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(GIST OF YOJANA) Export Strategy

[July-2020]

Export Strategy

Introduction:

The word “Aatmanirbhar” refers to both self-reliance and self-sufficiency.
The former has a pragmatic positive connotation aimed at developing capabilities indigenously without shunning imports while the latter, is unpragmatic, inward looking and has a negative denotation which hits at Ricardo’s theory of “Comparative Advantage” which holds that international trade is a result of differences in the relative opportunity costs of countries in the production of different goods.
The interpretation of any word or expression depends on the context in which it is being used.

Background:

The Prime Minister used the phrase “Aatmanirbhar Bharat” while referring to the pandemic which has put a premium on self-reliance as essential supplies from source countries have been interrupted.
COVID-19 has also disrupted the global supply chains and their new realignments are in the pipeline. India is again blessed with the opportunity to be a part of those supply chains where significant trade is still happening.
An effective exports promotion strategy hinges on robust and competitive domestic manufacturing. Manufacturing is competitive when it can compete with the best globally while simultaneously facing imports, particularly duty-free imports from our partners on the domestic turf.
In ‘Wealth of Nations’, Adam Smith argued that “the great object of mercantilism was to diminish as much as possible the importation of foreign goods for home consumption and to increase as much as possible the exportation of the produce of domestic industry.” His theory is still relevant today particularly for countries having large internal markets.

Key objectives of an export strategy:

An exports strategy aimed at import substitution and export promotion, as two sides of the same coin, is ideally suited for us.
Import substitution, unlike its general perception, is not undesirable. It is not inward looking in the sense of closing your door to imports, rather it is focused on developing domestic capability and prowess to reduce your dependence on imports, particularly when disruption of supply chains can deprive you of critical inputs/products.
Many countries constantly monitor the trends of imports and whenever they observe a sharp hike, they engage with the industry to understand the challenges faced in manufacturing such products domestically. Some countries have adopted an FDI-tariff linkage which enhances tariff for attracting FDI and encourages foreign suppliers to set up bases in their country to serve their consumers. It is not necessary to hike the import tariff to implement such a strategy.
However, an ecosystem which provides a level-playing field must be offered to our manufacturers. This does not only mean granting them “deemed export” status but also involves extending concessional credit to such manufacturers along with competitive electricity tariff and efficient logistics.
Currently, Indian manufacturers pay much more for inland freight, while supplying machinery from Southern India to Northern/Eastern India, than a foreign supplier dispatching it from Europe or North-East Asia; therefore, there is no level playing field.
The tariff hike for imports substitution is warranted only to address the inverted duty structure or for a specific objective and it should have a definite sunset clause; such a clause is required so that companies scale up and get investment but don’t become inefficient due to complacency.
We also have to be vigilant of such tariffs as they can result in domestic cartelisation or monopolies which push prices up, thereby adversely impacting the upstream production.
A positive environment to enable a supportive ecosystem for domestic manufacturers should be given preference over a tariff hike.
Indian exports have progressively diversified in terms of products and the share of developing and emerging economies as destinations of Indian exports has significantly increased over time. However, the evolution of our exports has not followed a classical pattern.
The trends point to a contradiction in the Indian economy, a technologically advanced services sector exporting high technology services and a lagging manufacturing sector exporting relatively low-value products; our export profile requires a major transformation. We are largely focused on exports of textiles, leather, handicraft, gems and jewelry, carpets, marine and agro products. While these are important for employment creation, their share in global exports is on a decline.
The top 5 products in global exports, accounting for over 50 per cent of the trade are- electrical and electronics products, petroleum goods, machinery, automobile and plastic goods.
However, the share of these products in our exports is less than 33 per cent. Our global share in these 5 products, put together, is a little over 1 per cent though our share in overall global exports stood at 1.7 per cent in 2019.

Way ahead:

The revised definition of MSME will also encourage exports by these companies as the government has excluded exports turnover from the aggregate turnover for eligibility purposes resulting in more companies qualifying for MSME status. Moreover, the increased limit on investment in plant and equipment for medium companies, from Rs. 10 crore to Rs. 50 crore, will encourage adoption of more advanced technology in manufacturing which is the key to competitiveness in exports.
An efficient trade facilitation can integrate into the regional value chain and subsequently into the global value chain for pushing the exports. It is good that trade facilitation, reduction in logistics cost and constructive engagement with our trade partners is high on the agenda of the government.
Greater focus should also be given to FDI to boost exports and enhance productivity. Numerous initiatives have been taken for liberalising the FDI regime in recent years, yet FDI inflows have not picked up substantially. We should improve the business environment and expedite regulatory and other clearances at all levels to translate greater liberalisation into higher inflows. FDI not only brings capital but more importantly access to technology and markets which are key to exports.
Vietnam has played its card very well in working out such arrangements with the EU; by having FTA with both EU and China, it can attract investment which is moving out of China at the time of this pandemic while still allowing them to cater to both markets.
Exports have to be treated as a National Priority and all stakeholders (central and state governments, regulatory and promotional agencies, service providers and entrepreneurs) need to be on the same page to facilitate exports. An institutional set-up to address the problems and challenges faced by exports in the shortest time frame possible is the need of the hour.
A three-tier structure with the district, state and central level working on an electronic platform would be ideal and the officers attending such meetings should be empowered to take quick decisions. Despite a thriving domestic market, exports are an important and integral part of our economy. All those years in which the economy grew by 8 per cent or more were the years in which exports grew over 15 per cent.

Conclusion:

Therefore, a rebound in exports during the post COVID-19 period is essential for a revival of the domestic economy. A resilient exports sector has successfully done so in the past and with the support of an enabling and supportive ecosystem, it can certainly deliver now as well.