Why in news?
At a recent ministerial meeting of the 16 members of the Regional Comprehensive Economic Cooperation (RCEP) in Beijing, the Indian industry showed a timid approach to free trade agreements.
India’s early post-independence development strategy was marked by export pessimism. It was more guided by the nationalistic approach of import substitution-led industrialization. Besides this, there was public-sector control of the commanding heights of the economy.
Consequences of such an approach:
Excessive catering to the industry by keeping wage goods cheap and import tariffs very high. This meant food prices were kept very low, hurting farmers. Their conditions were worsened by policies such as compulsory monopoly procurement and control on the movement of produce. High import tariffs on industrial goods shielded the domestic industry from competition, and there no pressure to innovate and be cost-efficient. One more consequence of this inward-looking strategy was the neglect of labor-intensive manufacturing.
Despite the success of the export-led growth of East Asian “tiger” economies, followed by China’s three-decade-long growth based on the advantage of low labour costs, India still does not seem to be leading to the dropping its age-old export pessimism.
So why this export pessimism?
Most of the objections to India’s signing up to RCEP stem from a fear of a flood of duty-free goods from the Association of Southeast Asian Nations or China. So Indian negotiators have been cautioned by industry to be very cautious, as it would hurt domestic producers.
The world is turning protectionist, global demand is sluggish, there are far too many non-tariff barriers, Indian firms face tough regulatory qualification requirements to enter foreign markets, and so on.
India’s share of global merchandise trade is less than 2% as against China’s 13%. Going from 2% to 4% is possible, even in a world driven by protectionist forces and a growth slowdown. It would call for a 100% jump in our exports, which is an important engine of domestic growth.
Export is all the more important because the other three engines cannot be fuel growth so easily.
- Consumption spending is constrained by an excessive burden of retail debt, the drying up of non-bank finance at the retail level, and high job anxiety among households.
- The second engine, government spending, faces fiscal constraints since our current sovereign borrowing already gobbles up most household financial savings.
- The third engine, industrial investments, is constrained by a variety of factors ranging from taxation, ease of doing business, risk aversion, lack of equity capital, low capacity utilization and uncertainty on-demand growth.
Poor export growth in the last five years?
- For more than five years since 2014, the cumulative growth in exports was nearly zero, at a time when the world economy grew 23%.
- In garment exports, India lost out not just in relative but also in absolute terms to Bangladesh and Vietnam.
- Meat and leather exports suffered, so did gems and jewellery.
- There were other factors like goods and services tax refunds and currency appreciation that hurt exports. For instance, the rupee has appreciated nearly 20% against the Chinese yuan in the past five years, partly explaining the deteriorating trade deficit, despite growth in trade.
How to reverse this export pessimism?
- First, focus on trade facilitation. Exporters still face an “inspector raj” at the border. The government must allow self-certification, with minimal and statistically sound sampling inspection, and severe penalties for breaches.
- Second, amend the anomalies that hinder the growth of export-oriented Special Economic Zones. For instance, due to our free trade agreement with Thailand, it makes more sense to produce in Thailand and sell duty-free in India, than produce in Aurangabad and face stiff duty barriers to sell in the domestic market.
- Third, embrace global value chains. The entire production process is made of small steps, each adding a small bit of value but generating large-scale employment. The small value addition should not deter us from allowing duty-free access to and participation in the entire chain. This may require modifying our stance on high-value addition and rules-of-origin in our free trade agreements.
- Fourth, vigorously promote agriculture and agro-based industrial exports. This is an overdue piece of deregulation.
The objective, ultimately, is to encourage, not thwart, India’s export optimism. One beneficial side effect is that competitive pressure will force domestic belt-tightening and reform. We are a large economy, and it’s time we behaved like one, especially in international trade, unafraid of engaging with canny trade partners.