It’s Crash Intervention Time for Suresh Prabhu

The Wire, September 18, 2017

By Pradeep S Mehta and Bipul Chatterjee

India aims to double the value of exports to $900 billion by 2019. Given sluggish global demand and our own export slump, there is no way that this objective can be achieved.

India’s newly appointed commerce and industry minister, Suresh Prabhu, has his task cut out.

While he has little time to firm-up India’s positions in various bilateral, regional and multilateral negotiations such as the Regional Comprehensive Economic Partnership, the forthcoming Buenos Aires Ministerial Conference of the World Trade Organisation members is his biggest challenge is to revive our exports and associated sectors for large-scale job creation.

Upon assuming office, Prabhu adroitly said: “… [e]xports to GDP ratio has to rise … So we are at a crash intervention sort of a thing. We are trying to work out what has to be done to promote exports in a shortest possible time which includes issues coming up because of the Goods and Services Tax”.

He is right, as no country in the world has experienced healthy growth over a sustained period of time without at least a 12% to 15% annual increase in exports.

Therefore, the ‘Foreign Trade Policy of India’ and the ‘Industrial Policy’, which are expected to be unveiled soon, should complement each other and should have specific measures to revive our exports for employment generation.

In this context, Prabhu has rightly said that “Global supply chains are now become a reality. India is part of that in auto components and generic formulations. You cannot join the global value chains unless your own technology, manufacturing ability is up to that level in other sectors”. He also emphasised on an agriculture export policy to integrate Indian farmers into the global supply chains and raise their incomes.

Three immediate steps

One of the objectives of our ‘Foreign Trade Policy’ is to double the value of India’s exports to $900 billion by 2019-20. Between 2014-15 and 2016-17, our exports have declined from $468 billion to $437 billion. While it is expected to increase to about $500 billion this year, given the sluggishness of global demand and challenges in our own export competitiveness, there is no way that over the next couple of years this objective can be achieved.

However, some specific immediate actions can be taken over the next six months or so to boost our exports. First, there should be correct valuation of the Indian rupee. Our currency is becoming stronger due to various monetary policy developments, domestic as well as international. As Indian inflation is more structural in nature, there is not much threat to it from correcting the value of our currency.

While some of our imports will become costlier, given the fact that a majority of our producers are mostly sourcing their inputs domestically, this policy measure will certainly help our exporters to gain some relative competitiveness.

Secondly, in the Foreign Trade Policy as well as in Industrial Policy, there should be specific measures to boost export-oriented foreign direct investment. Policies towards special economic zones and export-oriented units should be revived and modernised. Other than attracting new technologies to make our exports more competitive and helping our companies to get into global value chains, this can create large-scale employment opportunities.

Thirdly, there should be a special section on agriculture exports, including processed food, in our Foreign Trade Policy. From a high of more than $40 billion couple of years ago, our agricultural exports have declined to just above $20 bilion. Given the richness of our agro-climatic conditions and with the right kind of flanking policies in place such as a benefit sharing mechanism between farmer-producers and manufacturers/exporters, this sector can contribute hugely to our export basket and also create new jobs in our rural areas.

Short-term measures

Over the next two years, there should be at least two measures to boost our exports. First, in our Foreign Trade Policy, the’ Focused Market and Focused Product’ initiatives are to be revived. Instead of providing direct incentives/subsidies as in the existing Merchandise Exports from India Scheme (MEIS) and Services Exports from India Scheme (SEIS), there should be support to some specific sectors to consolidate their existing markets and explore new ones. As against subsidies, they should be helped with action research for market developments as well as R&D support to adhere to increasingly higher level of sanitary/phyto-sanitary and technical standards in international markets.

This is because of India’s commitments to the WTO that once it crosses the per capita annual income threshold of $1,000 and sustains it for three consecutive years, it will stop providing export incentives such as duty drawback. It is a reality now and in near future many support measures under MEIS as well as SEIS can be challenged as WTO disputes. Secondly, for enhancing our trade competitiveness, more specific logistic support measures are to be implemented at the border as well as behind-the-border so as to reduce the transaction costs of doing trade. For this purpose, there should be alignment between trade policy measures and those in the transport and logistics sector.

Medium-term agenda

For our exports to sustain double digit growth and for our companies to penetrate into global value chains, we have to realise that trade is a two-way street. This should be the paradigm shift in our thinking about trade. We have to get out of the mindset of “exports are good, imports are bad”.

The main reason why we fear imports is that we are not competitive enough. While it is easy to blame the so-called manipulative practices of some of our competitors, the onus of becoming competitive lies on us. In today’s India, the input costs of production are relatively high than most of our competitors. We are able to do some exports mainly because of various incentives/subsidies and the network that our exporters have developed over time.

There is not much effort on the part of our producers, particularly those in micro, small and medium enterprises, to become more competitive through innovations and concomitant higher productivity gains. In most cases, due to rigidities in our input markets, they are not interested in investing their resources to innovate.

Therefore, over the next five to ten years, we should take country-wide consolidated measures to reform our input markets in a manner that they are beneficial to all concerned stakeholders. Given the political system and accompanying political economy of India, it is easier said than done.

However, examples of arriving at broad political consensus on matters of national interest are there. As against taking ad-hoc measures to score brownie points, the country as a whole should take a research-based approach to reform our input markets so that we become dynamically competitive. It is possible to implement this agenda as a positive-sum outcome.

Pradeep S. Mehta and Bipul Chatterjee are secretary general and executive director of CUTS International, a global think-tank on trade, regulations and governance.

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