By PRADEEP S MEHTA
India can scale up on the Ease of Doing Business metric only if States, along with the Centre, pull themselves up
India’s distorted factor markets, poor infrastructure and an overvalued currency have played a major role in this decline
Last year on this day, the government of India had released the new Foreign Trade Policy (FTP), 2015-20. It was, by no means, a Fools Day prank. It laid a foolproof plan to enhance India’s trade ecosystem and competitiveness.
The FTP was released amidst falling exports and imports, and with the objective of arresting, and ultimately reversing this trend. In 2013-14, India’s total export was worth $314 billion and it declined to $310 billion in 2014-15.
Similarly, in 2013-14, India’s total import was $450 billion and in 2014-15 it came down to $ 448 billion. In 2013-14, India’s trade deficit was 7.1 per cent of its gross domestic product. As a result of decline in both export and import, in 2014-15, it was reduced to 6.7 per cent of its GDP.
Unfortunately, the declining trend has continued in 2015-16 as well, and at a higher pace. In first nine months of 2015-16, India’s exports have fallen to $196.60 billion and its import was $295.81 billion. Some might argue that this is on account of decline in global trade, and claim that everything is just fine. Nothing could be farther from the truth.
According to the latest data released by the International Monetary Fund, the total volume of global trade has fallen by 0.5 per cent in the second half of 2015 and a similar trend is expected to prevail in 2016. For the last few years, the growth in global trade is less than that in global gross domestic product. Are we seeing the demise of trade-led growth?
Most importantly, the proportionate decline in India’s trade is much more than the global decline. Export of goods such as petroleum products, pearls, precious and semi-precious stones, drug formulation, gems and jewellery, readymade garments, rice, iron and steel has come down both in value and volume terms. Similarly, there is a fall in the value of import of petroleum due to a fall in global prices of that commodity.
Input market reforms
This is not to suggest that policymakers are oblivious to India’s declining trade performance. Both, Prime Minister Modi and trade minister Nirmala Sitharaman visited Brussels to participate in the 13th EU-India summit. Finance Minister Jaitley is currently in Australia for bilateral talks, which include a bilateral trade treaty. These visits are a serious indicator of India’s keenness to enhance its trade and investment profile.
However, such outward focused efforts are not enough. The FTP set out a multi-pronged approach to boost country’s trade ecosystem, which was not limited to outward measures, but laid equal emphasis on domestic reforms.
It is time that the government deals with structural issues, such as lack of reforms in input markets like those in land, labour, capital, logistics, which are hindering our producers to produce goods at competitive rates.
The FTP emphasised the need to build adequate export infrastructure. It recommended building of primary infrastructure in terms of better multi modal transportation for improved road connectivity to ports, rail heads, airports and inland waterways, faster throughput at ports and shorter dwell time, faster movement of rakes by railways and quicker air cargo movement with all the concomitant trade facilitation measures in place.
In addition, it recommends the creation of a supportive infrastructure for exports, including more laboratories for testing, more tool rooms and plant quarantine facilities, larger trade facilitation centres and land customs stations and enhanced cold storage facilities for pharmaceutical and perishable goods.
The FTP acknowledges that the movement of goods within the country, from one territory to another, is constrained by the laws, practices, regulations and taxation regimes of various states. It appeals for concerted action from relevant departments at the central and State government levels.
It laments the lack of inter-agency coordination and stakeholder participation in the administration of trade procedures and, as per our commitments under the WTO Trade Facilitation Agreement, recommends the creation of the National Committee for Trade Facilitation for this role.
Exchange rate management
One of the key stakeholders in the export ecosystem is the Reserve Bank of India (RBI). It appears that India’s exports are facing difficulties because of a relatively over-valued rupee as reflected in India’s real effective exchange rate. Our exports are becoming relatively dearer, while imports are getting relatively cheaper. The RBI should let rupee finds its bottom, and true value.
In a recent talk, RBI Governor Raghuram Rajan quipped, “While the RBI would not claim to know precisely what the equilibrium level of the exchange rate is at any given point in time, we intervene to moderate adjustment whenever we believe the movement is extreme, driven by sentiment, and likely to be reversed. Our intent is to prevent overshooting and undue volatility, rather than to stand in the way of the needed adjustment.”
While it seems to be driven by sound rationale, RBI needs to use its discretion, and think about adjusting the value of our currency with that of our competitors. This would inspire confidence amongst other stakeholders and facilitate aligning their strategy with that of the RBI.
Capacity building of the relevant stakeholders and institutions is of utmost importance in this regard, in order to fully realise the potential of various trade agreements and foreign trade policy measures.
Given the fall in world commodity prices, if we do not consider our exchange rate adjustment now, we will miss an opportunity to boost our exports. This is particularly true when our exports are supply-driven and not necessarily dependent on their demand in other countries.
Thus, there is a need to look within, focus on difficult input market reforms and introduce a more trade-focused, pragmatic approach in exchange rate management to ensure long-term gains for country’s trade competitiveness. Ignoring the warning signals on trade fronts and dismissing these suggestions would be akin to living in a fool’s paradise!