade policy: Overlooking downsides

India’s foreign trade policy: Overlooking downsides

Indian exports would have to expand beyond their skins to achieve the growth rate the policy expects them to

By: | Published: April 29, 2015 1:52 AM

India recently announced its foreign trade policy for the next five years (2015-2020). A five-year foreign trade policy structurally represents a medium-term economic plan aiming to achieve key goals. The macroeconomic goal is to increase India’s share in world merchandise and services exports from 2% at present to 3.5%. Translated in numbers, the increase would imply doubling exports from just under $500 billion to close to $1 trillion over a five-year period with annual average increases of roughly 20%.

Around 65% of India’s current export earnings are from merchandise exports, while the rest is from services. It is not clear whether the total increase proposed by the policy assumes this current ratio to be maintained over time. If it does then it entails annual increases of around $65 billion and $35 billion respectively in merchandise and service exports from their baseline levels.

An annual increase of 20% in merchandise and service exports from India is a tall order given that during 2005-2013 these exports experienced average growth rates of 15% and 14%, respectively. Indian exports would have to expand beyond their skins for achieving the kind of growth rates the policy expects them to.

Trade is a two-way traffic. Indian exports are imports for other countries. Exports are not taken by importing countries as favours or acts of charity. They are imported either as necessities or because they come at cheaper prices and better quality than same products at home.

India is not a global producer of necessities. It does not have ample resources of oil, gas, minerals and nuclear material for feeding the rest of the world. Nor does it have as broad a manufacturing base producing as cheap and varied items as China. Its exports can crack the world market only if they are efficient, say, for example, from cheap production, or from unique features, like design or other specific attributes like environment-friendly features.

The problem is that it is not only Indian producers that are aiming to secure efficiency-based comparative advantages. Most of the rest of the world is. And India does not appear to be doing too well in this regard.

Consider India’s export strongholds. As far as textiles are concerned, India no longer has the advantage in garments. Vietnam, Bangladesh, Cambodia and Nepal, just to mention the neighbouring countries, cut, stitch and sew fabric faster and cheaper than India. India’s only major hope in textiles now is as supplier of raw cotton. But that would imply it getting confined to the upstream and lower end of the textile value chain. Almost similar implications are for leather products where the production advantages in leather uppers and footwear are increasingly shifting to other country producers with India left back looking only at raw hides.

Gems and jewellery? Yellow gold has lost its lustre all over the world. Except the Chinese and Indians, the rest of the world, particularly the West, is not fascinated by jewellery made of yellow gold. Diamonds, yes: India is still the largest diamond-processing centre in the world. But poor business conditions are driving out processors to other facilities like the Gemopolis export zone in Bangkok. Moreover, processors can’t perform their art unless they get the diamonds. What the Indian gem processing industry doesn’t seem to realise is that world over, consumers are veering towards less pure, processed industrial diamonds for use as fashion and replaceable jewellery. This is where Indian diamond processors are yet to get a handle on global tastes and preferences.

Automobiles are another sector where great hopes are pinned on. Connection of automobile value chain locations—both at the lower and upper ends—through various regional agreements can cut off India from major final demand and intermediate markets. With major automobile lead firms from Japan, Korea, US and Germany getting neatly tucked into mega-regional agreements like the TPP (Trans-Pacific Partnership) and the Transatlantic Trade and Investment Partnership (TTIP), investments in component and design facilities in value chains will be confined within these agreements. It would hardly be surprising if Honda, Hyundai, Toyota and the rest of the auto majors increasingly begin relocating facilities in TPP members like Mexico, Malaysia, Peru and Vietnam for taking advantages of lower tariffs, common standards and uniform investment rules.

Finally, services. The game is already lost on business process outsourcing and IT-enabled services. Ireland, the Philippines and even Bangladesh, are speaking better English and working longer for providing outsourcing services.

While the non-English speaking world is desperately learning English to stay relevant, India is learning it lesser and does not mind giving up its BPO advantages. In services like nursing and basic education, India is unable to match the certification requirements of most countries. There is little hope of these service providers travelling far and wide for boosting India’s service exports. Given its image as an unsafe destination and lack of budget travel facilities, ‘Incredible India’ might not be able to lure tourists despite visa-on-arrivals.

The foreign trade policy pitches for increasing exports by connecting it to the objectives and vision of  the Make-in-India initiative. But is Make-in-India aimed for Indians, or the rest of the world? Indian consumers might be denied access to imports and forced to buy substandard products. The rest of the world cannot be. The foreign trade policy appears to have overlooked some of the obvious downsides in taking India to the rest of the world.

The author is Senior Research Fellow at the Institute of South Asian Studies in the National University of Singapore. E-mail: isasap@nus.edu.sg. Views are personal

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