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Exports - Fuel for India's Growth
September 8, 2009

"By 2014, we expect to double India's exports of goods and services",says the Minister of Commerce and Industry on the new Foreign Trade policy. The share of trade as a per cent of GDP has increased from 15% in Financial Year (FY) 1992 to 39% in FY 2009. We interviewed Prof. Nilanjan Banik at Institute of Financial Management and Research (IFMR), IFMR for his insight on the factors influencing export growth and the new foreign trade policy.


Author : Dhanashri Rane



Untitled Document

Post 1991, reforms in India have gathered momentum with liberalisation of the foreign investment norms, reduction in trade tariffs and removal of the licensing policy. The US, UAE, China, Singapore and UK account as the top five export markets for India with total exports at US$163 billion in the FY 2008.

Within services sector, the software exports has seen a compounded annualised growth rate of 32.1% between FY2002-08 (source: EXIM Bank). According to National Association of Software and Service Companies, the exports for the Information Technology (IT) and Business Process Outsourcing (BPO) sectors are expected to touch US$ 60 billion in FY11.

We speak to Nilanjan Banik, Associate Professor, IFMR to understand how exports can act as a catalyst for growing India’s economic prowess.

 

Table 1: Share of Principal Commodities in India's exports

Commodity Group

FY 2008

Primary Products

17

1. Agriculture and allied products

11.4

2. Ores and Minerals

5.7

Manufactured Goods

63.6

1. Leather & Manufacturers

2.2

2. Chemical & Related Products

12.9

3. Engineering Goods

23.1

4. Textile and Textile Products

12

5. Gems & Jewellry

12.4

Petroleum Products

15.6

Others

3.8

Source: Reserve Bank of India

iFAST: What factors affect Indian exports?

Nilanjan Banik (NB): Exports are influenced through many channels that can be broadly classified into two groups as in figure1.

One channel refers to demand-side factors, which can lead to a sudden turnaround in growth, while the other channel refers to supply-side factors.

If supply-side factors are not favourable, this may prevent a quick revival of exports and may also act as an obstacle to maintaining high growth for a long period.

The demand for products is price-sensitive because even highly differentiated products have close substitute products.

Firms offering a lower relative price would be able to sell more than their competitors.

Figure 1: Factor affecting Exports

Therefore, it makes sense to examine the importance of the price factor to compare changes in India’s external competitiveness relative to those of its neighbours.To measure lower relative price, it is necessary to look at price and exchange rate (rupee appreciation benefits exporters) as compared to those of its competitors.

Since imports by India’s major trading partners are based on derived demand (that is, as a function of their GDP), demand for Indian exports refers to potential rather than actual demand. Thus, the growth in India’s exports can be partly explained by the growth in imports by its trading partners.

The positive impact on exports has come mainly from reforms in the domestic economy and in the external sector. Other factors, such as growth in world trade since 2003 and the change in the composition of trade towards value items, have complemented growth in India’s exports.

 

iFAST: What are the possible hurdles to an increase in exports? 

NB: Although reforms in India are taking place, there is scope for further reform. Exporters face a maze of government orders, regulations, rules and procedures, which raise the cost of production and hence affect exports. The World Bank places India in the 122nd position out of a sample of 181 countries in its latest World Bank Doing Business Report, 2009. Interestingly, India’s ranking is worse than some of its regional competitors – China (83rd), Sri Lanka (102nd), Bangladesh (110th) or Pakistan (77th), when it comes to the convenience of doing business.

The lack of proper infrastructure facilities indirectly raises the costs of Indian exports. It is hardly surprising to see why the country’s services exports (which are less dependent on infrastructure) are outperforming its manufactured exports (which are more dependent on infrastructure).

Except for telecommunications, sectors such as power, ports, aviation, railways and roads are witnessing slow progress.  The irregular power supply hurts manufacturing activities, although, in recent times, large manufacturing units have depended on their captive power plants. Major ports, such as Chennai, Mumbai, Tuticorin and Visakhapatnam are overutilised and less efficient than other Asian ports. As a way out, there has been a dramatic increase in private sector participation in building ports and port-related infrastructure at Jawaharlal Nehru Port Trust, Mumbai, Mundra (private port in Gujarat), Pipavav (private port in Gujarat) and Chennai. The government needs to introduce labour market reforms and address the problems associated with encroachments, where unutilized ports and aviation authority’s lands are gradually being taken over by local settlers.

There is a need to increase operational efficiency in road and railway projects. National highway development programmes are hampered by time overruns and budgetary constraints.

iFAST: Going forward, what are the ways to promote India’s export competitiveness?

