By Geethanjali Nataraj and Mridul Mohan*
In the face of the continuous slowdown and negative growth of exports, the government launched the New Foreign Trade Policy of India, 2015, in late August with the aim of achieving the exports target of $900 billion and 3.5% share in world exports over the next five years. So far, India’s exports figure stood $312.6 billion, that is just 1.8% share in world exports. The continuing slowdown in exports in the last 10 months has been a major cause for concern for the government which wants to achieve a growth rate of 7.5% to 8% this fiscal. In fact, the growth rate fell to 7% in the April-June quarter of 2015 from 7.5% in the same quarter last year. A debilitated monsoon, limp in global demand, not being a part of key regional trading agreements for market access, and stonewalled policy action on structural reforms such as overhauled taxation system, trade facilitation and lag in policy implementation have been taking the steam out of India’s exports which comprise 25% share in GDP.
Decline in exports
In spite of Prime Minister Modi’s ‘Make in India’ initiative to boost manufacturing, Indian exports, particularly merchandised exports, haven’t picked up. As per the Ministry of Commerce, India’s exports nosedived by 16.17% between April to August, 2015, compared to the same period in 2014. The slowdown of exports is progressive as year-on-year exports growth in August, 2015 witnessed the steepest decline, falling by almost 21%. There has been a fall in exports of 23 key sectors including leather and leather goods, Iron ore, and electronic goods. But the hardest hit exports have been petroleum and engineering exports, the top two exports items, which saw a 47.9 % and 30% decline respectively. Though imports also witnessed negative growth of 11.61% between April to August, 2015, the steep fall in exports resulted in an increase in the trade deficit in recent months. There are estimates that fall in exports is likely to reduce the GDP by 2%.
Reasons for decline
Prime reasons for the India’s exports contraction are slowdown of demand in global markets and moderation in commodity prices. India’s main export markets, mainly the US, China, the Euro area, Singapore and Japan are still going through either a slow revival or a slowdown in GDP growth. Prices have tanked lacking demand and the negative impact is being felt through decline in the value of exports, particularly in top exports like petroleum products, gems and jewellery, textiles, iron ore etc. Looming above all is an uncertain economic outlook due to last year’s stock market crash in China, Greek crisis, Middle East unrest etc.
Though the price of crude oil, the most important input for India’s manufacturing and merchandise exports, has fallen substantially reaching $48 a barrel till date, it has not helped the merchandise exports, particularly petroleum and lubricants which make up 20% of India’s total exports. This is mainly due to weak global demand and inability of the Indian firms to use the low international commodity prices to their advantage. Further, not being a part of the global value chains has also affected Indian firms which have been unable to take advantage of the low commodity prices. To add to the exporters woes is the appreciation in the value of rupee against the dollar in real terms over recent years when India’s peers like China, Brazil and Russia have either devalued or allowed big depreciation of their respective currencies for price competitiveness of their exports that has affected India’s exports. For instance, Brazlian and Russian currencies have depreciated by nearly 30% and 25% respectively last year.
Time to push reforms
Apart from external factors, the domestic factors remain problematic starting from infrastructure to stalled policy changes relating to domestic taxation systems that have not helped India’s merchandise exports. Infrastructure, particularly trade logistics, continues to be a major bottleneck affecting India’s exports as reported by the CAG report, 2015, tabled in the parliament. Infact CAG brings out that exports vessels need two to three days on water to get allotment berth resulting in higher trade and transaction costs. The delay and time consuming process for registering, clearance and customs adds to the costs. There is always a lag in policy announcement with respect to trade policy and its implementation causing confusion among different stakeholders. On the top of this, incidents like the eight day strike in August at the Gateways Terminal of India in Mumbai’s Jawaharlal Nehru Port, which accounts for 60% of all container cargo moving through India’s 12 major public ports, also contributed to slowdown in India’s exports. It’s not only exports but the goal of inclusive growth and 9% GDP depends on infrastructure development, which makes productive use of man and materials. The government must revisit the issues of budgetary allocation, tariff policy, fiscal incentives, private sector participation and public-private partnerships with intense resolve. Apart from improving connectivity through expansion of roads and ports, tackling electricity shortages, rationalizing labour laws and bringing in elasticity to factor markets will certainly provide a boost to India’s export sector. In addition, rolling out of GST quickly will certainly boost exports as domestic manufactures will be able to take advantage of not only lowering cost but harrowing tax complications.
Needs pro-active steps
Apart from existing domestic factors, the government needs to take proactive and sustained efforts to help India’s export sector growth. In fact, the Federation of Indian Exports Organization (FIEO) has requested the Government to declare exports as a priority sector and also restore interest subvention scheme to exporters to arrest the fall in exports. For India to become a part of the global value chains, a better intellectual property regime is needed. Further, India needs to take measures to be a part of the mega regionals which are going to shape the future of global trade architecture such as TPP (Trans pacific partnership) and RCEP (regional comprehensive economic partnership agreement being led by ASEAN). Being a part of these mega regionals will go a long way in not only helping India to become a part of the regional and global value chains but also boost Indian exports significantly.
One way to be part of global value chain is attracting export oriented FDI on which government is taking steps, but the success depends on improving ease of doing business. Government also should try to conclude a few FTAs such the India-EU FTA, which has been on the anvil for a long time. These agreements would also give a major boost to India’s textile exports. However, at the same time, it is high time that government, particularly ministry of Commerce, do their homework properly before signing any FTA or comprehensive agreements. India has had unfavourable trade with trading partners, with whom it has signed trade agreements, during post-agreement period, particularly with big economies in Asia like Korea and Japan. In recent months, exports contraction is mainly because India finds it difficult to penetrate in Asian markets such as China, Korea, Japan and Indonesia. So it is time to negotiate with these countries for market access and, address tariff and most importantly non-tariff barriers that Indian exports are facing in these countries.
*Dr. Geethanjali Nataraj is a Senior Fellow and Mridul Mohan a Research Intern at Observer Research Foundation, Delhi