The last nine months have seen India’s merchandise shipments contract by 5 per cent, 12 per cent, 14 per cent, 21 per cent, 15 per cent, 20 per cent, 16 per cent, 10.3 per cent and 20.7 per cent, consecutively. Most analysts give three explanations for this: the adverse effect of a fall in crude prices, the competitive devaluation of competing economies’ currencies against the dollar and the slower growth of world trade.
The fall in crude prices have affected the dollar earnings from export of refined petroleum products such as diesel and petrol. The slower growth of world trade is an irrefutable reality that is bound to affect India’s exports.
Manufacturing concernsHowever, India’s merchandise exports have been hovering around $300 billion for over four years now. That is not fully explained by low crude prices, which became a feature only after mid-2014.
Nor does slowing global trade fully account for this slide, given India’s modest export share at 1.7 per cent. Similarly, India’s top competitor in its key exports such as steel, chemicals and textiles is China, and the yuan has fallen just 3 per cent against the dollar (compared to the rupee by 10 per cent) since July 1, 2014.
The roots of India’s declining exports are deeper. There are no short term fixes, such as letting the rupee depreciate against the dollar, simply because India’s export basket is no longer as price elastic as it used to be. Hence, much greater currency depreciation would be needed to give any real push to India’s exports.
Yet it may not work as each country is trying currency devaluation to capture an increasing share of sluggish global demand. One can’t do much about subdued crude prices, which are likely to continue in the near future. Then, what’s holding up India’s exports?
Despite all attempts at diversification, India’s merchandise export has a narrow base with the top 20 categories accounting for 78 per cent of the total. Even under top export categories, such as textile, India is exporting low value commodities such as cotton yarn or apparel rather than technical textiles. India’s manufacturing exports are fast losing price competiveness primarily because of poor logistics infrastructure compounded by a poorer trade facilitation regime. India’s over-dependence on road freight means that logistics cost as a percentage of GDP remains as high as 13-14 per cent compared to 7-8 per cent in developed countries. .
Most of India’s preferential trade agreements (PTAs) are shallow in terms of product coverage. For example, India-Mercosur PTA doesn’t include textile and apparel items that face prohibitive import duties, going up to 35 per cent.
Poorly conceived FTAsIndia’s pharmaceutical exports have not benefited from tariff reduction under India-Japan CEPA mainly because it’s too cumbersome to deal with the Japanese drug regulator. Japan allows duty free import of apparels from India only if all the raw materials used are of either Indian or Japanese origin with an exception of 7 per cent content by weight that can be sourced from third countries. No surprise then, that the utilisation of India’s PTAs for export promotion remains very low.
Strangely, India itself has not imposed any sourcing restrictions even for sensitive items like textiles while granting unilateral duty free market access to countries like Bangladesh.
India’s ill-conceived trade pacts have also resulted in inverted duty structure that discourage production and export of value added items.
Fixing its trade regime should be the top priority for the government. India is also going slow on trade pacts that could be immensely beneficial.
Vietnam has concluded an FTA with the largely untapped Eurasian Customs Union comprising Russia, Belarus and Kazakhstan while India’s negotiation is moving at its own pace. Worse, India recently called off the trade talks with EU.
The recently concluded, Transpacific Partnership (TPP) which India did not really try to join could be damaging for its exports. A tighter IPR regime may adversely affect India’s export of generic medicines to the TPP countries, the US in particular. TPP will create direct tariff disadvantage for India’s apparel exporters (vis-à-vis Vietnam) who operate on as low as a 6 per cent margin.
TPP may lead to investment moving out of India to TPP countries, and hurt India’s future exports.
Reviving India’s exports call for a well thought out trade strategy. Any takers?
The writer is a former government official and currently a corporate economic advisor based in Mumbai. The views are personal