Hike in export incentives good, but most traditonal exports getting less competitive due to labour etc issues
A recent article in The Wall Street Journal explains globalisation through the humble cashew. Cashew trees were transported to India by Portuguese explorers sailing from Brazil in the16th century and India started exporting them to the US in the 1920s. With the industry doing well—in the 1990s, India controlled 80% of the global trade—it got unionised and hefty wage hikes followed. Vietnam copied Indian techniques initially, but soon enough, automated the process—the government in Kerala, meanwhile, discouraged this; between 2011 and 2016, Vietnam’s exports rose 100%, India’s fell 38%. If this was a one-off, in an excessively pro-labour state, it wouldn’t matter as much. In the case of textiles and apparel, India’s exports grew from $30 billion in 2011 to just $34 billion in 2016, while those of Vietnam grew from $20 billion to $32 billion and Bangladesh’s from $19 billion to $28 billion. In overall terms, in Apr-Oct 2017, while India’s exports grew 9.5%, Vietnam’s grew 23.8%, South Korea 18.4%, Indonesia 17.8%—so, at a time when global exports are recovering, India is not making the most of it.
Commerce minister Suresh Prabhu has done well to, on Tuesday, increase export incentives under the MEIS scheme by another two percentage points for labour-intensive exports. This is a 33% hike in incentive levels from the existing Rs 25,000 crore—these are labelled incentives but they are actually a payment to negate disadvantages due to taxes, etc—and the hike in the case of readymade garments is over Rs 2,700 crore. The policy also has more simplification like duty-free imports of inputs for exports based on just self-assessment by exporters and there are promises to fix the GST problems exporters face in terms of delayed tax refunds. The problem, however, is that until the big bottlenecks to production aren’t removed, India’s exports simply cannot do better. If labour laws ensure India has mostly small ready-made garment firms and these are just not competitive, either in price/quality or in the ability to supply large volumes fast enough, a 2% higher MEIS may not do the trick. That is why, as Crisil points out, the ‘revealed comparative advantage’ of gems and jewellery fell from 6.38 in 2006 to 3.96 in 2016, from 3.12 to 1.97 for leather and from 2.43 to 2.22 for readymade garments.
Fixing this requires repealing choking labour laws, finding ways to dramatically lower rentals and various infrastructure costs, among others, but apart from sporadic attempts, not too much has been done—a special policy was announced for apparel last year to take care of the labour issue but that has not been fully implemented so far. Agriculture is another big export potential area—exports jumped from $13 billion in FY10 to $24.5 billon in FY17. But the policy is anti-farmer—as long as local prices are low, exports are fine; once they rise, exports are banned. While wheat and rice exports were banned/restricted between 2007 and 2011, restrictions were put on onion exports just last month. Prabhu’s policy talks of a “stable and ‘open’ export policy for the long term”, but does this mean the government won’t ban exports or put stockholding limits on traders the moment local prices start rising? Till such issues are sorted out, it is unlikely there will be any major growth in India’s exports on a sustained basis.