The art of winning trade deals post the pandemic

India can gain global trade share after the pandemic, but only if it acts quickly

It’s no secret to anyone that economic growth will be very weak this year. The challenge will not just be to stage a quick recovery but also to seize new growth opportunities that have opened up due to the crisis.
 

And for that, one may need to reflect on the footprints that Covid-19 leaves behind. What will the threats and opportunities be? How can India prepare?

The Covid-19 experience may unleash a wave of home bias around the world. A push to produce more domestically and develop new national champions could come back in vogue. This could shorten global supply chains and reduce the amount of trade between countries. To be fair, this had already been happening since the global financial crisis, but could pick up pace now.

New markets for exports though could also arise over time, as importers look for new producers in a bid to diversify. But India will have to work hard to seize these opportunities, because gaining share in a shrinking pie is never easy. A lot may boil down to its administrative capability to roll out reforms that can smooth the way for business.

If global trade shrinks, the foreign funding that underpins it could do the same. And if capital controls and other restrictions come into vogue, funds from overseas may need juicier returns to be tempted to take on the risk, especially when venturing into emerging markets. Countries that can deliver higher growth will get the cash. For India, again, that means rolling out much needed reforms.

So what are these reforms? Those that improve India’s potential growth and raise its export competitiveness fall broadly into the category, but we focus on the latter as performance there hasn’t been great. Since FY14, core exports have fallen by 4.5 per cent of GDP. As a proportion of world trade, India is stuck at 1.7 per cent. Any improvement, if at all, has been in the second decimal.

To get to the bottom of what’s going wrong, we looked into the drivers of exports and found three key factors: Domestic bottlenecks explain 50 per cent of the slowdown, world growth 33 per cent and the exchange rate less than 20 per cent.

But that’s at a macro level. When we looked more deeply to examine exports sector by sector, we found some eye-opening results. While the three main drivers continued to matter, sector-specific factors played an increasingly important role.

To cite a few, we found that volatility in cotton availability and a disproportionate policy focus on cotton when world demand has moved towards man-made fibers has inhibited the growth of textile exports. Similarly, irrigation infrastructure matters for agricultural exports, and foreign direct investment and domestic import tariff rates matter for engineering goods.

Our findings suggested several dos and don’ts for reviving India’s export fortunes:

First, easing domestic bottlenecks will help the entire export sector. The list is long, so it may be a good idea to target some of the more pressing reforms in the land, power and transportation sectors where momentum for change is already underway.

Examples include fast tracking recent state plans to create large land banks, particularly those near ports and airports, and to make them efficient manufacturing hubs; put into operation the new commercial coal mining policy to allow for a more stable supply of coal; and make India’s major ports more efficient.

Second, sector-specific factors can make a meaningful difference. Free market thinkers would prefer that authorities work towards creating an overall environment where businesses can flourish, rather than tinkering with policies down at a sector level. Yet, past policies have created some problems, and sector specific corrections may be needed. For example, equal support for cotton and man-made fibres can lead to a healthier balance and higher growth for India’s textile exports.

Third, a signal to the world that India is open to trade. Here, India has been doing the opposite by raising import tariffs across the board over the last two to three years. The risk with this, as trade economists warn, is that a tax on imports can translate into a tax on exports. Instead, India should try to join Asia’s Regional Comprehensive Economic Partnership and benefit from the opportunities that come by as Asian supply chains rebuild.

Fourth, blaming export woes squarely on the currency is not the way out. The strengthening rupee (by 11 per cent on a real effective between 2014 and 2019) explained less than a quarter of the slowdown in exports over the last few years.

Finally, some good news for India’s IT companies. As working-from-home becomes popular, more investment will likely be made in digital transformation, cyber security and cloud migration around the world. Indian IT companies have proven to be quite adaptive in the past, and stand a good chance of seizing this opportunity. They should be allowed to flourish.

In the past, India has reformed best during periods of crisis. If it can make the right strategic choices quickly, it could make up for some of the lost momentum in economic growth and job creation.

The author is chief India economist, HSBC Securities and Capital Markets (India) Pvt Ltd