By Ritika Chauhan
The mid-term review of the five-year Foreign Trade Policy 2015-20 was released this week, and the government has announced several incentives that bring a massive relief to exporters. This was done keeping in view the decline of exports from $468 billion in 2014-15 to $437 billion in 2016-17.
A line of incentives
An incentive of Rs 8450 crores ($1.3 billion) was announced to help the export sector reach the goal worth of $900 billion by 2020 and increase Indias share in global exports to 3.5 percent. Labour-intensive industries such as leather and footwear have been granted incentives amounting to Rs 749 crores, the handmade carpets sector Rs 971 crores, agriculture sector Rs 1354 crores, the telecom and electronics sector Rs. 369 crores, garment sector Rs 2743 crores, marine products Rs 759 crores, medical equipment Rs 193 crores, and so on.
Further, a new logistics division has been established in the department of commerce to coordinate development in the logistics space. The incentives also include simplified paperwork, enhanced support to high employment sectors, duty-free procurement of inputs on a self-assessment basis, and other sector-specific incentives. The government has also announced additional steps to make processes relating to trade more straightforward, including a self-certification scheme for duty-free imports, a single point electronic contact to traders with the Directorate General of Foreign Trade for trade and consignment related queries, etc.
Global trends
Although a healthy 25.67% export growth was reported in September, the growth rate turned negative in October with a drop of 1.12%. Sector-wise, it was found that since September, there has been a 39% decline in the export growth of garments, 25% decline in export growth of gems and jewellery and 10% decline in export growth of leather and leather products.
The decrease in Indian exports is worrisome mainly because it comes at a time when foreign trade is booming globally. As per recent data released by WTO, global trade is likely to increase by 3.6% in 2017 from 1.3% growth in 2016. This favourable rise can be attributed to the surge in import demand of North America. It is surprising that the Indian export growth is declining in the months leading up to Christmas and New Year which is in contrast with the export growth of other Asian countries like Bangladesh, Vietnam and China.
Reasons for the deviation in India
The conditions in the global market seem favourable for growth whereas it is primarily the domestic factors here in India that have caused the decline; factors that go beyond the foreign trade policies. One of the primary agents responsible is the uncertainty regarding GST and the process of receiving refunds by the exporter.
Garment exporters believe that the competitiveness of their goods is affected by an increase in the requirement of working capital and a decrease in incentives for this purpose. Exporters from other industries also agree that they are getting a fierce competition from countries such as Bangladesh, Sri Lanka and Vietnam. The cost disadvantage to India also includes the duty-free access to the European countries enjoyed by the countries mentioned above. Some experts also argue that the value of the rupee has become strong and this has reduced its competitiveness in the global market. They suggest that the value of rupee should be depreciated to counter the fall in export growth.
The necessity of export growth
No matter how many incentives the government announces, there is no doubt that the Indian economy faces the challenge of ensuring a healthy long-term export growth. Exports are an essential building block of any economy. While they facilitate the growth of a country, they also aid in creating employment. Exports have played a vital role in the transformation of world economies such as China and South Korea.
The Indian export growth has not even crossed ten percent since 2011. As per data provided by the World Bank, no country has ever been able to sustain an overall growth rate of seven percent while having an export growth rate less than 15 percent. Therefore, this proves to be evidence for deeper fundamental issues within the Indian export sector. It is time for the policymakers to realise that quick-fix solutions such as cost incentives are no longer adequate for supporting the export growth in the long run.
The way forward
A plausible solution can be to distinguish those sectors in which India has a competitive advantage, and improve them in terms of market research, innovation, quality, cost, etc. Data reveals that investments in R&D and human capital have been low this year. Some other critical areas of focus include poor infrastructure, inadequate logistics and other structural issues. Transport and logistics costs, found to be costlier than tariffs, pose another barrier. Even though the Modi government claims that there has been a simplification of procedures and steps, the exporters state otherwise. It is also being discussed that Indias foreign trade relations are somewhat complicated and inefficient. While the countrys top exports face tariff as well as non-tariff barriers, there will always be a threat to the competitiveness of our exports.
In spite of issues in the Indian export sector, experts believe that this is a very suitable time to bring about structural reforms because China is losing its position as the worlds manufacturing hub. Appropriate steps should be taken before any further damage to the competitiveness of our exports takes place.
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