Make Indian exports cost-competitive and realign the focus towards non-traditional markets

Among the many challenges being faced by the Indian economy, the widening trade deficit is critical and needs to be tackled urgently. Indian exports declined by 4% during April to February last year and even though imports have not grown much, the trade deficit has ballooned, reaching a record high of $182 billion by the end of February 2013. Even after adding net exports from software and other services as well as the large inflows on account of transfer payments from Indians living abroad, the current account deficit will be at an all-time high this year. Capital inflows have so far been adequate to fund this deficit but these inflows are subject to huge volatility and could reverse without warning.

The Foreign Trade Policy, announced every year in early April, is an important policy instrument that can be used to address this issue. First and foremost, the policy must assess whether the decline in our exports is entirely due to lower demand or whether we are also losing market share. It is interesting to note that while India?s exports to regions such as Europe, Asean and Northeast Asia have declined, exports to regions such as Africa, Latin America, the CIS and Baltic region, and even the US have emerged as positive. This indicates that India has been fairly successful in diversifying its exports away from traditional markets, which has helped to a great extent in weathering the recent global slowdown.

However, opportunities should be exploited in other regions as well. The countries of South Asia account for a meagre 2.85% of India?s total trade despite their close geographical proximity. The Asean region also offers tremendous scope for furthering trade. Countries such as Singapore, Indonesia, Malaysia, Thailand, Myanmar, Vietnam, Cambodia and others accounted for only 9.6% of India?s total trade. Looking ahead, India?s strategy should be to make Indian exports cost-competitive along with realigning India?s export focus towards non-traditional markets.

Looking at the composition of India?s export basket, it is apparent that India has significantly increased its market share in a number of products since 2000-01. These include some products in high-value added sectors such as engineering goods and petroleum products. India has done moderately well in expanding its market share in a host of sectors where it has had inherent strengths such as ores and minerals, electronic goods, and gems and jewellery. However, Indian exports have lost market share in some important segments like textiles, leather goods and chemicals. Of the top 50 global imports, India has just six items which it exports, and out of these, only five items have a share of more than 5%. Three of these items are petroleum products, diamonds and jewellery, which are all dependent on imports with relatively low value addition.

We should study the strategies followed by some successful exporting countries such as China and Korea. In the case of Korea, the government took top 10 products in which they were competitive and then tailored their policies around the requirements of these sectors in order to help them become global leaders in their sectors. In China, a low-cost export base was developed by providing excellent infrastructure and various incentives. In contrast, India?s Special Economic Zones are losing sheen due to the imposition of Minimum Alternate Tax and Dividend Distribution Tax.

Many countries have benefited from the creation of a body whose function is to promote exports. An India Trade and Investment Cell, which has presence in countries with export potential, could play an important role in identifying opportunities for exports. This cell can also work with banks to identify SMEs which can benefit by exporting to specific countries. This can be on similar lines as the UK Trade and Investment (UKTI), which has offices in 96 countries, and helps UK-based companies succeed in international markets and assists overseas companies to bring high quality investment to the UK economy.

The need for procedural rationalisation and reduction in transaction costs cannot be overemphasised. Currently, there are various incentive/licensing schemes available to exporters. All these schemes are very cumbersome and time-consuming, and various agencies are involved. These procedures should be simplified with the use of IT and policies to promote self-certification by various export houses should be encouraged. Preferential treatment should be granted to exporters with a good track record. Indian exporters also need to be provided full refund of all indirect taxes and levies. They continue to pay CST at 2% on all inputs used in the manufacture of goods, CENVAT and local VAT on petroleum products including diesel and furnace oil, octroi and entry tax, tax on power and service tax (only a portion of which is allowed as drawback). The GST needs to be introduced for such refunds to become embedded.

Ultimately, Indian exports will rise only if we can ensure a competitive domestic environment. Unfortunately, for various reasons, exporters have been facing rising costs at home over the last few years. Weak infrastructure has also played a role in delaying exports. Though the government has initiated the modernisation of ports, most of the improvements are limited to the equipment and technology. Road and rail connectivity to ports remains constrained. What is needed now is a holistic approach where the critical need to encourage exports is realised by the government.

The author is director general, CII