How to support Indian exports in a bleak global environment

(Representative image: Reuters)

Monetary tightening and slowing growth in major economies especially China, the European Union and the United States have deflated the commodity market bubble. If that was not enough, temporary export curbs on iron ores and steel, rice, wheat and wheat derivatives hurt India’s exports.

Thus, after growing at 20-25 percent in the January-June period, India's merchandise exports moderated in the July-September quarter and then contracted by a whopping 16.8 percent, year on year, in October. This doesn’t mean India's exports can’t be increased.

India’s share in the global export market of $22 trillion is less than 2 percent at $421 billion. Even if global export remains at the same level for the next couple of years, India can still raise its export share if the following five corrective measures are implemented:

1. Remove raw material bias: India’s export basket has a stronger bias towards low-value raw materials such as cereals, mineral ores and cotton as also intermediates including steel and cotton yarn rather than high-value finished products. If raw materials and intermediates are expensive, finished products processed from them can't be cost-competitive. If cane prices are high, Indian sugar processed from cane is bound to be expensive. Similarly, expensive steel will make steel-intensive products such as automotive expensive, and dampen their export prospects. Worse, it makes imported steel-intensive goods instead of locally manufactured ones more attractive.

The same story plays out in textiles. Higher import duties on synthetic fibres such as polyester and viscose staple fibres vis-a-vis cotton increase the relative price gap between these two categories of fibres. The lack of neutrality in taxation among different types of fibres over-promotes cotton textiles when the global demand is higher for synthetic fibre-based garments. This problem can be addressed by raising import duties progressively with the level of processing.

Thus, raw materials should attract lower duties than intermediates, and intermediates should attract lower import duties than finished goods. A more sensible way to help domestic industries is to help them become more cost-competitive so that they can easily withstand competition both in domestic as well as export markets.

2. Embrace FTAs: India had rushed into signing FTAs with ASEAN, Japan and South Korea that haven’t done much for its exports while delaying those that could have helped its exports such as those with the EU, Gulf Cooperation Council (GCC), Eurasian Economic Union and LATAM. The difficult-to-comply sourcing normsimposed by Japan under India-Japan free trade pact have resulted in a virtual denial of preferential market access for India’s apparel exports and need urgent review. Similarly, it doesn’t make sense to join the supply chain pillar of the Indo-Pacific Economic Framework (IPEF) but leave its trade pillar. Trade and supply chains are interlinked and joining one while leaving the other is not smart.

Expediting free trade deals with the likes of the EU, GCC and the largely untapped Eurasian and Latin American markets will help broaden India’s product portfolio, expand market access and help indigenous businesses reap the benefit of economies of scale. Besides, an FTA with the EU will restore the tariff advantage for Indian merchandise, as the EU plans to exclude Indian products from its unilateral tariff preference scheme (Generalised System of Preferences or GSP) from January 1, 2023. The trade agreement will also place India on par with Vietnam which already has an operational FTA with the European Union for products such as textiles.

However, the benefits of post-FTA lower import duties can be neutralised by stringent sourcing norms as in the case of the India-Japan CEPA or an overvalued rupee that penalises exports.

3. Exchange rate must support exports: A weaker rupee incentivises foreign buyers to buy more from India. It also helps bring in export-promoting foreign direct investments (FDI) when countries and corporations want to diversify their supplier base. Moreover, unlike the PLI subsidies, which incentivise manufacturing, a weaker rupee incentivises the export of both goods and services.

Again, between a weaker rupee and high tariff walls, the former should be preferred as it will provide much-needed protection to Indian manufacturers from dumped and subsidised imports from countries like China. It will also help net exporting sectors such as apparel, leather goods and pharmaceuticals. Critics argue that a weaker rupee may not help India's exports much at a time China, the EU and US are staring at recession. Regardless, a stronger rupee will certainly hurt exports in an intensely competitive global marketplace. Besides, when most currencies have weakened against the US dollar, defending the rupee will put Indian exports at a disadvantage.

4. Reimbursement of duties and taxes on export products (RoDTEP) without discrimination: RoDTEP is not an export incentive, it is a refund of taxes and duties on exports, not covered elsewhere. Thus, it should apply to all industrieswithout any exception if we really believe in the maxim that duties and taxes should not be exported. Thus, its extension to chemicals, iron & steel and pharmaceuticals is a sensible move on part of the government, but putting an expiry date (September 30, 2023) is not. The minimum that exporters need is a stable and predictable regulatory regime.

5. No export ban please: The frequent imposition of export curbs to deal with temporary domestic shortages creates complications for importers and damages India's reputation as a reliable supplier. Besides, they act as a disincentive and adversely affect future supplies (needed to keep inflation low on a longer-term basis) and hurts exports. Moreover, it’s a fallacy that export curbs help contain inflation especially when the major factor driving up inflation is increased input costs.