Get real with targets – on foreign trade policy

Source: The post is based on the article “Get real with targets” published in Business Standard on 26^th April 2023.

Syllabus: GS 3 – Economy – Industrial Policy

Relevance: concerns associated with the foreign trade policy 2023.

News: The government announced a new foreign trade policy last month.

What are the concerns with the new foreign trade policy?

The new policy has set a target of achieving exports of goods and services worth $2 trillion by 2030.

Therefore, in order to meet the target of $2 trillion by 2030, a compound annual growth rate (CAGR) should be 14.61 percent during this seven-year period.

This means the share of goods and services exports in India’s gross domestic product (GDP) should increase from 23 percent in 2022-23 to over 28 percent in 2029-30.

However, the CAGR for exports of goods and services in the last 10 years was a little less than 6 percent. Therefore, in such a scenario, these aspirational targets look challenging.

Must Read: India’s New Foreign Trade Policy (FTP) and its significance – Explained

What are the drawbacks of establishing such an export target?

Unachievable Targets: The foreign trade policy in 2015 had set a target of 11.6 percent CAGR from $466 billion (merchandise goods and services) in 2013-14 to $900 billion 2019- 20.

However, the actual performance during the period of the 2015 policy was a disaster, with exports between 2014-15 and 2019-20 showing a CAGR of just 2 percent.

Therefore, the government has not learned from experience and has again set the export target in the new foreign policy.

Overtaking Roles: It has been argued that the government should not get involved in setting export targets because exports are done by companies not by the government.

Instead, the government’s job should be to create a conducive environment for higher exports through a supportive policy.

Lack of Accountability: The government set fiscal deficit target and it is held accountable for that because a fiscal deficit target is all about how the government goes about raising its revenues and spending on various schemes.

Whereas exports have to be achieved by exporters and hence the job of meeting a target should be seen as a success or failure on the part of the exporting community.

Hence, these kinds of targets free the government from being held accountable. 

For instance, nobody was held accountable for the failure of the foreign trade policy of 2015 in meeting the exports target of $900 billion to be achieved by 2019-20.

What can be the way ahead?

First, the government should not worry about setting targets for exports and instead, it should focus on ways domestic policies are framed to make exports more competitive. 

Additionally, attention should be paid to how exchange rate regulations may benefit exporters by bringing them closer to the real effective exchange rate and how import tariffs can be reduced effectively to lower exporters’ costs.

Second, if the government wants to set a target, it should not be for a period of five or seven years. The target should be annual, which could be monitored at the end of the year, and based on the performance, the goals could be revisited.