Why neglect exports?

The Indian economy is in the midst of a steep and pervasive slowdown, with the growth rate having declined in six successive quarters down to 4.5 per cent in FY 2019/20 Q2 and with little prospect of early recovery. There is a great deal of debate in the media and other fora on how to revive the main components of aggregate demand such as consumption and investment, and whether the parlous fiscal situation permits further pumping up of government spending. Astonishingly, there is little discussion on the missing component, exports.


Yet, as recently as 2013-14, exports of goods and services accounted for 25 per cent of gross domestic product (GDP), which is more than the share of government expenditure and just a little less than that of fixed investment. Unfortunately, the stagnation of India’s goods exports at around $300 billion since 2011-12 has brought the share of total exports down to below 20 per cent in 2018-19, and that of goods exports to 12.4 per cent (see table). Global development experience shows that no sizable economy has sustained rapid economic growth (7 per cent plus) without sustained strong growth of exports. That is also our own experience: The two best periods of Indian economic growth (1992-1997 and 2003-2011) closely mirrored strong spurts of export expansion. Exports also tend to be employment-intensive and, in India, good for the micro, small and medium enterprises (MSME) sector, which has traditionally provided 35-40 per cent of goods exports. Export growth is also necessary to strengthen our somewhat vulnerable external finances. So why not reverse the policy neglect of exports?


Before we turn to policies, we have to deal with one misleading narrative, which argues: There is nothing much wrong with India’s trade policies; our export stagnation is all due to the stagnation in world trade after 2011. World export growth has indeed been sluggish since then. But we have sustained export growth higher than the world in both the periods noted above. Furthermore, unlike us, some other Asian countries have done rather well in recent years. The chart shows that between 2011 and 2018, India’s goods exports increased by only 8 per cent. In sharp contrast, Vietnam’s exports grew by 154 per cent, Cambodia’s by 114 per cent, Myanmar’s by 82 per cent, Bangladesh’s by 61 per cent, the Philippines’ by 40 per cent, and China’s by 31 per cent. Rapid export growth is all about increasing market share. Between 2011 and 2018, our share of world exports stagnated at 1.7 per cent, while Vietnam’s share more than doubled, Myanmar’s increased by 80 per cent, Bangladesh’s by more than 50 per cent, the Philippines’ by 27 per cent, and even giant China’s by over 20 per cent despite trade wars. China’s share of world exports increased by 2.4 percentage points over the seven years, which is 40 per cent more than India’s total share in 2018! 

So let us not blame world trade trends. With the right policies we can increase our share of world exports, to the benefit of growth in GDP, employment, MSME output and stronger external finances. Conversely, with the current inadequate policies, exports may continue to stagnate, with negative implications for overall economic growth, employment and external financial viability.


So what are some of the policy priorities for resurrecting our weak export performance? These include: Long-gestating policies such as better education and skilling of our abundant, low-paid labour force; building more and better infrastructure, which enhances connectivity and logistics performance and improves the availability of cheap and reliable energy; reform of land and labour laws, and revival of our embattled financial system. These will benefit overall economic productivity and performance and thus help build a competitive and productive economy.


Within the narrower domain of foreign trade policies with a short- and medium-term pay-off, our focus should be on those policies which have contributed significantly to export stagnation over the last seven years. Four are particularly important. First, the current over-valuation of our currency has to be corrected, since it is equivalent to taxing exports and subsidising imports. As the table shows, the real effective exchange rate of the rupee has been significantly higher in this decade, as measured by the Reserve Bank’s 36-country index. The reduction of this over-valuation will not only spur exports but could also help reverse the three-year-old lurch towards widespread, import tariff protection. We have to recognise that higher import duties not only encourage inefficient and high-cost domestic production but also discourage exports by making their inputs more costly whether from foreign or domestic sources. No country can sustain high export growth while resorting extensively to substantial import tariff protection. If we are serious about resuming robust export growth, we have to roll back the import duty hikes of recent years. And that will be easier against a background of declining currency over-valuation.


Third, we must understand that much of the world trade growth in the last two decades has been propelled by global (and regional) value chains (GVCs). It is no coincidence that most of the exemplars of rapid export growth depicted in the chart are also far better embedded in GVCs than India (for a good comparative analysis of GVCs in Asia, see Amita Batra’s, “India’s Exports and Factory Asia”, Business Standard, September 3, 2019). Furthermore, despite the finance minister’s commendation of GVCs in her July Budget speech, resort to pervasive and unpredictable import duties undermines successful participation in GVCs, which require nil or low import duties and easy, cross-border flows of goods. Our recent refusal to be a founding member of the Regional Comprehensive Economic Partnership (RCEP) will, over time, seriously hurt our trade and export prospects in the largest trading community in the most dynamic region of the world. If it is at all possible to still sign up, we should do so. Otherwise, time may prove our reluctance to be a historic error in trade policy.


Fourth, ever since the goods and services tax (GST) was implemented, there have been widespread and persistent complaints from exporters about incomplete and much-delayed receipt of input tax credits. These problems must be tackled on a war-footing through procedural reforms. The textbook rule of zero-rating exports in the GST system must be made to work in practice.


Higher export growth will help reverse the economic slowdown, create more jobs and strengthen our external finances.



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