Export thrust needed to give economy a boost

As India struggles to cope with a fractured economy, a key element of the overall picture is being overlooked — trade. Global trade is projected to fall by 13 to 30 per cent this year, according to the World Trade Organisation. Predictions for India vary, but there has already been a 47 per cent decline in exports during the first two months of this fiscal. With imports crashing as well, the country may end the first quarter with a rare current account surplus, the first in 12 years. In addition, foreign exchange reserves have reached a record $507 billion. Unfortunately, this is not a reflection of a healthy economy. Instead, it highlights one that has ground to a halt and cut back on imports of the fuel, raw materials and components usually needed to drive industrial growth.

The state of the economy is evident from the fact that right from the Reserve Bank of India to the Asian Development Bank and international ratings agencies, all are projecting a contraction in growth during 2020-21. Revival in the next fiscal is more likely to be U-shaped or take a longer time than the V-shaped sharp recovery expected by the RBI in 2021-22. This is partly because the economy was already in the doldrums in the previous fiscal with a dismal 4.2 per cent growth while the government’s stimulus package has neither enthused the industry nor provided immediate relief to those at the bottom of the pyramid.

The revival process in the coming months needs to be linked to increasing trade flows. No country has ever become an economic powerhouse without playing a big role in the arena of global trade. China, for instance, has a 12 to 13 per cent share of world trade, only slightly less than the EU and the US. India’s share, on the other hand, is much lower at 2.5 per cent, on par with tiny Singapore. Clearly, there are miles to go before it can reach the high table of the economic superpowers.

But some steps can be taken immediately. The focus can be put on exports at this juncture when efforts are being made to revitalise the key contours of the economy. This includes employment and significantly, most export industries are highly labour-intensive. Whether it is textiles and apparel, gems and jewellery, leather or handicrafts, the export sector employs a large number of skilled workers. Many returned to their rural homes in the wake of the corona lockdown. A resurgence of these units could mean a reversal of fortunes for the migrant workers. The process has already begun, judging by reports of workers being lured back by promises of higher wages and extra facilities.

Another aspect of boosting trade flows is that micro, small and medium enterprises (MSMEs) comprise a big chunk of export-oriented industries. So, support to these units actually means giving a lifeline to a segment of the economy facing extreme distress. What needs to be carried out in the medium and long term is scalability. To compete abroad, these units need to expand to take advantage of economies of scale. Currently, one complaint of exporters is that the present capacities are insufficient to meet demand from the European and American markets. The result is shift of bulk orders to China simply because their large factories are able to produce the volumes needed for these markets. At the moment, with anti-China feelings pervading large parts of the world, exporters hope this aversion will lead to more orders being placed on Indian suppliers. The big question is, will the existing units be able to meet the requirements or will the orders merely move on to the bigger capacities available in Indonesia or Vietnam.

As for Make in India, it remains a laudable objective in terms of trying to expand the manufacturing sector, but the scheme needs to be dovetailed into global supply chains. Instead of making nationalistic calls for boycotting Chinese goods, one needs to adopt strategic policies to build a wider manufacturing base. Just as China has become the world’s supplier of components for a whole host of products, India too needs to become a part of comparable supply chains. Even here, scalability is a key factor. MSMEs need to be given further incentives to expand capacities rather than remain at existing levels. Labour is now going to become more expensive as the returning migrant labour is at a premium. As a result, easier credit availability is urgently needed to provide support to these units. Sadly, MSME associations have been claiming that despite government announcements, banks have been slow to clear loan applications.

And finally, China’s reported decision to reduce tariffs on imports from Bangladesh shows the way in which confidence needs to be built up with trade partners. In contrast, India has been raising protective tariff barriers albeit gradually in some areas. While trying to boost exports, access to the domestic market has to be provided to critical trade partners like South Asian neighbours. It is also a good time to try and renegotiate easier terms with the US along with providing some concessions in terms of providing greater market access. Not only does India have a trade surplus with the US, that country is also one of its biggest export markets. Therefore, reasonable market access concessions should not be ruled out, especially at a time when the two countries are coming closer in terms of strategic ties.

In this context, the entire concept of ‘import substitution’ becomes a problematic one. Apart from being redolent of the licence-permit raj era, the term has little relevance in the contemporary era where components are sourced from the most efficient producers. Global supply chains will simply overlook Indian producers unless their output is competitive with the best and the cheapest in the rest of the world. Besides, this is the time for India to make its mark in the export markets by selling products that can be competitively produced here, not copies of goods made better in other countries. The new slogan needs to be ‘Export India’. A policy matrix needs to be designed around this concept so that the industry can meet the challenge of the post-Covid global trade scenario.