Mid-Term Foreign Trade Policy Review: Why it fell short of real export promotion

Even within the smaller segment, India secures less than 5% in world textile exports, and 2% in clothing (against China’s 33% and 38%, respectively)

Trade, India foreign trade policy
Mid-Term Foreign Trade Policy Review: Why it fell short of real export promotion

India’s five-year Foreign Trade Policy (FTP), announced on April 1, 2015, stated, “Change has been a constant in the global economy, not least in the international trading landscape.” But the framework—the endorsement of which was reaffirmed, after a mid-term review, by the government—is no precursor to any paradigm shift. The FTP laid an annual export target of $900 billion of goods and services by 2020, and talked about increasing India’s share in global exports to 3.5% from the current 2%. Going by the trends since, it seems the country may not even retain the paltry 2% share.

Since 2012, global trade has grown by only 3.1% annually, or at half the rate in the three preceding decade. However, India’s continued under-performance cannot be ascribed to the global slowdown. Its share in world merchandise exports fell in 2015 and 2016, while that of China, Vietnam and Bangladesh edged up. China commands a share in excess of 11%. India’s merchandise exports, at $274.6 billion, had grown an anaemic 4.7% in FY17—over FY16’s $262.2 billion. As RBI data revealed, India’s merchandise exports, having peaked at 17% of the GDP in FY14, dropped to around 12% in FY17, the lowest since FY06. Diversification of the export markets saw no traction.
At the FTP review, the government announced a slew of incentives, aggregating `8,450 crore It enhanced incentives under the Merchandise and Services Exports from India scheme, covering labour-intensive sectors such as leather and footwear (sops amounting to `749 crore), hand-made carpets (`971 crore), agriculture (`1,354 crore), marine products (`759 crore), besides telecom and electronics sector (`369 crore), among others, and services (`1,140 crore). Similar incentives doled out earlier for readymade garments amount to `2,743 crore.

Constraints before industry are deeply structural. The Indian enterprise’s future has hinged on state benedictions, even manipulations, from the days of the permit-quota raj. As commerce and industry minister Suresh Prabhu pointed out, “Export is a strategic part of economic policy and should be part of the foreign policy.” Policymakers may as well scan eminent global success stories for lessons—for instance, China.

As government forges regional trade agreements and free trade agreements, industry must gear itself for new standards and norms. Although external factors like sluggish global demand and falling commodity prices impact foreign trade, the crux of export promotion remains the supply-side. The economy needs to encourage optimisation of productivity, reliability and consistency in product development, manufacture, and delivery. Today, scale is important to be cost-effective. Much of India’s resources are currently trapped in small, low-productivity firms that neither grow nor exit. Cost-cutting is a constant quest worldwide. Transaction costs thus assume a critical importance. Expeditious transit of goods itself helps reduce inventories viewed as NPAs.

World exports could broadly be put in five categories: energy and resource-intensive goods such as fuels and mining products, iron and steel, paper, etc (about 30% of the $17.3 trillion total global exports in 2012); sun-rise industrial goods, e.g., electronics and telecom goods, accounting for about 25%; automotive products, machinery, chemicals, pharmaceuticles, etc, (another 25%); agricultural products (10%); and labour-intensive tradeables (another 10%). India’s exports remain confined to sectors which account for less than one-fourth of global exports. Its top five export sectors—petroleum products, cut and polished gem stones, gold jewellery, drug formulations and biologics, and ready-made garments largely bring in only value addition, dependent as they are, for example, on imports of crude oil, uncut gem stones, and gold. The country has remained only a peripheral player in sectors that command a lion’s share in global trade.

Even within the smaller segment, India secures less than 5% in world textile exports, and 2% in clothing (against China’s 33% and 38%, respectively), For garments, too, with exports of about $13 billion in overall global garment exports of around $450 billion, India trails far behind China, Bangladesh and Vietnam.

India will also need to ceaselessly focus on a few items amenable to country’s comparative advantage in terms of cost, quality, scale, supply lines and logistics. A strategic onslaught on value-added agricultural and horticultural exports will entail quality and scale in production, cold chain, and efficient supply chain. While India is ill-equipped to aspire for a meaningful share in the $220 billion, global top-100 luxury goods trade, it may well recreate the romance of heritage craft, integrating country’s legacy of exquisite craftsmanship with newer skills for labelling, packaging and presentation.

The FTP review referred to pursuing an export promotion mission. The concerned central government departments as well as state governments need to move in tandem for new export capacities to be generated. There appears enormous scope to tap resources in various states. Maharashtra and Gujarat together accounted for half of country’s total exports in 2014—27% and 22% of the total merchandise export, respectively—while Tamil Nadu and Karnataka together contributed another 18%.

Investment in R&D has been low, in addition to under-investment in human capital. Touted changes in labour laws remain unrealised. It is not rare that economies of scale are stifled, thereby eroding price-competitiveness. Transport and logistics costs pose a barrier at least as large, and frequently larger than, tariffs. Although the government claims to have substantially reduced the number of mandatory trade documents, procedures and processes continue to be labyrinthine, costly and time-consuming. Despite the crackle of initiatives like Customs Electronic Commerce Gateway, Risk Management System, On-site Post-Clearance Audit, 24X7 operations, etc, the World Bank’s Doing Business highlights India’s Logistics Performance woes.

How can Doing Business get easier when the department of commerce, like the rest of the bureaucracy, keeps adding numbers on its rolls as also in its burgeoning number of attached and subordinate offices, PSUs and EPCs? The need, instead, has always been of shedding the flab and trimming the layers—closing down the DGFT, DGS&D, etc. Much was expected of the Modi government on creating a climate of confidence for entrepreneurs, rationalising the panoply of laws and rules, freeing the labour laws of known rigidities, and, in PM Modi’s own words, generating a fervour for “skill, scale and speed”.

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