Mainstream, Vol XLVIII, No 14, March 27, 2010
Measures for Promoting Exports in the Short and Medium Terms
Saturday 27 March 2010, by
India has emerged victorious in the recent recession, which started in the US and engulfed the whole world in a short span of time. India could be able to secure a respectable rate of growth of 6.7 per cent during 2008-09, which is the second highest in world after China. This was mainly because of the domestic-led demand of the Indian economy and stimulus measures initiated by the government at the fiscal and monetary policy levels. However, the exports of India suffered a great deal as a result of the sagging demand in the world economy in general and its main trading partners’ economies in particular. Except for the months of November and December, the previous months of the current fiscal year 2009-10 witnessed negative export growth rates. This in spite of the array of trade policy initiatives announced by the government under the Export-Import (EXIM) Policy 2009-10. These were incentive measures to promote exports. They mainly comprised extension of the Duty Entitlement Passbook (DEPB) scheme up to 2010, making the Export Promotion Capital Goods (EPCG) scheme more attractive, enhancing incentives for Export-Oriented Units (EOUs)/Special Economic Zones (SEZs), etc. Some product-specific and market-specific incentives, which were already in place, were also made more attractive. However, much more is desirable to promote exports not only in this crisis time but also for the long term. Though the World Trade Organisation (WTO) provisions have squeezed the policy space for the promotion of exports, still there are many WTO-compliant areas where the government can pay due attention.
The whole gamut of measures to promoting exports can be divided into two broad categories—price measures and non-price measures. The price measures are supposed to enhance the competitiveness at the price front, whereas the non-price factors give competitive edge in areas other than the price front. The former category includes devaluation of currency, all kinds of indirect and direct tax benefits to exporters etc., whereas the latter one comprises the upgradation of quality of product, fast delivery of consignment, post-sale services etc. The price factors are of short term in effect because they can be emulated easily by the competitor country in a short span of time. For example, if the government initiates the devaluation of the currency, which is the most popular measure at the price front, it would make exports competitive at the price front in the international market, unless the exports are not much import-intensive. This would be immediately increasing sales in the international market (supposing there is the price elastic demand and enough supply of the product). However, having experienced the decrease in demand of their products, the competitor countries might also initiate the same measure neutralising its effect. So the effect of price factors can be easily neutralised in the short term by the competitor countries.
As far as the non-price factors are concerned, they have long-lasting impact and cannot be matched easily by the competitor countries. For example, improving the export infrastructure, both soft and hard, to fast deliver export consignments would have a long lasting impact on the country’s exports. However, it would not be as easy as the price factors to be implemented, but once effected, they would have a long-lasting effect on exports, which cannot be easily neutralised by the competitor country.
International transaction (export) faces many barriers. They can be broadly categorised under sub-headings—tariff barriers and non-tariff barriers. The tariff barriers in general have come down substantially the world over under the multilateral negotiations of the WTO, regional trading negotiations and unilateral initiatives. Barring some countries, like the African ones, and some sensitive commodities, the tariffs have come down across all tariff lines and countries. The conventional non-tariff barriers, like quota, have also been scaled down a great deal. However, currently new non-tariff barriers decide the competitive edge of the country concerned. These include trade facilitation conditions of the country and capacity to meet sanitary, phyto-sanitary and technical standards, among others. One estimate suggests that one-third of the cost of international trade is attributable to transportation cost, which includes carrying goods from the production site to the exporter’s sea port or airport, meeting all documentation-related formalities, shipping/air cost and finally costs relating to taking the goods to consumers in importing countries. All these costs reflect in the price of one’s exported commodity which, in turn, decides the competitiveness of commodity vis-à-vis the domestically-produced good and goods imported from competitor countries. Thus the trade facilitation cost is an important determinant of deciding the country’s competitiveness in the international market. The trade facilitation cost is even higher for the agricultural and mineral items, as the transportation cost is the positive function of weight. It is higher for the heavier goods than the lighter ones. (De 2010)
Though in this crisis time, price factors might bring immediate respite for the exporters (supposing the competitor countries do not respond in a similar fashion), the non-price factors will have long-term effects and they cannot be matched easily by the competitors. Among the non-price factors, some of them can be easily implemented with relatively less effort and time. For example, soft infrastructure, including export and import procedures, can be improved with relatively less effort in the short run. Though the initiative to streamline the system has already been taken, still a lot more is desirable at this front. India’s trade facilitation index value constructed by combining three variables—procedures to exports, days to exports and costs to exports—is not comparable even with many ASEAN countries, leave alone the Western countries. (RIS 2010) As per the Doing Business Report (2008) of the World Bank, exporting a consignment takes 17 days along with dealing with eight documents and costing US $ 945 in India, whereas in Malaysia exporting a consignment takes 14 days, deals with seven documents and costs US $ 345. The EU averages for the same are 11 days, five documents and almost US $ 940. As per the Logistic Performance Index of the World Bank, India stands at the 47th rank with the average being 3.22 points in the list of 150 countries. So there is much scope for improvement on this score.
