The forthcoming Union budget for FY24 is expected to announce several measures to boost exports of goods and services that are being buffeted by adverse global headwinds. Due to a slowdown in global growth and trade volumes, India’s outbound shipments fell 12.2% year-on-year in December following a much sharper contraction of 16.7% in October—the first drop since the last 20 months and the worst since May 2020. As exports of goods and services account for over a fifth of India’s GDP, the government is mulling a 10% higher outlay for its flagship Remission of Duties and Taxes on Exported Products scheme and assistance to develop various districts in the country as export hubs to reverse the deceleration in exports, according to FE. The RoDTEP scheme refunds duties, taxes and levies at the central, state and local level borne for the production and exports of notified items. The government is also weighing a proposal to hike the interest subsidy for pre- and post-shipment credit for MSME exporters.
While these steps reduce the cost handicap of exports, what will make a huge difference is participating in global supply chains that is been disrupted due to US-China tensions. Some foreign companies who opted to move out of China have preferred fast-growing Vietnam, which has steadily built up its competitiveness over the last 15 years. Apple has shifted less than 5% of its iPhone 14 production to India. But if it is to deepen its footprint, a lot more has to be done beyond reducing the cascading impact of taxation on exports. India as yet does not have the requisite skills and infrastructure that makes assembling its products in China a compelling proposition for Apple. This entails developing a manufacturing ecosystem, better logistics, land and labour reforms. With a coastline of 7,517 kms abutting nine states, large hubs or industrial clusters can be potentially developed near deep draft ports to target the world market like the coastal economic zones similar to Shenzhen. In this regard, however, there is limited progress on the Development of Enterprise and Service Hubs Bill to replace the SEZ Act of 2005.
Above all, to attract supply chains shifting out of China, the most efficacious policy response is to maintain an open and unrestrictive trade policy and a higher level of ambition in inking deep free trade agreements with mega regional groupings. Amita Batra of Jawaharlal Nehru University has argued that supportive policy inputs include a phased reduction in average applied most-favoured nation tariffs in manufacturing and for inputs in sectors of supply chain dynamism in line with levels prevailing in the Association of southeast Asian Nations. Trade expansion possibilities are limited by the significant hike in India’s imports tariffs since FY15. The noteworthy strides the country made toward a more liberal trade regime since the early 1990s was reflected in a steady rise in the share of goods and services exports in GDP which peaked at 25.4% in FY 14. Since then, it hit a low of 18.7% in FY20. The pandemic impacted trade followed by a sharp rebound to FY 23 when the share of exports in GDP rose to 22.7%. Sustaining this uptrend should be a priority of Budget 2023, entailing phasing out of tariffs increases since FY15, among the measures being considered to improve the cost-competitiveness of India’s exports.