Economy looks up, a bit

Sushma Ramachandran

THERE is finally some good news for the Indian economy. Exports recorded a 26 per cent spurt in September compared to the same month last year. This is higher than the 18 per cent import growth over the same period. The result is a smaller trade deficit as well as likelihood that the export sector is finally out of a long slump. The positive indicator comes after the gloom of economic growth slowing down to 5.7 per cent in the April-June quarter, the lowest in three years. 

While most of the focus on causes for the economic slowdown has been on demonetisation and the impact of the GST, exports had been languishing for several years before these two events. A contraction in growth was recorded for nearly two years, but there was ultimately a glimmer of hope about a year ago, when a small upswing was recorded. Growth has been only about 4.7 per cent till now. But the performance in September is now at double- digit levels, raising the prospect of this segment finally moving on a higher trajectory. What is significant is that growth has taken place on the back of an appreciating rupee. It also implies that mere depreciation of currency is not a cure all for the export sector.

Another green shoot has been detected with an upswing of 4.3 per cent in industrial output in August, reversing the decline in June and the marginal rise of 0.9 per cent in July. The hint of revival in industrial activity, however, will have to wait a few months to judge whether it will become a sustained positive trend.

Trends in export growth will also have to be watched carefully for the next few months. But the current data augurs well for the many employment-oriented industries in this sector. Engineering products, for instance, have gone up by 44 per cent, while chemical and petroleum products have risen by 46 and 40 per cent,  respectively. The increases are clearly due to an upswing in the global economy which is recording better growth than the last two years. 

As for imports, the 18 per cent rise was moderated by a slight but welcome decline in gold imports. Oil, coal, machinery and equipment imports rose significantly, indicating that the industrial demand is rising slowly but surely. As a result, the widening trade deficit has been contained from $9.07 billion to $8.98 billion. 

The dramatic improvement in exports has taken place just as the new Commerce Minister Suresh Prabhu has taken over, giving him some respite at the outset. The fact is that the most of the support to be given to the export effort lies out of the domain of the Commerce Ministry. The old concept of the import-export policy has become archaic as old regulations governing imports have been done away with, leaving only export incentives to be dealt with by the ministry. Trade issues are now largely tariff issues following liberalisation of economic policies, as well as the need to be in line with the guidelines of the WTO. In other words, it is dealt with primarily by the revenue wing of the Finance Ministry. All duty changes or refunds are thus in its purview, leaving the Commerce Ministry to function more like an advocacy agency for export industries.

Similarly, the other big issue for export-oriented industries is infrastructure. This includes power, telecom, ports, containers, railways and airports. The quicker modernisation takes place of our transport systems, the better it will be for exporters who need to ensure that products are shipped quickly and efficiently. The bane of Indian exports has been high transaction costs owing to poor infrastructure that make goods more expensive than those of competitors. Being competitive is imperative, as exporters face-off against goods made in China and Southeast Asia, where finance is much cheaper and infrastructure is far superior to that in India.

Yet another challenge for raising the export growth is the quality of products. Till ‘Brand India’ becomes a quality nomenclature, it will remain a second choice for foreign buyers. Even in areas where exports are huge, quality issues have affected expansion of growth in key markets. For instance, the reputation of Indian drugs has been tarnished by the failure to maintain regulatory standards laid down in the US by a few companies. While remaining one of the biggest export earning segments, pharma exports are no longer growing at double-digit levels.

Mr Prabhu thus needs to work out on a three-pronged strategy to boost exports. First, ensure better coordination with the revenue department so that procedural issues do not become an obstacle to raising exports. Revenue collection agencies tend to look only at the bottom line in terms of raising resources. Instead, a more nuanced approach needs to be taken as far as exports are concerned so that imports needed for export-led industries are treated on a separate footing. The Finance Ministry must also be held responsible for errors that lead to lower exports.

Second, he needs to become a strong advocate for better infrastructure for export-oriented industries. India will only be able to play a significant role in global trade when infrastructure bottlenecks are ironed out. This includes basic issues like better Internet connectivity, sustained availability of power and a mature supply chain. Unless exports are made a priority by all arms of the government, India  will continue to play second fiddle to much smaller countries like the tiger economies of east Asia. It cannot be only the Commerce Ministry’s job to promote exports and improve the country’s share of world trade from the current tiny 1.7 per cent.

Third, it is not just for the government, but for industry to recognise that establishing ‘Brand India’ as a premium range of goods and services will enable them to compete more effectively in world markets. But the government needs to motivate exporters who can only take advantage of the rising demand in global markets by providing goods of the highest quality. 

The spurt in export growth will thus need strenuous efforts to become a long-term trend. It may not be a flash in the pan, but unless Mr Prabhu is able to galvanise revenue agencies, improve infrastructure and raise quality levels, India will continue to have a minuscule share in world trade.