Trade facilitation (soft infrastructure) has been found a statistically significant factor affecting trade flow. In one World Bank study, it has been found that 10 per cent improvement in export custom procedures would enhance the export performance by 15.8 per cent and 17.1 per cent for the merchandise exports and manufactured exports respectively. (Broadman 2007) In the same way, an increase in internet services by 10 per cent in the exporter country would enhance the exports of all products and manufactured products by 1.9 per cent and 2.2 per cent respectively. (Broadman 2007) The sensitivity (elasticity) of Indian exports to trade facilitation is more than to the tariff rate as per the estimation of the gravity model carried out by the author. The soft infrastructure can be improved in the short run with some conscious efforts for better coordination of various agencies involved in trade and capacity-building programmes of the staff. E-trading/filing is still operating on papers, which can be made operational with less efforts in a short time.
Likewise, of late the capacity to meeting sanitary and phyto-sanitary standards for agricultural products and technical standards for other manufactured products is significant for exporting especially to the developed countries. Conforming to these standards is difficult mainly for the small scale industries (SSIs). Educating the businesses, especially the SSIs, about these standards and establishing testing laboratories and certificate-giving agencies would be helpful in this regard. Financial and technical assistance to the SSIs to upgrade their technology would also go a long way in this direction. The government is already doing work in this area. However, there is a need to intensify efforts in this crisis time.
Another area that can be exploited in this crisis time with relatively less effort is diversifying Indian exports geographically. Though country-specific incentive schemes are already there, a lot more is desirable. India has traditionally relied more on the countries of the North for its exports. It is advisable to identify new markets from the South. For example, there is much scope to increase exports to the African countries. The African countries, in spite of being prominent allies of India politically, always figure less favourably in India’s economic priority list, albeit of late some efforts have been initiated by the Indian Government to strengthen economic ties with these countries. Major policy initiatives by India after year 2000 included the Focus Africa Programme, TEAM-9 Initiative, Pan-African E-Network, India-Africa Partnership Conclaves and India-Africa Summit. A major thrust to Indo-African economic relations came after the conclusion of the Indo-African Summit, held in 2008 in New Delhi, with the aim of promoting trade and investments between India and the African countries.
