The Hindu Business Line : Sustaining export growth — Leverage on external opportunities

The sustained growth in exports is a vindication of the liberalisation measures and the progressive policies followed by the government in recent years and, more important, a compliment to trade and industry. One hopes that the trade policy to be announced shortly will spell out further measures that sustain the momentum of growth, says P. P. Prabhu.

THE Finance Minister, Mr P. Chidambaram, in his Budget speech, announced an ambitious export target of $150 billion by 2008-09. The encouraging growth in exports this year, on top of the excellent showing the previous year, has spurred efforts to double the country's current share of world trade.

The sustained growth in exports is a vindication of the liberalisation measures and the progressive policies followed by the government in recent years and, more important, a compliment to trade and industry. The performance also demonstrates the greater heights that can be reached, were there to be in place pro-active policies that encourage large-scale investments in export production besides minimisation of transaction costs.

The satisfying export performance should not, however, blind us to the fact that the vast improvement in the growth rate has been due to a very rapid rise in the exports of a small band of products. It may be possible to sustain high export growth only if our export basket becomes broad-based; that would call for our country becoming competitive in many other products that have significant share in world trade.

The trade data brings out that three items — petroleum products, iron ore/ iron and steel, and gem and jewellery — have greatly contributed to the higher growth. During April-September this year, the three items alone contributed an additional Rs 16,744 crore of the overall increase in exports of little over Rs 37,425 crore, or nearly 44 per cent.

Similarly, between 1997-98 and 2003-04, the overall export growth was 83 per cent, but if the three items are excluded, the figure drops to 63 per cent.

Of these three items, in petroleum products, the import content is, as is well known, very high and the value addition low. As regards iron ore and iron and steel, export growth is mostly driven by Chinese demand; in 2003-04, nearly 54 per cent of export was to China; also, international prices have been ruling very high.

India's per-capita consumption of iron and steel is at present very low, indicative of the state of the economy, but with the expected higher growth in the coming years, the domestic demand for iron and steel will pick up; then the availability for exports may be limited.

Though India is a low-cost producer of steel, given the massive investment needed for augmentation of production and the long gestation period involved, the surplus in the coming years is unlikely to be substantial.

The outstanding performance of the gems and jewellery sector is, no doubt, a tribute to, and a shining example of, Indian entrepreneurship, but the import content in this industry is fairly high; also, India has already carved out a major slice of the global market, which is not substantial.

Improving our share in world trade would call for building competitive strength in a wide range of manufactured products that constitute a substantial and growing part of world trade. As the data from the Table (from International Trade Statistics 2004 of WTO) brings out, in calendar year 2003, manufactures accounted for $5,437 billion of the total world merchandise trade of $7,294 billion; and three product groups — office machines and telecom equipment, other machinery and transport equipment, and automotive products — constituted nearly 53 per cent of the trade in manufactures.

In these three broad product groups, our presence is insignificant. Only in textile and clothing, does India have a reasonable share but far below potential.

The failure to give a fillip to manufactures and that too, medium and high technology products, has been telling on our export performance. China's impressive export performance in the last decade or more is explained by its success in penetrating the world market in manufactures.

China could boost its export of manufactures from a mere $44.31 billion in 1990 to $397 billion in 2003; Malaysia's exports jumped from $15.82 billion to $77.8 billion during the same period, but India could manage to edge up export of manufactures from $12.52 billion to mere $37.32 billion.

One example of the case of office machines and telecom equipment (global exports valued at $933 billion during 2003, constituting almost 12.8 per cent of total trade) brings out the issue in perspective. From 1990 to 2003, Malaysia's export of this product group improved from $8.21 billion to $49.73 billion, Thailand's from $3.52 billion to $19.48 billion and the Philippine's from $1.83 billion to $24.76 billion. Our exports grew to just $0.59 billion, from a low of $0.18 billion.

The importance of manufactures, not only for the domestic economy but also for exports, is now well recognised. The Finance Minister, in his Budget speech, emphasised that, world-wide, it is manufacturing that has driven growth and India should build on its manufacturing capacities and scale them up to global standards.

The country has in recent years achieved a fair amount of export success in certain products such as auto components, pharma, etc., in addition to the traditional area of textiles and garments. These sectors also offer good potential for export growth, in addition to machinery, telecom products, etc. It is not the case that special efforts and favours need to be bestowed upon certain selected sectors. Given the innate skills and entrepreneurial abilities that are abundant in our country, every industry can become globally competitive if favourable policies are in place; but certain sectors hold out large opportunities in global trade and exhibit great promise and it will be in our country's interest to provide the necessary fillip to give a boost to such sectors.

To give one more example, China's export of textiles (including garments) and consumer goods to the US and the EU were $76.6 billion and $43.7 billion respectively in the year 2003. This shows the vast market potential available for exploitation if investment and competitiveness could be ensured in these sectors. These are labour-intensive industries and precisely the type of export sectors our country needs to encourage.

There are many other sectors, such as auto components, engineering and hardware electronics, which could also achieve substantial growth if infrastructure and other constraints that are acting as a brake on the rapid growth of those industries could be tackled.

Several factors are responsible for the slow growth of exports, including the inability to attract investment in export-oriented manufactures, inadequate infrastructure, inflexible labour laws, high transaction costs, and so on. Infrastructure being the country's major weakness, immediate measures are required to improve efficiency of Railways, port operations, etc., as these have considerable impact on cost-competitiveness. All these issues need to be addressed to make our industry globally competitive.

In this context, the proposed Manufacturing Competitiveness Programme announced in the Budget is timely. The details are not available, but it is hoped that the programme will really contribute to improving competitiveness. Other measures such as the reduction in duties on certain capital goods, the continuation of the R&D Corpus Fund and the Technology Upgradation Fund for textiles, besides de-reservation of certain industries, are useful measures.

Another welcome move is the reduction in the peak rate of Customs duty. However, as the incidence of total indirect tax rates will continue to be comparatively high, there is every need and justification for continuing with the existing duty neutralisation schemes. If the DEPB scheme were to be altered, the substitute or the Modified Duty Drawback scheme needs to be structured in a way that is simple to operate and also ensures complete neutralisation of all duties. Hopefully, VAT should be operational soon when it should be possible to devise a suitable scheme for refund of the incidence of all State taxes also.

There was little in the Budget relating to export facilitation. There was no mention about EDI, a long pending measure that will help further simplification of procedures and reduce transaction costs; nor any assurance on the eagerly awaited Special Economic Zone Act. Perhaps, the trade policy will address these issues. It is hoped that the SEZs will be made attractive enough to encourage huge investment, domestic as well foreign, in export-oriented manufacture.

In the last few years, due to liberalisation and the pro-active policies pursued, there has been a spurt in exports and our recent export performance is, no doubt, creditable. However, complacency may be imprudent as there is a long way to go before we can garner a respectable share of world trade. The expectation is that the trade policy to be announced at the end of the month will, besides continuing the liberalisation measures, spell out the various measures necessary to sustain the momentum of growth that we can, as the Finance Minister said, " build on the growing external strengths of the economy".

(The author is former Commerce Secretary.)

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page

Stories in this Section
Gas realities

The softest pillow is a clear conscience

Budget: Illusory gains for pensioners

No such thing as free lunch

Sustaining export growth — Leverage on external opportunities

Draft Condi, draft Hillary!

Pension schemes

Budget rollbacks

Cash transaction tax