Exports in limbo

It would be a mistake to dismiss the 5 per cent decline in India’s exports for October 2014 as a temporary blip. Not only have the exports steadily lost momentum from their 12 per cent growth in May this year, the slowdown is getting more broadbased, with half the items on the export list registering declines in October. Given the structural factors that contribute to the decline, we need active policy intervention to arrest it.

India’s export competitiveness has been eroded by three factors in recent months. One, the rupee’s relative strength against the dollar this year, which has put Indian exporters on the back foot on pricing. Two, the sharp fall in global petroleum and agri-commodity prices has pruned export realisations in these critical sectors. After booming for many years, commodities now seem to be entering a prolonged bear market — a worrying prospect since these have been the two fastest growing segments of Indian exports over the last five years, making up 35 per cent of total export revenue. And three, India’s continuing high interest rates, which contribute to a high domestic cost structure. Recently, Europe and Japan have eased rates further to deal with their weakening economies and China has begun a new round of stimulus to kick-start growth. Given this it is clear that the problem of slowing exports needs structural solutions. In agri-commodities, global price declines cannot be offset through short-term props such as one-time export subsidies. Instead, we need to explore new markets for large farm exports such as basmati rice, oilmeal and tea, which are currently over-reliant on a few regions (Iran, Russia). With inflation waning, policymakers should desist from imposing ad hoc export limits, minimum export prices and registration requirements on farm products. These have made India an unreliable trading partner in the global agricultural trade. Falling global commodity prices, on the other hand, make this an opportune time to change its export mix in favour of value-added manufactured goods. Segments such as auto components, engineering goods, textile products, chemicals and pharmaceuticals have shown traction in recent years. Demands from these exporters for procedural simplification and better inter-ministerial coordination can be met through technology. Beefing up port infrastructure, incentives for industrial R&D and investments in re-skilling and technology upgradation can provide a long-term boost to manufacturing exports.

Recent data shows that the Centre cannot afford to procrastinate any longer over the notification of its new foreign trade policy. The expiration of the earlier policy in March this year has put exporters in a limbo, with incentives such as the 3 per cent interest subvention scheme being discontinued. Given the challenges exporters face, the interest subvention scheme should be reinstated without further delay. The annual outgo of ₹1,500 to 1,700 crore on the scheme is surely not a big price to pay, given the unfolding crisis in Indian exports.

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