All these initiatives resulted in a steep increase of Indian exports to Africa during the last 10 years. Exports from India to Africa have increased about five fold from US $ 1.69 billion in 2001 to US $ 8.80 billion in 2007. However, it is still below the potential. More institutional backing by the government coupled with private business chambers’ efforts to identify business opportunities in various new markets by organising business meets would go a long way in this regard. The research institutes may also be helpful on this count. In fact, the major problem is the dearth of information and misconceptions about the new markets impeding exports. This seems to be reason as to why exporters always feel satisfied with conventional markets. Finding new markets requires research, which entails cost. This is an area where the government can chip in. It would be WTO-compliant also as it would fall under the permitted category of subsidies. Another region for diversifying Indian exports might be the Latin American countries. Let alone these distant markets, even within SAARC nations many commodities which India can export to the rest of the member countries at competitive prices are imported from outside the bloc partly for lack of knowledge. (Das 2010)
Searching new markets from the South is also strategically significant for India in the long run. The current financial crisis has exposed the imbalances in the world economy. It has exposed many weaknesses in the present world economic system and the US economy. The confidence in the US economy as the ‘power house’ of the world economy has been shaken. It has been widely realised that the US cannot live forever beyond its means, a privilege it has been enjoying for long as a result of its currency being the main reserve currency in the international monetary system. It gives it seniorage benefits, which have been permitting it to maintain the current account deficit continuously for a long time. (Agarwala 2009) However, having realised the danger of the present system, it is advisable for India to start finding new markets from the South, as there are strong chances of reshuffling of the composition of demand in the world economy. To make the world system more stable, it is a good idea that the US learns to save and Asia, regarded as the saving glut, learns to spend more. In the near future, there is a chance of substantial devaluation of the US currency. It would be in the long-run interest of India to step up the demand for its exports away from the conventional markets to the South, which has a strong possibility of growth in the future.
The government can initiate the process of strengthening the institutional mechanism with these countries. For example, India does not have any operating regional trading bloc (RTB) with the African countries, though a few are in the process of negotiations. One regional trading bloc is being negotiated with the Southern Africa Customs Union (SACU) and another bilateral trading arrangement with Mauritius is in the process of negotiations. The IBSA, including India, Brazil and South Africa, is also in the pipeline. India has two preferential trade agreements with the Latin American countries—one, with Chile and another, with MERCOSUR. It is advisable to expedite the process of negotiations in Africa to operationalise these RTBs early and replicate the same process with the other countries of the continent on the basis of thorough research for the economic viability of the RTBs. The results of these initiatives might fructify in short to medium terms.
The Government of India, with the help of the Export-Import (EXIM) Bank, can increase the line of credits (LOCs) to these countries for various infrastructure projects with the arrangement of buying machineries and equipments from India. The EXIM Bank of India has many lines of credits (LOCs) operating in Africa, Asia, the CIS, Latin America and the Caribbean. As on November 30, 2008, the Bank had 114 LOCs operating in 94 countries with credit commitments aggregating US $ 3.75 billion. They are meant to facilitate the import of project-related equipments and services from India on deferred payment terms. These can be further increased. These will bring a win-win proposition for India and the poor countries availing this facility. On the one hand, it would provide the much-needed help from India to these countries for developing their infrastructure; on the other hand, it would provide the impetus to Indian exports at this crisis time.
One reason as to why Indian exporters do not prefer to export to these new markets from the South is that they do not have proper trade-facilitating financial institutions. Conducting international trade requires the involvement of banks in both the countries. There is a lack of institutional capacity in the financial sector in these economies. The Indian Government can help these economies on this count as well. The EXIM Bank of India has already helped many poor countries in establishing their EXIM banks. These efforts can be further intensified.
On the price front, it is advisable to make the Indian economy more cost-effective. Though after the 1991 reform programme many initiatives in this regard were initiated, many areas are still not addressed. One such area is making the cost of capital (lending interest rates) more competitive. Apart from the business cyclic conditions, the lending interest rates in an economy are decided by the cost of reserve which the bank is supposed to pay, the cash reserve ratio (CRR), statutory liquidity ratio (SLR), operating cost of banks etc. Though the CRR, SLR and bank rates are coming down over the years, the lending rates are still not competitive in comparison to the world standard. The main reasons are the administered rates fixed by the government on certain savings, such as post office monthly savings, Public Provident Fund, Kisan Vikas Patra etc., and the high operating cost. Banks are paying attention of late on the operating cost by being more technology-savvy. However, administered interest rates are still coming in the way of banks reducing their deposit rates to the level dictated by the market fundamentals for the fear of losing deposits to other instruments offering administered interest rates, which are higher than the market-determined rates. This, in turn, eventually reflects in higher lending rates. Doing away with administered interest rates would help in reducing overall lending rates in the economy. This measure will be WTO-consistent.
