Even though the exports target of $900 billion by 2020 looks unrealistic, India can achieve significant exports growth if it implements the right mix of sustainable policies in a time-bound manner. There is no short cut to boosting exports and the phasing out of export subsidies is a reality
The Indian industry cheered the recently released mid-term review of the foreign trade policy (FTP 2015-20) by the ministry of commerce. The reason was obvious—the government offered additional export incentives amounting to Rs 8,450 crore under the Merchandise Exports from India Scheme (MEIS) and Service Exports from India Scheme (SEIS). Out of this, Rs 4,567 crore has been allocated for MSME and labour-intensive sectors covering leather, agriculture, carpets, handicraft, marine, rubber, ceramics, sports goods, medical and scientific products, and telecommunication equipment. Textiles (ready-made garments and made-ups) will receive benefit of around Rs 2,743 crore from the above pool. The remaining Rs 1,140 crore has been allocated for SEIS benefits for export of notified services such as business, legal, accounting, architecture, engineering, education, hospital, and hotels and restaurants. Overall, industry tariff lines that will receive benefits under MEIS were increased to 7,914 from 4,914 in the FTP released in 2015.
Exports have grown at a dismal pace of -1.2% (average year-on-year growth since January 2014) for the past four years. There is no doubt that India has diversified its exports since the 1990s, both geographically and product wise. In terms of destination, India now exports over 50% of its export volumes to emerging and developing economies, surpassing the share of advance economies. In fact, the EU and the US now account for only 30% of India’s total exports compared to 45% in 2000. In terms of product mix also, there has been a gradual shift as the export sector has moved up the value chain, leading the way with high-value products like industrial machinery, automobiles and car parts, and refined petroleum products. The accompanying table shows that, over the years, there has been a significant increase in the share of petroleum and crude products and engineering products in the export basket.
The share of engineering goods in total exports almost doubled from 12.5% in FY92 to 23% in FY17, and the share of petroleum and crude products rose from a mere 2.3% to 11.4% over the same period. The latter can be attributed to increase in petroleum refining capacity in the country. The share of traditional exports like textiles, ready-made garments and leather products has nearly halved in the past decade. In fact, petroleum products and engineering goods together now account for almost 35% over India’s exports.
In light of the recently-released FTP review and incentives offered, the more fundamental question is whether export sops are the real solution to India’s trade woes? Thus, it is important to understand what drives India’s exports and why? Indian exports are sensitive to price changes, global demand and supply-side bottlenecks. The way India’s export basket has evolved over the past two decades, it has made them much more responsive to global demand as compared to price changes. This is because India now exports more income-sensitive items like engineering goods, petroleum, gems & jewellery and chemical products. According to the International Monetary Fund (IMF), “in the long-run, a 1% increase in India’s international relative export prices could reduce export volume growth by about 0.9% for all industries and by about 1.1% for the manufacturing sector.” The long-run coefficient on global demand is estimated to be slightly above 1.5, which suggests that India’s exports are more sensitive to changes in external demand than price changes. Thus, increase in global demand drives exports much more than price cuts.
Further, the IMF research suggests that binding supply-side constraints like energy shortages dampen price responsiveness of exports. In the case of industry with an energy share of about 4% in the gross value of its output (which is about the average share in manufacturing), a 1% relative price depreciation will result in export growth of 0.6%. However, in the same industry, in case of energy deficit of about 10%, the export growth will decline to 0.4%. This shows that tackling the issue of energy deficit can boost export performance considerably. Similarly, higher logistics costs have been a major impediment to export growth. The FTP review document admits that logistics cost in India is close to double of that in developed countries. The average logistics costs in India are about 15% of GDP, while such costs in developed countries are about 8%. Thus, improving ease of trading is a high priority area for the government as Indian exporters face high transaction costs, making them less competitive in the global market.
Moreover, the most critical issue is that Indian industry will need to adjust to eventual phasing out of export subsidy schemes, going forward. The FTP mid-term review hints at the same and highlights a move “towards more fundamental systemic measures rather than incentives and subsidies alone” as a future strategy to boost exports. This is because, as per WTO’s Agreement on Subsidies and Countervailing Measures (ASCM), any developing country which breaches $1,000 GNI per capita for three consecutive years will have to phase out its export subsidies gradually. India has breached this level for three consecutive years starting 2013 to 2015. Thus, the commerce ministry will have to do away with specific export subsidies or recalibrate existing subsidies to WTO-compatible subsidies (which does not allow specific export-based subsidies).
In this regard, one should not undermine the initiatives that the government intends to undertake to address the above issues. The document clearly states that India will have to fine-tune current export schemes (MEIS and SEIS) and move towards more fundamental export promotion strategies such as Trade Infrastructure for Export Scheme (TIES, for bridging gaps in export infrastructure) and Market Access Initiative (MAI, catalyst to promote exports on product-focus country approach) Scheme. Reviewing existing free trade agreements (FTAs) and negotiating future FTAs for greater market access will also be critical in such a situation.
A logistics division has been set up in the commerce ministry which proposes to create an effective IT backbone and get all major agencies like customs, Directorate General of Foreign Trade (DGFT), railways, ports, waterways, etc, on a single platform. The National Committee on Trade Facilitation (NCTF) has been set up, headed by the Cabinet Secretary, following ratification by India under the Trade Facilitation Agreement (TFA), and the National Trade Facilitation Action Plan has been prepared. According to WTO, full and accelerated implementation of TFA could boost developing countries’ exports by an additional 3.5% annually. Measures such as single-point contact for trade queries launched on the DGFT portal, setting up of a professional team to assist exporters in procedural clearances, 24/7 customs clearance facility extended to all bills of entry, etc, are steps in the right direction.
Even though the exports target of $900 billion by 2020 looks unrealistic, India can achieve significant exports growth if it implements the right mix of sustainable policies in a time-bound manner. It is high time we realise there is no short cut to boosting exports and the phasing out of export subsidies is a reality. Measures such as enhanced trade facilitation, export and production diversification, lower logistics costs, energy efficiency, lower cost of doing business—and not short-term fixes—will lead to sustainable exports recovery.
Authors are Corporate economists based in Mumbai