Export Growth Target Of 10% A Year Achievable, Says Government Committee
Indian exports can grow at close to 10 percent annually, allowing for a doubling of the quantum of outbound shipments every seven years, said a government-appointed committee looking into the country’s export competitiveness.
Achieving that level of export growth consistently, though, will require a range of steps which help improve the elasticity of India’s exports relative to global export growth. The steps range from introducing long-suggested labour reforms, reducing the corporate tax rate and bringing down the cost of capital, the committee said.
India’s exports have remained stagnant for several years now. Export growth has come under further pressure as global growth moderates. The committee acknowledged that not only has India’s export performance stagnated, it has deteriorated relative to the rest of the world.
How has this happened? Most likely, because the world has become a lot more competitive and inherited comparative advantage is no longer in the nature of low-hanging fruit. Countries around the world have recognized this reality and have engaged in lowering taxes and regulatory controls. India has been slow to adapt.High Level Advisory Group On Exports
Exchange Rate Not To Blame...
The committee acknowledged that a perceived overvaluation of the exchange rate — often blamed for weak export performance — has not played a significant role.
The study showed that:
- India’s real exchange rate index (as compiled by the Bank of International Settlements) between 2003-12 was 97.1. Between 2012-17 it averaged 97.8. Despite this, India’s export has been muted.
- On a real exchange rate basis, the Indian rupee is one of the most competitive currencies in a sample of 60 countries.
- In contrast, countries that have really performed well (Bangladesh and Vietnam) have seen a large increase (over 30 percent) in their real exchange rate.
- China (28 percent), Philippines (21 percent) and Thailand (10 percent) have also seen significant exchange rate appreciation but have still seen strong export growth.
But Cost Of Capital & Taxes May Be...
While the exchange rate has not hurt India’s export competitiveness, the cost of capital and high level of corporate taxes have had a negative impact.
The study showed that over the last five years, the real repo rate has averaged over 2-3 percent per annum. This is an increase in real rates of over 3-4 percentage points over the high export growth period.
In contrast, India’s competitors in the export market had a median real rate of around 0.8 percent per annum within emerging economies and even lower for advanced economies.
The real policy rate today (and the last several years) is the highest ever observed in India, and the highest in our sample of 60 countries.High Level Advisory Group On Exports
Corporate taxation and, hence, retained earnings, for Indian exporters also put them at a disadvantage, said the report.
“Among twenty large emerging economies, India was ranked as the fourth highest payer of corporate taxes. Retained earnings (after payment of wages and taxes) were 44 percent of income in India, compared to a retention rate of 62 percent for Vietnam and 66 percent for Bangladesh,” the report said.
According to the report, in 2017-18, the effective corporate tax rate in India was around 25 percent. The government has since cut the corporate tax rate while withdrawing exemptions for those who choose to move to the lower rate.
...And Restrictive Labour Laws Certainly Hurt
The committee added that a very likely determinant of slow export growth is India’s labour laws, which hinder expansion in firm size. “Making labour laws more flexible would enable firms, particularly in labour intensive sectors, to scale up,”
So What’s Can India Do To Push Up Export Growth?
The report goes on to recommend a set of broad priorities, policy initiatives and sector-specific measures to help achieve double-digit export growth in a sustainable way.
Some of these recommendations include:
Using FTAs Strategically
- The group recognised that there is considerable ground for India to improve business with neighbouring countries. Recent initiatives to improve hard and soft connectivity in South Asia and continued investment, especially in trans-border infrastructure, will yield handsome short and long term benefits.
- Reconcile the strategic imperatives of FTA membership with the interests of domestic industry that are often disadvantaged by its onerous circumstances. The immediate challenge is the Regional Comprehensive Economic Partnership (RCEP), but other negotiations await in the near future.
- Constant review of FTAs in operation is also required to introduce correctives. Lock-in of favorable situations by the other party should be strongly discouraged.
Systematic Use Of The WTO
- The group further emphasised on the need for a wider systemic approach for India to use the World Trade Organisation for improving its trade prospects and competitiveness.
- It recognised the need to raise specific trade concerns on trade policies of other countries and to remove existing trade restraints faced by India’s exports in WTO Committees.
Focus On Agriculture Exports
- The committee said that there is a need to revive agricultural exports. It recommended the dismantling of Agriculture Produce Market Committees. This domestic policy change must be accompanied by predictability and stability in policies regarding import and export of agricultural products.
- Recognise the changing structure of agricultural exports, and the urgent need to adjust to the relative scarcity of water and the exigencies of climate change.
- Horticulture and fruits and vegetables can become major export items. This will involve, on a priority basis, the provision of appropriate grading and sorting facilities, warehousing, refrigeration and transportation.
Sector-Specific Recommendations For Merchandise Exports
- Pharmaceuticals: Restructure the regulatory mechanism for the pharmaceutical industry by creating a central FDA-like institution; become a member of Pharmaceutical Inspection Convention.
- Textiles: Enhance scale across the textiles and clothing value chain and promote consolidation of firms. The government should introduce a limited-period investment allowance across the value chain. Focus efforts to attract top 10 global textiles and clothing companies (including those from China) to set up large-scale plants in India.
- Electronics: Shift from a tariff-based policy to an incentive-based policy for manufacturing of electronics. Provide incentives based on certain specified criteria such as technology, investment commitment, manufacturing capacity, employment generation, value addition, etc.
Diversify Services Exports Beyond IT
- India must consider significantly simplifying the process of applying for a medical visa, if it is to realise its potential as an Medical Value Travel hub.
- Accord infrastructure status to tourism infrastructure and amend tax rates.
- Education services hold immense potential, provided the gGovernment is able to address the critical issue of quality and improving regulatory transparency.
Strengthen Exim Bank
- Strengthen, recapitalise Exim Bank of India to cope with the increasing needs of Indian exporters and support India’s stagnant exports.
Introduce Elephant Bonds
- There is a gap in the market for specialised security product the proceeds of which will only be applied towards addressing the infrastructure requirements.
- Government may introduce a one-time disclosure scheme for declaring undisclosed foreign income and assets and pay tax on such undisclosed income / asset at the rate of 15 percent.
- The scheme should also provide for locking 40 percent of the funds in Elephant Bonds with a coupon rate of 5 percent. A 5 percent interest rate, earned from these bonds, would be credited to the depositor at the end of 20 years.