Reigniting India’s Export Potential  

As part of a stimuli package to revive the sagging Indian economy, Finance Minister Nirmala Sitharaman announced a slew of measures for the real estate and the export sectors over the last week.

For the last several quarters, these two drivers of the Indian economy have started to slow down. In fact, in a clear sign of just how steep this reversal has been, official data released for August 2019 indicated a 5.6 percent decline in the quantum of merchandise exports compared to the previous August.

Fortunately, the country’s import bill, deeply linked to global hydrocarbon prices, also came down on the back of reduced import of gold bullion and capital goods. This helped maintain the current account merchandise trade deficit at about $16 billion a month. However, the necessity for building up exports remains.

Furthermore, given the reality of sluggish domestic aggregate demand—arguably the single most significant factor in India’s growth rate slipping to 5 percent in Q1FY20, the lowest recorded pace in the last 20 quarters—it has become even more imperative to pull Indian exports out of the morass it has slid into.

How The New Government Package Would Work

In its first endeavor to rectify this, the Indian government has introduced a raft of measures; the more prominent of these being a new scheme for the remission of duties or taxes on export products (RoDTEP) aimed at offsetting the amount exporters pay as duties. It replaces a fairly similar scheme covering about 8,000 products called the MEIS introduced in 2015, as well as a separate program only for the export of textiles, ROSL. Though the extent of incentives aimed at zero-rating the exports have not yet been declared, the minister did indicate the new measures would be higher than the combined levels under the two previous schemes and would add up to a Rs 50,000 crore cost to the government. Importantly, the Finance Minister confirmed the move would also be WTO compliant, an important clarification given the Trump Administration had earlier questioned India’s export incentivisation measures.

Another assurance extended by the Indian authorities was the much-demanded electronic arrangement for effecting the automated refund of input tax credits to exporters.

Similarly, to address institutional working capital to exporters, government authorities have shown a willingness to pay another Rs 17,000 crore towards a higher insurance cover of up to 90 percent of working capital taken from commercial banks, up from the current 60 percent.

To augment exporters’ requirements of term credit, the Reserve Bank of India is also liberalising its priority sector lending regime to enable commercial banks to lend exporters between Rs 36,000-68,000 crore of additional funds. This bold move comes on the heels of a recent measure to increase interest subvention from 3 percent to 5 percent. With these changes, the Finance Minister indicated the dollar export credit interest rates could come down to a more competitive 4 percent, Rupee denominated to about 8 percent.

A number of related steps to facilitate greater exports were also announced on Sept. 14. Worth highlighting was the government’s effort towards the speedier movement of export merchandise and the reduction of logistics costs. Citing the current turnaround time for a ship at even an efficient Indian port, a target was set to bring the average turnaround time down to half a day across all Indian ports. This would be a number more in line with global norms, but still higher than the modern ports of Shanghai or Singapore. Similarly, further efforts are likely on reducing the cost of moving goods from factories to destinations.

The Next Steps

While these measures and undoubtedly a step in the right direction, much more needs to be done to get exports back to its historic trajectory – for almost a decade beginning 2004, exports rose at a secular 10 percent per annum. With a current account deficit of about $200 billion a year, India is highly vulnerable to movements in global crude supply, the moment they may be deliberately cut by major producers or disrupted unexpectedly as happened over the weekend with the Houthi drone attack on facilities in Saudi Arabia.

The revival of trade, especially exports, will undoubtedly be challenging with a looming global slowdown on the horizon, and continued U.S.-China trade war fears.

However, the strategy for India has to be to find niche products and markets, and to act with speed and nimbleness to cash in on limited opportunities when they arise.

• Vietnam, for instance, has adeptly got itself plugged into the gaps which emerged in the global supply chain with the tariff war between the U.S. and China.
• In the case of textiles, especially apparels, Bangladesh has started filling the recent void in several U.S. stores created by duties imposed on imports from China.

India could also be competitive in a host of labour-intensive products and services, especially apparel, leather products, gems and jewellery, pharmaceuticals, automobiles, and auto components. These industries must be prioritised and get the government’s support and assistance.

Rather than targeting all exports across over three dozen countries, authorities should graduate to bigger moves in specific markets and countries.

The urgently-needed economic recovery in India warrants that the otherwise domestic-demand driven country quickly begin focusing on its export potential. The consequence of any tardiness on the economy could be grave and put at risk the huge informal sector, which reportedly employs 90 percent of the workforce. The capacity of most daily wagers to sustain prolonged unemployment is highly limited, and keeping them on a job must remain a national priority.

Ajay Dua is Former Secretary, Department of Industrial Policy & Promotion, Ministry of Commerce and Industry.

The views expressed here are those of the author, and do not necessarily represent the views of BloombergQuint or its Editorial team.