Chinas shadow looms large in more ways than one in the trade policy document, Medium Term Export Strategy, 2002-07, published this week by the union commerce ministry. Nowhere is Chinas example more relevant for India than in the area of external trade promotion. While India may not be capable of replicating Chinas overly mercantilist strategy of export promotion, it can learn many lessons in promoting exports.
Chinas share of world trade was a mere 0.9 per cent in 1978, at the start of its modernisation and reform programme, and has expanded to over 4 per cent by the end of the 1990s. India, by contrast, improved its share from a lowly 0.5 per cent in the 1980s (compared to 2 per cent in the early 1950s) to 0.7 per cent by the end of the 1990s. Chinas trade expansion was in part built on a policy of an undervalued currency and hidden subsidies, which helped it displace East and South-east Asian exporters from western markets, and in part on aggressive domestic industrial development and the creation of infrastructure for competitive export trade.
The commerce ministrys export strategy document focuses far too much on price competitiveness and export promotion strategies and far too little on what is really holding back Indias ability to expand its share of world tradethe nuts and bolts of a competitive economy. For far too long have we viewed external trade as a niche phenomenon. We need exports to pay for strategic importsfood, energy, technology, defence equipment and the like. So an export policy is put in place to meet the demands of import dependence. It is only recently that we have begun to view export trade as integral to overall macroeconomic development, to employment generation, to skill building, and to building relationships of mutual interdependence between India and major economies of the world.
If the domestic economy is efficient, if there is adequate growth of capacity and capability at home, then there are automatic trade externalities to be exploited. Rather than view trade strategy in isolation, as an exercise to be undertaken by the commerce ministry, one must view it as part of macroeconomic policy and economic reform at the national and state level.
A meaningful external trade strategy must evolve as part of a macroeconomic policy package that eschews a sectoral approach and compartmentalises the external sector from the domestic. Sectoral strategies presume instrumental capabilities. If we say textile exports must be stepped up, who does what Rather, if we said that a certain infrastructure needs to be created, certain industrial and labour policies need to be put in place and certain fiscal policies must be adopted, then exports become attractive, exporting becomes feasible as well as remunerative and India becomes competitive.
By taking the traditional export promotion approach to trade strategy, rather than a macroeconomic approach, the export strategy document opts for a modest agenda. Last year, the commerce minister had said that India intends to increase its share of world trade from 0.7 per cent to 1 per cent by year 2004. Now we are told the target date is 2007. Not a tough enough target to chase if central and state governments can be made to deliver the feasible.
The exercise carried out to identify industries and sectors where export possibilities exist and must be better exploited is useful but it is based on a rather static and sectoral view of comparative advantage. The export sectors identified yield no surprises and include engineering, textiles, gems and jewellery, chemicals and allied, agriculture, fisheries and plantations, leather and footwear. Electronics and electrical goods have been identified as a potential areas for better performance.
If the domestic wherewithal is created to encourage efficient enterprise, more industries may find themselves to be competitive. In a traditional export commodity like textiles, the agenda for export promotion is largely an internal agenda of policy reform rather than a trade policy agenda. The document states categorically that in textiles, India has already yielded ground to Bangladesh and Pakistan, not to mention China and the Association of South-east Asian Nations! When the US opens up its textiles and garments market, India may see itself overtaken unless wider policy reforms are put in place at home. Mere export promotion will not help.
An interesting point is made that membership of trade blocs has helped countries like Mexico, some European countries and South-east Asian countries increase their exports. India suffers from its splendid isolation and the slow growth of the South Asian market. Regrettably, the document shies away from boldly asserting the relevance of Indias membership of the Asean free trade area, an objective China is pursuing, and of Asia Pacific Economic Cooperation. Membership of Asia-wide regional trade groups entails costs but the rewards can be significant too, both for trade and the domestic economy.
Rupee depreciation is a favourite recommendation of the commerce ministry, but its benefits can be transient unless the opportunity provided by a sharp devaluation is used to create capabilities that make the domestic sectors more competitive on a sustainable basis. China has of course pursued a mercantilist exchange rate policy but it would be wrong to ascribe all its prowess on the trade front to this alone. The recommendation in favour of tariff cuts, to make export industry oriented imports cheaper, is eminently sensible. But there are domestic costs involved and the policy paper does not consider these, preferring to adopt a sectoral approach to the issue.
This is an important document but, it could have been more instructive for policy if it had been the collective endeavour of more actors at the central and state level.