Get real with targets

The credibility of foreign trade policies will improve if they are not obsessed with setting export targets

The Union government’s latest foreign trade policy, announced late last month, has received wide-ranging comments from experts and the exporting community. However, an important aspect of the new policy that has not yet received adequate attention pertains to the aspirations that the government believes the new policy should help exporters realise in the next few years.

The new policy has set a target of achieving exports of goods and services worth $2 trillion by 2030. Measured by any yardstick, this is an ambitious goal. The government estimates exports of merchandise goods and services in 2022-23 at $770 billion. Meeting the 2029-30 target of $2 trillion would imply a compound annual growth rate (CAGR) of 14.61 per cent during this seven-year period. In other words, the share of goods and services exports in India’s gross domestic product (GDP) is expected to see a steep increase from 23 per cent in 2022-23 to over 28 per cent in 2029-30, on the assumption, made by senior government officials, that India’s GDP would reach $7 trillion by 2030.

Now, the CAGR for exports of goods and services in the last 10 years was a little less than 6 per cent. While it’s true that the Covid outbreak badly hurt exports at least for two years during this period, it is also a fact that exports saw a sharp recovery in the two years after Covid in 2021-22 and 2022-23. Despite this recovery, CAGR in the last decade was only 5.61 per cent.

If you break the exports performance down into merchandise goods and services, you will see how the task appears even more daunting. Merchandise goods exports saw a CAGR of 4 per cent in the last 10 years, but the target for the next seven years would be over 12 per cent. The scenario for services exports looks no less challenging with their 2029-30 target assuming a CAGR of 17.5 per cent for 2029-30, whereas the performance in the last decade was a little over 8 per cent.

It’s true that India has recorded a healthy rate of growth in services exports in the last two years, clocking an annual increase of between 21 and 29 per cent. But the growth in services exports was quite tepid in the previous few years. Hence, the CAGR for services exports in the last decade was about 9 per cent.

As for merchandise goods exports, their performance improved significantly in 2021-22, with an increase of 44 per cent, but the following year saw growth decelerate to just about 6 per cent. Worse, exports from more than a dozen sectors (including engineering goods, gems and jewellery, cotton and man-made fabrics, carpets, plastics, iron ore and cashew) declined in 2022-23. So, why would the government set a double-digit exports growth target for the next seven years?

The government’s argument here could be that there is nothing wrong in setting targets that are aspirational. But then aspirations must be set in the context of past performance. To be sure, the previous policy, announced in 2015, had also set a highly aspirational exports target based on healthy growth in the past few years.

The foreign trade policy in 2015 had set a target of 11.6 per cent CAGR from $466 billion (merchandise goods and services) in 2013-14 to $900 billion 2019-20. This target was set in the context of a healthy CAGR of about 14 per cent in both merchandise goods and services exports from 2004-05 to 2014-15. But the actual performance during the period of the 2015 policy was a disaster, with exports between 2014-15 and 2019-20 showing a CAGR of just 2 per cent.

Clearly, the government did not draw the right lessons from experience. The more important question that also did not get answered was whether there was any need for setting an exports target. A commerce minister of an earlier government had convincingly argued that the government should not be in the business of setting exports targets. His argument was that exports were not undertaken by the government, but by companies. The government’s job should be to create a conducive environment for higher exports through a supportive policy. After that, it should let exporters or different sectoral export promotion councils focus on how to raise exports of goods and services.

An exports target can hardly be compared with the government setting its fiscal deficit target. A fiscal deficit target is all about how the government goes about raising its revenues and spending on various schemes and projects. Thus, the government should set a fiscal deficit target and should be held accountable for meeting it.

However, exports have to be achieved by exporters and hence the job of meeting a target should be seen as a success or failure on the part of the exporting community. If the government’s help is needed in framing supportive policies, agencies entrusted with the responsibility of promoting exports or exporters themselves should discuss the relevant issues with the government and persuade it to take proper and corrective action. But the idea of the government spearheading the campaign on setting an exports target appears to be an example of a misplaced policy priority. 

Setting such a target is also a relatively easy policy option for the government. Nobody was held accountable for the failure of the foreign trade policy of 2015 in meeting the exports target of $900 billion to be achieved by 2019-20. No action plan was considered when the actual performance of exports of goods and services was only $526 billion, a shortfall of 58 per cent over the target. It is reasonably certain that, unless there is a huge turnaround in the global demand for goods and services, the target of $2 trillion would remain elusive seven years later. But then nobody will perhaps remember in 2030 to hold this government accountable for having failed to meet a target set in 2023.

A way out for the government is not to worry too much about setting a target for exports. If at all a target needs to be set, it should not be for a period of five or seven years. It could set annual targets, which could be monitored at the end of the year and based on the performance, the goals could be revisited.

More important than setting these targets is to focus on how domestic policies are framed to make exports more competitive, how the exchange rate policies are geared to help exporters by aligning them closer to the real effective exchange rate and on how import duties are brought down suitably to reduce the cost for exporters. Finally, a foreign trade policy that could be summed up in just three or five pages, as was the dream of the commerce minister in the early days of reforms of the 1990s, would go a long way in promoting exports.