NB: India still maintains relatively high tariffs on most agricultural products. Cheaper agricultural imports may jeopardize the income of the majority of the 68 per cent of the rural Indian population. Compared with its policy on agriculture and manufactured items, India has been more aggressive in negotiating market access in services.

There is a need for more aggressive negotiations and policy dialogue among developing nations, especially in the agricultural and services sectors in India. India could strengthen its involvement in meaningful Regional Trade Agreements (RTAs*) to facilitate better market access for its exports. Alternatively, India should be willing to take a more constructive approach, along with other developing countries, at multilateral forums such as WTO.  

On the domestic front, there is a necessity for proper infrastructure and eliminate the problems associated with burdensome government regulations and procedural bottlenecks.

Table 2: External competitiveness: Change in CPI – Change in Exchange Rate ( Lower values indicate a rise in competitiveness)

External Competitiveness

China

 India

 Indonesia

 Malaysia

 Pakistan

Rep. of  Korea

Thailand

2003

1.2

8.08

14.88

1

6.33

3.46

6.65

2004

4

8.25

1.77

1

7

17.21

5.43

2005

1.8

6.22

1.43

3

5.55

5.27

5

2006

1.2

8.07

18.73

3.61

7.92

11.09

9.64

2007

3.2

5.36

24.25

3.63

6.93

14.09

10.32

2008

3.6

2.35

N.A.

3.82

N.A.

16.30

N.A.

Source: Prof. Banik’s own calculations and IMF

 

iFAST: Clearly the services sector has been the key contributor to the India’s growth. What initiatives are required within the services sector in order to ensure significant growth?

NB: There has been policy changes related to deregulation, liberalisation of Foreign Direct Investment (FDI) and privatization of government-owned services which has created increased demand for services. FDI approvals in services sector has gone up to around 40% of the total FDI approvals. The government has taken some favourable policy interventions such as reforms in the telecom sectors and privatisation of power distribution. It has also developed numerous Software Technology Parks of India to provide ready-made facilities tailored to meet the needs of the IT industry and to overcome some of the challenges of the normal business environment. Such incentives need to continue for our services exports to do well.  

Also, at WTO, India should bargain hard with the US and the EU, to give access to Mode 1 or cross-border trade in business services, and Mode 4 or temporary movement of natural persons types services, where India has comparative advantage. 

iFAST: Apart from China, most of India’s trading partners include countries from the developed world. How is export demand expected to emerge considering a gradual global recovery?

NB: Much of the slump in global demand is aggravated because of the recessionary trend in the US and in Europe.

Chart1 reflects slowdown in the GDP and export figures of developed as well as developing countries.

Because of this, some of the developed countries have become more cautious in terms of granting additional market to the foreign exporters from developing countries.

The trade ministers had come close to reaching a deal on the Doha round of talks in July 2008, but it collapsed because of a dispute between Washington and emerging economies spearheaded by India.

Apart from farm subsidy which was cited as the major cause for this failure, there are many other issues^ that need to be addressed to conclude the Doha round in 2010.

Source: World Trade Organisation

Also, developing countries needs to explore each other’s market. Presently, not much is happening, as individual bargaining interests vary. Regarding agriculture, for example, India is rather passive when it comes to negotiating for greater market access. In contrast, countries such as Brazil, Mexico, Chile and South Africa, which are net agricultural exporters, want to reduce tariffs on agricultural items.

There is a necessity to seek out these differences through policy dialogues.

iFAST: The government expects to double India’s exports of goods and services by 2014. How do you view the new Foreign Trade Policy? What will be the impact on growth and exports in particular?

NB: In the present Foreign Trade Policy, the government has taken measures in terms of simplifying procedures, continuing with the existing export incentives, full refund of all indirect taxes and levies, and lowering transaction costs. The measures such as: extension of Duty Entitlement Pass Book (DEPB) scheme till December 2010, special incentives for labor intensive sectors, like gems and jewellery, leather, textile, etc., extention of interest subvention of 2 per cent of for pre-shipment credit, and income tax exemption of 100 % to Export Oriented Units (EOUs), are certainly going to help India’s exports in this difficult time marked by a fall in global demand.  

Since most of these measures are demand side, the government should make a conscious effort to provide better physical infrastructure, especially roads and better power, to complement the demand side incentives. Telecommunication, rail and airways, has so far been successful. Once the energy issues, in terms of power, and better road facilities are granted I think Indian exporters will deliver.

nilbanik@gmail.com


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