India still lags its true potential, thanks to protectionist policies, rigid land/labour laws and poor infrastructure

Thanks to a resurgent US economy and a revival in other parts of the world, India’s exports are doing well; it turns out that between January and April, non-petroleum exports came in at $26.3 billion a month, much better than the $23.4 billion a month between October 2019 and January 2020, before the pandemic struck. The pickings in April were $30.63 billion, which is undoubtedly good news since they are better than they were in April 2019.

Unfortunately, though, India’s exports have never really lived up to their potential because it is simply not competitive enough. Embarrassingly, India’s exports crawled between 2011 and 2019, while neighbouring Bangladesh’s were galloping. In the apparels space, for instance, where we have a distinct edge, southern and southeastern Asian nations like Vietnam and Bangladesh are now strong competitors, taking away market-share. They’ve been smart to come up with better labour and land policies, ensuring the business environment is friendly. In India, infrastructure remains hopelessly inadequate, labour policies are rigid, and it is still not quite easy to do business.

The biggest problem, though, is the approach of our policymakers who would rather look inwards and stay protectionist. As trade economist and former NITI Aayog chairman Arvind Panagaryia has so rightly argued, India needs to break out of the import substitution trap before it can become an export powerhouse. After all, the objective of having a strong export base is to be able to import those goods that the country can’t produce efficiently enough. Sadly though, domestic producers with clout have driven the policy agenda, successfully convincing governments they should be given a free run in the market—a risk-free environment in which hefty tariffs on imports keeps foreign competition at bay. Governments have, more often than not, given in to these demands, thereby completely thwarting the exports initiative while creating a set of not-so-efficient producers that are unable to build significant scale to be globally competitive. In the mobile phones sector, for instance, several local players have entered the market but not one has grown large enough to become a multinational.

India has opted out of global trade pacts, most recently, the 15-nation RCEP. New Delhi was unwilling to budge on its demands for an “auto-trigger” mechanism to protect the local market from dumping and strict rules of origins of imported products to check the abuse of tariff concessions. This may or may not be the right strategy; some experts argue India has trade deficits with 11 of the 15 RCEP nations and has been unable to leverage the bilateral trade pacts. However, as it works to revamp its trade policy India must set the bar high. As JP Morgan chief India economist Sajjid Chinoy has pointed out, India’s high GDP growth in the past has been directly related to exports growth and not so much to local consumption. In the boom years of 2003-08, India’s real exports growth averaged 17.8% annually while (public and private) consumption grew just 7.2%. Commerce and industry minister Piyush Goyal may believe exports will touch $400 billion this year, but in no year have they crossed $330 billion. In FY16 and FY17, exports crashed to $262 billion and $276 billion, respectively, from above $300 billion the previous three years, regaining momentum on this very low base in the subsequent three years. Before we set ourselves ambitious targets, we need to fix things on the ground.

Source: Financial Express