The export strategy needs to be coupled with strengthening of domestic production through Make-in-India
India’s merchandise trade witnessed yet another year of undistinguished performance, with exports registering a negative growth and the overall trade deficit pushing upwards after it experienced a sharp fall during in FY14. Thus, despite the overall favourable performance of the economy, as suggested by the GDP figures, the performance of merchandise trade has remained unsatisfactory. Although the dip in exports and the rise in trade was nominal, and may well be brushed away, the government needs to take a close look at the underlying problems to ensure that these negative sentiments are quickly reversed.
The increase in the deficit on merchandise trade account does not augur well since the previous financial year saw two favourable circumstances that led to a compression of India’s import bill. The first was the rare occurrence of a steep decline in crude oil prices to levels that had not been anticipated, even after the sluggish demand for oil in a stuttering global economy was factored in. The second was the continuance of the policy of restricting gold imports that the BJP government had persisted with well into the second half of FY15, before it relaxed these controls. These factors combined to restrict imports, whose impact was felt especially in the second half of FY15.
However, the real concern is the negative growth in exports. In two of the past three financial years, India’s exports have contracted. An obvious explanation for the export slump in FY15 would be the decline in petroleum prices, as a result of which nearly a fifth of the total export bill was adversely affected. But a close perusal of the available numbers for the exports tells us that the downward pressure on exports was caused not by the petroleum sector alone. Textiles and clothing, that continue to be one of the largest components of exports, remained virtually flat after registering a double-digit export growth in FY14, while exports of the broad chemicals group were perceptibly slower in the previous fiscal.
Amid this overall decline, a few manufacturing segments have registered decent growth rates. Two sectors in this category are non-electrical machinery and automobiles. The former category includes industries that have traditionally been India’s areas of strength in manufacturing. In recent years, this group of industries has performed consistently, thus maintaining its share in exports. Over the past decade, the automobile industry has been able to use the strength that it has acquired in the domestic economy to penetrate in international markets. This has been possible through consistent increase its exports, which, in the previous fiscal, were in double-digits.
The direction of exports tells two sharply contrasting stories. The positive development is that India’s exports to the two largest destinations, the US and the UAE, increased in excess of 8%. Interestingly, these were the only two among its major trade partners that India had registered trade surpluses. With the US, India’s trade surplus had increased by nearly a fourth in FY15 as compared to the preceding year.
Over the past decade, India has taken several steps to enhance its economic relations with its eastern neighbours. A free trade agreement (FTA) has been in operation with the ASEAN members since 2010, which was followed by comprehensive economic partnership agreements (CEPAs) with Japan and Korea, but these agreements have not yielded the desired results since India has not been able to enhance its presence in these markets. While India’s exports to Japan and the ASEAN countries, as a share of its total exports, have declined since the agreements became operational, the share of its exports to Korea has remained virtually stagnant.
India’s exports to the European Union are the largest among the major regions, but export trends to this region have not been very favourable in the recent past. This trend has persisted in FY15, with India’s exports having declined by well over 4%.
The biggest source of concern is the steadily deteriorating balance on the merchandise trade account with China, India’s largest trade partner. In FY15, the trade imbalance had increased by over a third. This large trade deficit is essentially a reflection of India’s inability to penetrate the Chinese markets, a problem that seems to have got aggravated over the past three years. In FY12, India’s exports to China were valued at $18 billion, but in FY15, the value of exports had dropped to below $12 billion. The magnitude of the trade imbalance can be viewed in yet another manner. In FY12, India’s exports to China were roughly half of the trade deficit; in FY15, they were barely a fourth.
These trends in the merchandise trade point to the necessity for India to develop a coherent strategy to participate in the economic integration agreements. Immediately after assuming power, the present government had sent out signals that it would review India’s FTAs, in light of the poor showing by the country. For such a review to be really useful for providing the guidance on how Indian enterprises should improve their presence in the markets of partner countries, the government must engage meaningfully with all the relevant stakeholders. Further, the export strategy needs to be coupled with the initiatives to strengthen the domestic production structures, in particular, with the Make-in-India initiative. In other words, it is important to recognise that the export sector cannot be expected to respond to the global challenges unless efforts are made to make the domestic manufacturing base globally efficient.
It must be emphasised that steps to improve the export sector should be taken urgently given the series of significant FTA negotiations that India is currently engaged in. These include negotiations for formalising the Regional Comprehensive Economic Partnership (RCEP), the mega-regional trade agreement that India is participating with 15 major countries in East Asia. Besides, India is negotiating similar comprehensive economic partnership agreements with the European Union, Australia and Canada. These agreements would create market access opportunities for the Indian enterprises, which they must be able to exploit.
The author is professor, Centre for Economic Studies and Planning, School of Social Sciences, JNU