What’s holding up India’s exports?

The slow progress of multilateral trade liberalisation under the WTO Doha Round (started in 2001) has led to a proliferation of bilateral and regional trade agreements (RTAs) across regions. RTAs now operate alongside multilateral trade agreements and account for more than half of international trade. Currently, there are 379 RTAs in force as notified by the WTO.

India is no exception to this trend. In the past decade, it has actively pursued the bilateral and regional routes to trade liberalisation. Already, 16 RTAs are in force with a dozen more under negotiation. There is some overlap between various RTAs. For instance, India has signed a bilateral trade pact with Malaysia even though there is an existing India-Asean free trade agreement (FTA) covering Malaysia.

Similarly, India-Sri Lanka trade can happen through any of the four preferential routes, namely, India-Sri Lanka FTA, South Asian Free Trade Area (Safta), Asia Pacific Trade Pact (Apta) and Generalised System of Trade Preference (GSTP) which is a preferential scheme between developing countries. In this context, it would be interesting to analyse how India’s FTAs/RTAs have performed in pushing India’s exports.

First, India’s exports to its RTA and non-RTA partner countries have grown at the same rate. Since 2006 (India signed most of its RTAs after 2006), India’s exports to RTA partners increased by 21 per cent year on year, quite the same as exports to non-partner countries. Therefore, India’s export surge could be attributed more to the diversification of India’s export basket — both in terms of destination and product mix, and less to RTAs.

In fact, after the coming into effect of India’s trade pacts with Asean, Japan and Korea, trade deficit with these countries has increased drastically. While the trade deficit with Asean increased from $7.6 billion in FY10 to $9.9 billion in FY13, it increased from $3.1 billion to $6.3 billion with Japan and from $5.2 billion to $8.9 billion with South Korea.

Second, India’s exports are much more responsive to income changes compared to price changes. Since they are not very price elastic, reduction in tariff rates do not lead to much increase in India’s exports. According to Unctad, a 1 per cent decline in world GDP growth will lead to a 1.88 per cent decline in India’s growth of global exports. However, a 10 per cent reduction in prices will lead to only a 5.4 per cent increase in exports.

Higher price competitiveness Much higher price competitiveness would be needed to boost exports if the global growth scenario is bleak. The main reason for lower price elasticity of exports could be the change in the composition of India’s export basket away from traditional exports of textiles, leather and agriculture products to the export of engineering goods and petroleum products. India now exports less price-sensitive items such as textiles, and more income-elastic items such as chemicals, engineering goods and petroleum products.

Official trade data does not give the volume of trade routed through India’s FTAs/RTAs. However, by looking at the issuance of certificates of origin (CoO) that traders need to produce to avail preferential duties, we get a fair idea of the extent of exports happening through the preferential routes. The data reveals that generalised system of preference (GSP) is the most widely used trade preference scheme in India.

However, the share of GSP-routed exports has come down in the last five years due to the emergence of new RTAs with Korea, Japan, the Asean and Malaysia. GSP and GSTP together account for over 90 per cent of India’s preferential trade. The rest constitute all the other RTAs taken together.

Even though there has been a surge in trade between India and Singapore following the India-Singapore Comprehensive Economic Partnership Agreement (Cepa), most of the trade has happened through the MFN route. This is probably because of the low MFN rates, and higher documentation and compliance costs in the case of other options.

FTA utilisation According to the Asian Development Bank, the utilisation rate of India’s FTAs varies between 5 and 25 per cent (one of the lowest in Asia). The data reveals that in the case of multiple RTAs available for exporting to a particular country, exporters prefer the route where compliance is less cumbersome, even if the duty benefits are fewer.

The other possible reason for low utilisation of India’s RTAs could be the numerous standards, sanitary and phyto-sanitary measures.

A strong argument in favour of India’s FTAs with Asean, Japan and Korea has been that they will facilitate cheaper imports of raw material, intermediates, and parts and components, and help improve the cost competitiveness of India’s manufacturing exports.

However, not more than 20 per cent of the imports from these countries take place through the preferential route. This is due to poor trade facilitation, often compounded by an inverted duty structure as highlighted in India’s latest Economic Survey.

What can be done? Import duties on inputs (already very low because of unilateral and multilateral liberalisation) can be reimbursed if imported inputs are meant for export, but not the cost of cumbersome import formalities. This is anything between 7-10 per cent of the values of imports. This limits the role of preferential pacts in India’s export promotion.

FTAs can’t be seen as a substitute for improving India’s manufacturing competitiveness. India needs to fix its trade facilitation regime, which is one of the worst even by developing country standards, to achieve greater trade integration with Asia. This will also improve the RTA utilisation rate. The key to better export performance lies in improving both the hard infrastructure (ports and shipping, railways, roads, airports) and soft infrastructure (telecommunication, business environment and logistics).

India must leverage its comparative advantage in commercial services under its FTAs/RTAs. The (untapped) emerging markets of Asia, Africa, the CIS and Latin America could be prospective markets. As of now, services remain excessively protected in India. We must offer and seek improved market access in commercial services to push India’s overall exports.

The writers are corporate economists based in Mumbai. The views are personal

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