Boost exports to gain edge in world trade

Sushma Ramachandran
Senior Financial Journalist

INDIA’s two per cent share of the global trade is not as high as it should be if it wants to play a decisive role in the international economy. Most countries which play a big role in world trade have also brought about higher domestic growth rates and ensured a better standard of living for their citizens. China and the Southeast Asian tiger economies are visible examples of the role that enhancing trade flow plays in the overall economic growth. In China’s case, exports are a key driver of the economy but it also imports massive quantities of commodities and goods for use in developing its industrial infrastructure. As for the Southeast Asian tigers, they have not only eschewed protectionism, but also joined hands to become a major force in the world economy through regional trade cooperation.

On the plus side, there now seems to be a growing recognition that India needs to gear up to become a more export-oriented economy. The latest round of export incentives announced recently as well as Commerce Minister Piyush Goyal’s call for returning to 20 per cent export growth indicates that more focus is going to be put on trade in the second tenure of the Modi government than in the first one. One reason may be the slowing down not just of the domestic economy but also the global economy. Goyal’s stress on picking up the pace of export growth is thus timely. Export growth has been rising in the last two years by about 9 per cent but this followed a consistent decline from 2014 to 2016.  It has begun to slip again since June though there was a marginal recovery in July this year.

The need to become more competitive in world markets has been highlighted recently by the spotlight on trade issues recently on the global stage. This began with the spat between the US and China over tariffs, but spilled over to the rest of the world. Not only has the Trump administration engaged China over tariffs, it has sought to renegotiate trade agreements with many other countries including neighbours like Canada and Mexico. Differences have also arisen between the US and the European Union with both sides threatening to impose retaliatory tariffs. The trigger for this dispute was the ruling by the World Trade Organisation that subsidies given to Airbus had an adverse impact on the US.

India has not been left out of the Trump administration’s obsession over trade deficits. In the case of India-US trade, there is currently a trade surplus in this country’s favour. President Trump initially flagged the issue of high tariffs on Harley-Davidson motorcycles which are imported in less numbers but this was followed by punitive tariffs on steel and aluminium exports to the US. 

The last straw was the withdrawal of the concessional Generalised System of Preferences (GSP) tariffs which have been given for many years to developing countries. This, in turn, prompted India to levy higher import duties on a range of American products.

But with Indo-US ties growing closer, especially during the recent public bonhomie between Prime Minister Modi and President Trump, negotiations are reported to be under way to conclude an interim trade deal to patch up differences in these areas. Whether the vast gap in perceptions between the two sides can be bridged is yet to be seen, as this government is not keen to remove the cap on medical device prices or to reduce tariffs on IT products. But some concessions will have to be made if the US is to agree to even partially restore benefits under GSP. Incidentally, the friction on economic ties is a sharp contrast to the growing closeness on defence and strategic issues.

Even as India-US trade relations remain prickly, India is finalising the terms of membership of the giant Regional Comprehensive Economic Partnership (RCEP), a trade grouping of Asean countries along with Japan, China, South Korea, Australia and New Zealand. The big worry here is to avoid domestic industry facing a flood of cheap imports, mainly from China. Tariffs will have to be reduced but efforts are being made to do this in a phased way so that domestic industry can gear up to meet the onslaught. 

At the same time, it is imperative for India to become part of such a regional trade group as these are now critically important to get access to key markets. The industry is up in arms at the prospect of cheaper imports but India really has no option but to join the RCEP as it has yet to become a part of any other major trade partnerships in the world. 

Some studies have shown that while trade deficits have increased with countries with whom India has entered into free trade agreements, imports would have been more expensive without these FTAs. Besides, if industry starts looking for new markets, it will be hamstrung in the future if India excludes itself from regional groupings like the RCEP. It would also be to India’s advantage to join the RCEP at the outset when it can influence the rules of engagement for the trade group.

As far as protecting Indian industry is concerned, it would be more productive to help it become competitive in world markets rather than raising tariff barriers. A beginning has been made by the reforms introduced recently, including slashing of corporate taxes as well as providing more export credit. Other reforms to make the life of entrepreneurs easier will include cutting bureaucratic red tape and digitisation of government services.

There is no option but to become more globalised and increasing trade flow, especially exports, has to become an integral part of this country’s economic strategy. Both agriculture and industry have to become more competitive on the world stage. Agro-processed exports can become a mainstay of the economy if policies are tailored to give the right amount of support to this industry. 

Similarly, industry needs to be provided with adequate infrastructure to be able to compete abroad with manufacturers of other countries who get cheap credit, easy power supply and minimal government interference in their operations. 

A positive approach to exports needs to be inculcated in the mission mode through all government departments. A policy change on these lines is essential to ensure that trade becomes a priority, otherwise India will not be able to achieve its potential as an economic powerhouse.