Jun 21, 2015

The frigidity of Indian Exports

The trade figures for May 2015 are here. The trade decreased, both in terms of exports and imports.   Exports were down by around 20% this month over last year, and imports were down by around 16%.  We exported around 22 Billion USD of merchandise in May and imported around 32 Billion USD worth of goods. At this rate, we would be lucky to touch the figure of USD 300 Billion of exports by the end of year.  On services front, the net services earning stood at around 5.6 Billion USD. A new foreign trade policy was released last month, with a stated aim of doubling the exports in next five years.

The last sentence of the above paragraph is in contrast to all other sentences. Therein lies the problem in making policies that target the outcomes that rely on multiple underlying factors. We can't just double exports without addressing the fundamentals that lead to better export performance. 

Now, there are reasons as to why the figures are not encouraging. Oil prices are low. This leads to lower numbers on both imports (crude) and exports (refined petroleum products) as oil is currently the single largest contributor to merchandise trade. Global demand continues to be low, which is another major factor, dragging down the demand for all products in general. Merchandise trade growth as we know it, has peaked, about which I have elaborated in another post here, and that leaves very little elbow for India's trade to wedge in. India continues to suffer from whatever disadvantages it suffered in the area of international trade for long time and not much has really changed on the ground. 

Apart from better global growth and thus better demand, which itself is a distant possibility, there is hardly much that can be done in the short term. A devalued rupee in itself doesn't assure better exports, and even if it helps, it has its own lag effect. 

All is not that bad if we look at our general economy. Though the trade figures are low, our current account deficit, as a percentage of GDP, is under control. Rupee is not volatile. Inflation is subdued, helped by low oil prices. Government expenditure is not worrisome. Monetary sector looks fine, if we overlook the bad debts of banks. What's not so good is the real sector, from which we can derive the exports. Though the Index of Industrial Production data is showing the so called green shoots of growth recently, it is still far from satisfactory. Overall, the macroeconomy is stable, but weak. 

Given the above, if one wants to increase exports, there has to be some kind of built in incentive. The best incentive is the price difference based on market economy, and that is a function of global demand, which is not stirring.

Govt of India has tried various export promotion measures, about which I will elaborate in some other post, but most of them have failed to stir exports. What one must now realise is this. Do whatever, the export performance in the end is a strong function of global demand. Policymakers must realise that there are two, and only two areas where they can intervene to improve exports. 

a) By providing better infrastructure. Infrastructure includes not just roads, ports, and physical infrastructure but also effective regulatory regime, policy stability, governance,  ease of doing business and all other aspects that good governance can provide. 
b) By imparting training and awareness, including support, about international trade. 

The first one, better infrastructure, is a time taking affair. And there is hardly much that can be done in an isolated way. It is a systemic issue and can be tackled only by the whole-of-government approach. 
The second one can be ramped up faster. The various export promotion councils, there were 38 of them last time I counted, have morphed into glamorised beggars, and should be ideally put to task for the second point. Apart from one or two councils, they have hardly proved themselves useful. The DGFT, which makes foreign trade policy, should be a lean organisation and the field offices of DGFT should be the nodes that liaison with state governments and various agencies towards export promotion activities. Unfortunately, DGFT field offices have reduced to implementer of various tax nullification schemes, which can ideally be done by customs. 

Lastly, one must realise that there is nothing called increasing exports by taking measures. An increasing exports is a result of robust manufacturing and services sector that is producing more than the country can consume, and is able to produce goods and services that the world demands. If our exports are frigid, there is a good reason somewhere above.