Trade trouble

Lower exports reflect structural weaknesses

In yet another blow to the prospects of the Indian economy in the medium term, the data released this week revealed that export growth has hit a 41-month low. According to the Union Ministry of Commerce and Industry, exports contracted by 9.7 per cent, year-on-year, in June, after a small increase in May.
 
There is no immediate concern about the external account, as imports contracted by a larger amount in absolute terms, and the trade deficit thus decreased. But that is not relevant. The issue is that exports are now a drag on growth, as distinct from being a significant engine of economic expansion. This has been the case for some years now, with the occasional green shoots perceived by optimists in the sector failing to mature. A closer study of the data does not provide much foundation for optimism. It is true, as officials have reportedly pointed out, that one major contributor to the fall was a decrease in the export of refined petrochemicals, and that this might be temporary. Two major refineries — Reliance’s in Jamnagar, and the state-owned one in Mangaluru — were partially shut for maintenance for some time in the relevant period.

 
However, this alone cannot explain the slowdown — non-oil exports still contracted by around 6 per cent. For example, the gems and jewellery sector continues to be plagued with inconsistent export growth, and the export of engineering goods — one of the bright sparks in the previous financial year — contracted by 2.65 per cent in June.
 

Part of the slide can be attributed to global headwinds for trade, and it is true that there are concerns surrounding the US-China trade war. But many peer economies correctly see this as an opportunity. Vietnam, for example, has posted 6.7 per cent export growth in the first five months of 2019. Bangladesh clocked double-digit growth in apparel exports last financial year, while Indian apparel exporters have struggled. In 2014-15, exports of textile and apparel from India were valued at $40.1 billion; in 2018-19, exports from this sector were $40.4 billion. This is a sign of a failure to inject competitiveness into a crucial, labour-intensive sector.

 
The government needs to acknowledge that its various trade-focused schemes have not worked, including sector-specific packages and higher tariffs on imports. All these have done is to render Indian tradable sectors less competitive. The shortage of credit and a poorly implemented goods and services tax have further retarded growth in exports. Therefore, the first step must be to ensure that tax procedures are simplified drastically. Instead of doing this, the government has declared that “manual checks” will be reintroduced before tax credit is provided to exporters, which might mean that the gap between filing a return and getting a refund would triple. For low-margin exporters, this will be a further constraint on expansion. But tax issues are only part of the story. The longer-term story is one of eroding competitiveness, aided by an overvalued rupee. Challenges on the export front reflect the structural weaknesses of the Indian economy and should be addressed through structural reform. Clearly, this should be one more pressing concern for the new government to address.