View: India needs $1 trillion exports to become a $5 trillion economy
India needs $1 trillion exports for a $5 trillion economy. But the pathway is bumpy and patchy.
High export growth rate is crucial for India’s goal of becoming a $5 trillion economy by 2025. To achieve this objective, the economy will have to grow at an average rate of 8% during the next four years. India’s exports will have to grow at an even higher rate.
The current slowdown has made the objective more challenging, with India’s exports having shrunk 6.57% in September. Moreover, GoI has to take a call on whether to join the Regional Comprehensive Economic Partnership (RCEP), the free trade grouping of 10 Asean members and their six allies. The group continues to pressure India on finalising the deal by November 4, even though several industry and trade organisations have increased the pitch of their opposition to the agreement.
Free Up Trade Agreements
In view of the stakes involved, the report of the high-level advisory group (HLAG) set up by the ministry of commerce could not have come at a more opportune time. The report presents a roadmap to double India’s exports to $1 trillion by 2025 from about $500 billion at present. To achieve this, it suggests a slew of measures, some of which have been much talked about in the past. These include reducing the cost of capital by further lowering repo rates.
However, the main focus is on raising competitiveness of Indian exports. Moreover, it makes bold recommendations on several issues traditionally considered to be risky economically and sensitive politically, such as free trade deals.
In principle, by promoting exports, free trade agreements (FTAs) can help the country move up the value chain. That, in turn, can provide India an edge vis-à-vis non-member countries. However, the fact remains that we have not gained from existing FTAs. The main culprits are the non-tariff barriers and administrative hurdles faced by Indian exporters such as difficulty in quality and specification certificates, and time-consuming custom clearances, just to name a couple. They have prevented Indian exporters from exploiting markets of trading partners. Unsurprisingly, the partner countries have gained more.
Moreover, due to corruption and lax quality control, several cheap but poor quality goods, especially from China, have flooded the market. These are bad for India’s health, environment and balance of trade.
The FTAs, in themselves, do not address these problems. For Indian exports, the logistical bottlenecks are other stumbling blocks. The turnaround time at the best of Indian ports like Kochi is two-three time longer than for Chinese ports. We come a cropper even compared to our Asian competitors like Vietnam and Bangladesh. Shipping of garments from point of origin to the nearest port can take as much as seven times longer in India than in Bangladesh, and as much as 20 times than in Vietnam.
Unsurprisingly, India falls well below its potential in attracting foreign direct investment (FDI), crucial for raising exports. To a large extent, China’s spectacular performance on the export front is on account of FDI, whose share is estimated to be over 50% in China’s manufactured exports.
Export Hard, Bargain Harder
Reportedly, many companies are considering moving out of China, since the start of the US-China trade war. However, not many are keen to relocate to India. To overcome this hurdle, the HLAG report proposes a centralised authority for issuing licences, and to empower it to grant incentives for companies meeting pre-defined criteria.
While the Insolvency and Bankruptcy Code (IBC) has helped fix part of the mess from the past, contract enforcement in India still leaves much to be desired. Judicial delays, coupled with the lack of appreciation of the economic consequences of delayed decisions, call for a clear and consistent legal and regulatory framework to guide judicial decision-making. Moreover, GoI would need to negotiate hard on non-tariff barriers that restrict Indian companies from accessing markets of trading partners, such as the requirement of local experience by China.
Addressing these issues, and having a staggered timeline, can reduce the risks of entering into an FTA. The proposal to fund infrastructure using long-term bond market, though spot on, will work only if the regulatory framework for grading of projects is in place beforehand. Several other measures will help.
Consider the issue of land. GoI owns large tracts of unused land. The ministries of railways and defence have upward of 43,000 and 33,000 hectares of idle land respectively. The case is similar for major airports, power plants and other public sector utilities (PSUs), a large part of which is in prime areas or near cities, such as the 31,886 hectares of idle land owned by special economic zones (SEZs). This land should be utilised for omnipresent infrastructural demands, investment projects and multi-model logistics hubs.
Creation of big data-driven prediction systems for Indian exports will help in identifying priority areas. In fact, big data and artificial intelligence (AI) also have the potential to serve as a source of new exports to the developed world. Councils along the lines of goods and services tax (GST) councils may be a good idea for developing logistical hubs and value added exports of agricultural products.
The pathway to $1trillion exports is bumpy. But the recommendations, backed by the above policy actions, will go a long way in promoting exports and increasing share of manufacturing in the GDP and total employment.
The writer is professor, Delhi School of Economics.