The incentive schemes to promote exports should be designed in such a way which could generate the maximum growth of exports. The export items can be divided into two categories—dynamic export items and non-dynamic export items. Dynamic export items are those which have been experiencing high growth rates for the last many years, whereas non-dynamic ones are having low growth rates, though they may hold high shares in total exports. As per the four-level HS classification, the dynamic products the world over are only 125 items. Out of these dynamic items, India exports 40 items. In the last recovery time, these items played a significant role in reviving India’s overall export growth rate. This time also, these items are expected to record high export growth rates in the period of recovery. There is a need to focus on these dynamic products for the incentive schemes.
For the medium to long term, the hard part of export infrastructure can be improved. These include improving inland roads/railway lines to ports, enhancing warehousing and cold storage facilities, improving port/airport capacity to handle export consignments fast etc.
Another area which can be taken care of in the medium to long term is going for network production, which is the modern way of organising production. Of late, technological advances in information technology, logistics and production have allowed corporations to divide value chains into functions performed at different countries (based on comparative advantages) by either foreign subsidiaries or contract suppliers. These comparative advantages can stem either from the availability of some special raw material or availability of a certain kind of labour market. For example, as the product goes through many stages before it reaches the consumers as the final product, some stages require relatively low skilled labour, whereas other stages of production require semi-to high-skilled labour. Relatively less-developed countries have cheap low- and semi-skilled labour, whereas relatively developed countries have medium- to high-skilled labour. Thus a range of countries can be incorporated in the network production to cut the cost. There has been a rapid growth of intra-industry network trade in parts and components relative to conventional inter-industry trade of late.
The countries of the North and ASEAN countries could be able to increase their competitiveness through this process. India can also follow the same strategy by engaging the South Asian countries, with which it has the South Asian Trade Agreement (SAFTA), and other countries. Regional trading arrangement is a facilitator for the network production, as components and parts can be traded without tariff and non-tariff barriers. India has also tried network production recently. The Indian tyre company, CEAT, is a typical example: it established an export-oriented tyre plant in Sri Lanka to cater to its growing markets in Pakistan, Middle East and other countries. This will take the advantage of abundant resource of natural rubber available in Sri Lanka. This can be emulated in other areas also, especially relating to buyer-driven network production, such as food, textiles, furniture, etc. It is also possible in the services sector. Medical tourism is one such area. Back-up offices of Indian companies in other relatively less-developed countries (having low wage rate) with reasonable computer-skilled labour is yet another potential area. Medical tourism would increase directly services export, whereas the back-up office would give competitive edge to the main product lines on the price front in the international market.
Agarwala, Ramgopal (2009), Regional Keynesianism: An Urgent Need of the Hour and Its Relevance for India Today, RIS Policy Brief, RIS, New Delhi.
Broadman, G. Harry (2007), Africa’s Silk Road: China and India’s New Economic Frontier, World Bank, Washington D.C.
Das, Ram Upendra (2010), Regional Economic Integration in South Asia: Prospects and Challenges, RIS, New Delhi.
De, Prabir (2010), Regional Cooperation for Regional Infrastructure Development, RIS, New Delhi.
Export-Import (EXIM) Policy (2010-11), Commerce Ministry of India, New Delhi.
EXIM Bank of India (2008), Annual Report.
WTDR (2007) Building a Development-Friendly World Trading System, World Trade and Development Report, RIS, Oxford University Press.
Dr Anshuman Gupta belongs to the RIS for Developing Countries.