Exports in the first half of this fiscal year were $267 billion, 1.9 per cent higher than last year. This was dismal if exports are to be the engine driving GDP growth. Imports, at $312 billion, reflected poor domestic demand and contracted by 3.2 per cent. The only good news was that the trade deficit shrank to $45 billion.
During the period 2003-2011 when world export and GDP were growing well, we ranked sixth (out of a set of 60 large economies) in the growth of services exports. During the slow growth period of 2012-2017, we slipped to the 23rd rank. In the growth of manufacturing exports, we slipped from 16th to 25th rank; in merchandise from 10th rank to 38th; in agriculture from 11th rank to 30th rank. A depressing story of falling competitiveness all around.
And yet there is hope. While world exports grew at 11.5 per cent per year (pcpy), our export growth was slightly less than double of that level at 20.5 pcpy during 2003-2011. World exports growth slipped to 0.3 pcpy but our exports grew at 5X that level to 1.5 pcpy during 2012-2017. We did much better than the average, but not well enough to keep up with the top exporters.
By the standards of our conventionally minimalist stance on the role of exports being merely to fill the hole in foreign exchange reserves after paying for imports, there is no reason for alarm. Net inward remittances from our 18 million Indian expatriates bridge around two-thirds of the trade deficit. But this is a slender thread to hang by for an economy with global aspirations.
A new foreign trade policy was eagerly awaited some time this year. But with time passing by, the next best thing is the report of a High Level Advisory Group unveiled on October 30. Helmed by economist Surjit S. Bhalla, now India’s executive director to the International Monetary Fund, but earlier a part of Prime Minister Narendra Modi’s Economic Advisory Council, the group report has much needed gravitas — a critical asset if core trade reforms are intended.
Government advisory committees come with implicit constraints to stay within the limits of what is politically doable. Consequently, identifying what the committee report does not try and do gives an indication of how deep is its reform imprint.
First, the report does not call for realigning the overvalued exchange rate, which handicaps export competitiveness and simultaneously reduces protection for domestic manufacturers. The report uses Bank of International Settlements data to debunk the overvaluation argument.
Curiously, per the Real Effective Exchange Rate (REER) computed by the RBI, INR depreciated against the US dollar by around 15 per cent in the 12-year period from FY 2005 to FY 2017 — an average annual depreciation of around one per cent per year. Over the same period, inflation in India was more than four per cent per year higher on average than in the US, indicating insufficient depreciation of INR.
Curiously, the report decries the upward revision of import tariffs in 2017 and 2018 which reversed the low, stable import tariff regime implemented by the 1991 trade liberalisation. Ironically, REER based depreciation could have provided a natural protection to domestic manufacturers possibly making upward revision of import tariffs unnecessary. The extant exchange rate policy is more focused on avoiding imported inflation than boosting exports.
Second, the report ignores the urgency to revamp the plumbing for managing external trade. Inducting 500 top class trade economists, lawyers and operational specialists into key positions in the Union and state governments and our key embassies could generate Total Factor Productivity improvements via well-known spill-over benefits from such communities of practice extending seamlessly into academia and the private sector.
However, the report redeems itself on the immediacy metric by unequivocally recommending that it is in India’s interest to join the RCEP, that is now being negotiated. Statistical analysis by NCAER shows that this proposition holds true whether or not the US-China trade war continues, and whether or not either or both impose tariffs on Indian imports. It also confirms that imposing tit-for-tat tariffs is not in India’s interest.
The institutional changes proposed include an external agency for big-data analysis; the establishment of a real-time management information and statistical analysis system and an apex body to identify and push through FDI; more powers for Sebi to regulate foreign investors directly and a 20-year “Elephant Bond” in tandem with an illegal foreign assets amnesty scheme to generate the $4.5 trillion required for infrastructure and logistics till 2045.
Generic suggestions for reforms in the financial sector, industrial and labour regulation, single point regulation of pharmaceuticals and biotech products all align with a much needed “whole of government” approach to reform. This could be transformative. But sadly, India is better known for reform by stealth.
The report does signal service by identifying key operational barriers to higher export growth in textiles and garments — India’s staple exports; merchandise exports; pharmaceuticals; biotechnology; medical devices; electronics and agricultural produce — the last with the caveat that the export of water-intensive products like sugar or low value rice should be discouraged to preserve our fast-depleting ground water aquifers.
The report also does well to emphasise that higher trade-to-GDP ratios are a signal of competitiveness and an entry point for coupling the Indian economy with the international economy, including through global value chains. These generate good jobs and contribute to higher GDP growth, which in turn is a necessary precondition for ending poverty. In this context, sadly, the report ignores a splendid opportunity to apply a poverty reduction filter to the proposed interventions to demonstrate that export-led high growth need not be anti-poor.
Is the report likely to turn around India’s external trade in the near term? Probably not. Expansive institutional changes take time to mature. Opting to take the rents out of regulation of the factors of production needs massive political will. At present, India seems to be drifting into a hybrid model — staying afloat on borrowed foreign capital attracted by high real interest rates and a stable exchange rate, like the United States, while using the borrowings to fund a China-style Big State model of export growth. Who knows, maybe even hybrids can fly....