PLUSES & MINUSES. Exports need more than a lower rupee

For more than a year, India’s exports have been falling steadily and in the current financial year the total value of our exports is expected to be $270 billion, far below than the $310.5 billion in the last fiscal. Thus our current target of doubling exports by 2019-20 will be missed.

This fall in exports is despite the fact that in 2015 global exports grew by 2.5 per cent over the previous year. Therefore, fall in demand in markets of our interest only partially explains this fall. No single measure, such as exchange rate adjustment, will reverse this trend.

We need to implement a three-pronged strategy. This entails: providing short-term incentives for restoring our exports to traditional markets, medium-term measures to improve our competitiveness and explore new markets, and long-term convergence of trade policy and domestic reform measures, to penetrate into global value chains.

While some experts say we should do away with incentives and provide improved infrastructure to our exports, incentives do matter in the short run. Because, almost 60 per cent of our exporters are micro, small and medium-sized, and trade incentives are a critical part of their bottom line.

What kind of incentives are to be provided to them? While in the current trade policy various incentives are clubbed together under one scheme, which is good for their operations, many of our exporters are unaware of how to avail them. This is particularly true for exporters from the MSME sector who are located in small towns. Most of them feel that accessing incentives for exports is not cost-effective.

We need to provide sector-specific incentives, targeting MSME exporters and their clusters in particular. This will help restore their confidence in the system and will provide them the much needed boost to secure their traditional markets.

During the remaining part of this fiscal and in the next fiscal, the government should work with export promotion bodies and States to reach out to clusters for making export promotion schemes more effective and targeted to traditional markets.

According to the latest estimate of the World Economic Forum’s Global Competitiveness Report 2015-16, ending five years of decline India jumped 16 places to the 55th position.

While this is laudable, many of our competitors in Asia-Pacific such as China, Malaysia, Thailand, Philippines are doing much better. India is experiencing tough competition from Asean countries in our traditional markets. This is expected to intensify as all of them are in the top half of the Global Competitiveness Index.

Despite this improvement in competitiveness index, as compared to our rivals, our real effective exchange rate is still high and that is why we are getting bottomed-out at the consumer end. We need to improve our competitiveness by creating world class trade-related infrastructure at our borders and behind-the-borders, and by reducing information asymmetry at the users’ end.

While our companies are investing to improve their productivity, they are faced with high cost of capital and other inputs and high transaction costs of getting goods from factory to port. Domestic reforms are needed in all input markets to reduce this cost. The government has to work in tandem with States and incentivise them to create world-class infrastructure in trade corridors and ports to reduce business transaction costs.

Coupled with this, India should explore new markets through free trade agreements. Other than quickly concluding our current FTA negotiations with Australia, Canada, European Union, European Free Trade Area and the Regional Comprehensive Economic Partnership of Asia and the Pacific, we should immediately start negotiations with the Eurasian Economic Community, the regional economic communities in Africa such as the East African Community, and the Pacific Alliance and conclude them quickly over the next two to three years.

The trouble is that we continue to negotiate for ever, without an end date in mind.

Our exports to these markets are far below potential. India is in a position to negotiate asymmetrical agreements with many of these groups as there are complementarities between their demands and our supplies. In the medium-term, this policy will help Indian exporters improve their competitiveness through business certainty.

According to the latest data released by the World Trade Organisation and the OECD, in 2011, India’s backward participation in global value chains was 24 per cent, while forward participation was 19.1 per cent.

This means that as compared to domestic content there is greater use of foreign content in India’s export. At a sectoral level, India’s manufactured exports contain more foreign value content while the share of domestic value content is higher in services.

In future, global value chains will get more and more aligned with harmonisation of standards and other regulations determining trade. It is expected that the standards of regulations as in the US-led Trans-Pacific Partnership and the Transatlantic Trade & Investment Partnership will set the benchmark, which will gradually creep into the WTO. India should take all necessary domestic reform measures over the next five to ten years to improve its standards and other regulations to the level set by these mega regional agreements.

Moreover, India should make full use of the “produced exclusively” rules of origin criteria as proposed in the RCEP negotiation.

This will help Indian companies to create linkages with the value chains developed by Asean countries and other major players in Asia-Pacific such as Australia, China, Japan and South Korea.

In sum, along with an effective exchange rate management policy, all these measures will help India in developing a transformative trade policy and will help us balancing our negotiating strength with our share in global exports. We should not treat trade as a residual activity but consider it as a key to our future growth. If we cannot do it over the next 10 years, we will miss the bus again as we did in 1970s.

The writer is the secretary general of CUTS International. With inputs from Bipul Chatterjee