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Rising up to the challenge of declining rate of exports

Rising up to the challenge of declining rate of exports

By Ishita Misra

The rate of exports in the GDP, calculated on current prices, stood at 18.2 percent for the first quarter of the current financial year. In comparison to the rate in the corresponding quarter of the financial year 2016-17, the present rate dropped by 1.1 percent. Addressing the issue of declining rate of exports, the incumbent Commerce and Industry Minister, Suresh Prabhu, termed the current scenario for exports as challenging and said that the export to GDP ratio needs to rise significantly.

Need for increasing exports

The GDP plunged to a three-year low of 5.7 percent in the April- June quarter of FY17. The Commerce and Industry Minister mentioned that exports have a great ability to generate economic activity and thus, priority needs to be given to substantially increase the export to GDP ratio. Exports contributed to only 0.4 percentage of GDP growth in 2016-17, signalling that tremendous scope exists to improve the situation of exports and thereby, increase the growth of GDP.

India’s share of exports in world trade has been stuck at the existing 1.7 percent since 2011. In order to reach a ‘respectable’ share of five percent in world trade, India’s exports need to grow at an annual rate of 26.5 percent for the next five years according to the second volume of the Economic Survey for 2016-17.  The Economic Survey also stated that the rate of exports can be achieved only through reforms in trade policy by diversifying exports, restructuring tariffs and developing export infrastructure. Considering that India’s exports grew only 4.7 percent after two years of continuous decline, reforms in the trade policy are urgently needed to increase exports.

GST related setbacks

The new tax regime has had a major impact on exports. Exporters were allowed duty-free import of goods that are used for manufacturing export products under the old tax regime. However, now they have to pay the duty upfront and apply for refunds later. President of exporters body FIEO, Ganesh Kumar Gupta, said that the interest on delayed payment is received in effect only after 60 days, which often leaves companies without enough working capital and slows down production. Exporters have already requested the ministry to change the norms under GST so that they are not left without crucial working capital and that production can take place at a faster rate. Therefore, the minister said that resolving the problems faced by exporters regarding the new tax regime is at the top of his agenda.

Policy interventions: Agriculture and industry

In a year of good harvest, prices fall drastically for agricultural products as domestic markets cannot absorb the entire surplus of production. In such situations, increasing exports of agricultural products can provide a boost for the economy as it not only increases GDP through an increase in exports but also leads to higher rural incomes and the consequent increase in domestic consumption. Noting the paradox of prices crashing drastically in a year of good harvest, the minister said that a pre-planned policy on strategic exports of extra agricultural produce would be extremely beneficial for the economy. Hence, giving shape to an idea being contemplated in the ministry for quite some time. He added that he has directed officials to start working on a policy focused on agricultural exports.

Even though India’s merchandise exports have risen for the 11th straight month in July, the rate of growth has been steadily falling. Observing the decline in growth rate, the minister emphasised on the need for India’s exports to find a firm footing in the global supply chain. In order to increase exports, the minister also mentioned that the government is working towards bringing out a revamped manufacturing policy. He said that more detailed district-wise plans for industrial revival should be put in place rather than state-wise plans. However, senior government officials said that global trade has been growing very slowly and thus, cannot support a sudden change in export volumes across products.

Underutilisation of resources

Even though the minister said that the ministry is attempting to revive export in the shortest possible time, senior Commerce Department officials have dismissed the possibility of increasing incentives or adding products to the already extensive list of items covered by support programs. In such a scenario, export revival can take place through more efficient usage of underutilised resources. The minister had said that underutilisation of resources in the manufacturing sector is leading to production levels that fall below the existing capacity and is thus, partly responsible for this slow growth of exports. He added that these dormant capacities can be used to boost the growth of exports.

A prominent example of underutilised resources is the cheap labour and young population available in India. Approximately half of India’s population is under the age of 26. While many Asian countries are ageing, India is forecasted to be the youngest country in the world by 2020 with a median age of 29. A growing workforce not only increases domestic consumption but also drives down labour costs, making the country attractive to investors. With approximately 250 million people set to join the Indian workforce by 2030, India can be the site of numerous new business ventures.

Unfortunately, India ranks near the bottom of the list of countries ranked according to the ease of doing business in the country. India has well-documented problems with regulatory requirements, bureaucracy and infrastructures, problems that have not been successfully tackled even after central government initiatives have been implemented. If these problems are mitigated and new business ventures are started in India, the large workforce can be successfully used to increase the export rate of the country and uplift the economy.

Featured Image Source: Visual Hunt

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