Widening trade deficit to a 56-month high at $16.3 billion in January this year have raised eyebrows among pundits that too at a time when India’s exports have started looking up after the poor showing the last couple of years. This is because of a surge in imports of crude oil and precious stones. Global oil prices have started increasing lately and it is not clear where it is going to stabilize. The trade deficit might have expanded much faster this year than last year but the fact is that this is the right time for India to start big-ticket export reform so that the country has a greater share in world trade.
India missed the bus in early 2000 when it had an opportunity to become a global hub for manufacturing as well as services. India’s share in goods exports was less than 2 percent in world exports as against China’s nearly 14 percent. But in ‘services’ exports, our performance is slightly better at around 3.5 percent of world exports. Today there is yet another opportunity for India to become a global exports hub if right policy is put in place to push both goods and services exports. After global trade being in the negative territory growing at less than World GDP growth, it has started growing rapidly at 4.7 percent this financial year. According to International Monetary Fund (IMF), global trade is expected to grow impressively at around 4.6 percent in the next couple of years. So it is an opportune moment for India to cash-in. After exports growth being in negative territory, it is now growing at 9-10 percent this financial year even though there is a small blip in January.
According to H A C Prasad, who until recently was Principal Economic Advisor in the Finance Ministry, has come out with two separate studies on the challenges and policy initiatives needed to take India’s goods and services exports to a new high.
Prasad, who was earlier Economic Advisor in the Commerce Ministry, is of the view that there are green shoots in India’s merchandise exports that is goods exports. So it is only appropriate to raise India’s share in world exports to a respectable five percent. For this India’s goods exports should reach $882 billion by 2022, which means India’s export growth rate needed to be around 27 percent CAGR in five years. This is not impossible as India has had higher exports growth than this during 2004-09.
Services exports, which had gone from $53 billion in 2005 to $162 billion annually in 2016, have done better than goods exports growth in the first half of 2017-18 at 16.2 percent. Various initiatives have already been taken by the government to push services exports but more needed to be done now considering that ill-effects of demonetization and rollout of Goods and Services Tax are now behind us.
Prasad is of the view that India’s goods exports have to be made demand-based rather than supply-based as at present. Regarding services exports, there is a need for ‘Services from India’ initiative just as Make in India’ initiative to promote manufacturing exports from the country.
In most of the top imports of the world, the presence of India’s exports is very small. In 2015, India’s exports share in the top 100 items was not that impressive and only in 5 of those items, the share was more than 5 percent. That’s why there is a need for making our exports demand-based rather than supply-based. Likewise, there is a need for rationalizing tariffs. Though average customs duty is around 10 percent, the real applied duty is around 2.8 percent because of various exemptions provided. This is creating distortions. However, the recent hike in customs duty in some of the electronics items in the budget is warranted to promote ‘Make in India’. This has also helped in reversing inverted pyramid customs duty structure that was hindering domestic manufacturing.
On ‘Ease of Doing Business’, though India has moved up in the global ranking, it still has a long way to go. India is still much behind many ASEAN countries in trading across borders. Some specific steps were needed. Though there are claims of ‘single-window customs clearance’ for exporters, still there are hurdles which need to be rectified. India is the cheapest and largest manufacturer of agri-products particularly fruits and vegetables and yet India’s share in global agri-exports is very small. This is one area where the government has to come out with clear-cut and out-of-the-box initiative so that India becomes not only a major exporter but also addresses livelihood concern of the farmers. There is a need to create an Ombudsman for resolving export-related problems and disputes. Presently there is no clear-cut dispute resolution mechanism.
On promoting services exports, Prasad pointed out that there is a need to reform domestic regulations so that they are conducive for services exports rather than erecting restrictive trade barriers. There are many market-access trade barriers in India’s trading partner countries, which include visa issues, shipping, licensing of professional services and so on. There is tremendous potential for disinvestment of services PSUs both at central and state levels, particularly that of hotels.
However, in the case of shipping, there is a need for strengthening domestic shipping industry including that of the public sector. At present less than 10 percent of India’s merchandise exports are shipped by domestic liners. Though India allowed 100 percent FDI in shipping as early as 2001, no foreign investment has come so far. This called for some introspection and the government should make it mandatory for domestic liners to carry bulk imports as well as some of the exports besides making it cheaper to shipments through domestic liners. This is one area where the government needs to ponder over. Besides port facilities and connectivity require massive improvement and upgradation. Even Colombo has a major trans-shipment port, which is far superior to the best ports in India.
These reforms need to be attended to immediately if India is to get back to high exports growth path considering that global trade environment was now favourable. Higher exports growth will also help in pushing up jobs apart from boosting India’s GDP growth by at least two percentage points to get back to 8-9 percent annual growth.
(The author is a senior journalist, who was formerly Editor Press Trust of India and Economics Editor in Financial Chronicle and TickerNews).