Opinion: How trade can boost India’s growth

News: India’s exports have reached $418 billion in FY 2021-22. These figures have surpassed the pre-pandemic level of $331 billion in FY 2018-19.

Status of India’s Exports

National

– Total merchandise trade, including imports of $610 billion, amounts to $1.28 trillion for FY 2021-22.

State-wise statistics

– As per the Export Preparedness Index (EPI) 2021 for Indian states, there were wide variations across the states due to high variation in trade policy, business ecosystem, export ecosystem and performance.

What were the driving forces?

The government’s proactive policy schemes, such as merchandise exports scheme, duty exemption scheme, export promotion capital goods, transport and marketing assistance scheme have helped the export sector.

In addition, the RBI’s gold card scheme and interest equalisation scheme and the export promotion council’s market access initiative were also useful. 

India’s Export Potential

The annual growth rate of India’s exports between 2011 to 2020 is a little over 1%. This is way below 3% and 4.2%, respectively, for China and Bangladesh.

According to India’s Trade Portal estimates, there are a huge difference in India’s exports potential and actual exports in many sectors, especially pharmaceuticals, gems and jewellery and chemicals.

India is endowed with a large share of the working-age population for the next couple of decades.

Importance of India’s Export

The revival of exports has provided relief at a time when major components of aggregate demand such as consumption and investment had been slowing down.

These milestones on the trade front are a sign of a rising India. It would certainly accelerate the growth.

The trade achievements are a sign of growing confidence in the Indian economy.

The acceleration of merchandise and services exports could potentially make the Indian economy a $5-trillion economy.

What are the opportunities?

Many of the manufacturing giants are moving away from the labour-intensive assembly of network products, which offers India an opportunity.

As the Economic Survey (2019-20) suggests, “assemble in India”, particularly in network products, will increase India’s share in world exports to 6% and create 80 million jobs.

What are the challenges/threats? 

Despite India’s offering of a big market and cheap manpower, the space vacated by manufacturing giants such as Japan, Korea, Malaysia and China have been captured by Vietnam, Bangladesh, Mexico and Thailand.

India’s rank in the logistics performance index is 44 while China’s rank is 26 and South Korea’s 25.

The price competitiveness of India’s exports is lower compared to China, South Korea and others. This is because the unit cost of a container of exports is significantly higher for India compared to others. 

Way Forward

It is time to address sector-specific and market-specific problems to fully capitalise on exports across sectors. India’s key strength is in labour-intensive manufacturing.

India has to increase its participation in global value chains (GVCs). India should capitalise on the “China+1” strategy, avoid protectionism and inverted duty structures.

India needs to find out the reasons which caused MNCs relocation to countries like Vietnam, Bangladesh and Mexico.

Work on institutions facilitating trade, processes for exports and imports and logistics.

Work upon reduction in trade and transaction costs as well as ensuring reliability and timely delivery, which is important to becoming part of GVCs.

There are also opportunities arising out of geo-political conflicts and the intention of the world to diversify its supply chain portfolio.

The states having scores below the national average should usher reforms like reducing red tape and complex laws including taxation.

The complexities of trade and business can be reduced by recently concluded FTAs with the UAE, and Australia. This will reduce tariffs and give market access. These FTAs may help in streamlining policies. Further, India is negotiating FTAs with the UK, GCC and Canada.

The government should bring down non-tariff barriers such as administrative fees, labelling requirements, anti-dumping duties and countervailing measures.

In addition to the merchandise exports, India should focus and diversify its services exports from IT and IES exports to other categories including travel and tourism and business, commercial and financial services.

Source: The post is based on an article “How trade can boost India’s growth” published in the Indian Express on 01^st June 2022.