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The rupee has depreciated by over 35% vs. the US dollar in the last 2 years giving India the advantage of a ‘depreciation dividend’ as one Business Standard editorial put it. (Read here)
Simply put, that means a cheaper rupee makes domestic producers more competitive in the international markets, giving India a cost advantage and thus an opportunity to boost exports. After months of decline, exports have indeed seen a fillip as confirmed by the August trade data released today.
Simply put, that means a cheaper rupee makes domestic producers more competitive in the international markets, giving India a cost advantage and thus an opportunity to boost exports. After months of decline, exports have indeed seen a fillip as confirmed by the August trade data released today.
But is a falling currency sufficient to perceptibly change a country’s pattern of trade? While some sectors could reap immediate benefits, is this trend going to remain sustainable in the long run, amid structural barriers and inefficiencies?
Here are 5 key operational challenges India faces as talk of exporting our way out of the slowdown gains traction –
1) Infrastructure bottlenecks
A recent survey by PHD Chamber of Commerce revealed that 88% of exporters blamed infrastructure bottlenecks as the lead hurdle to boosting exports. Reports suggest Indian exporters lose up to 10% of the value of their goods due to issues like cargo handling time at ports, slow-moving inland transportation & inadequate capacity at ports.The JNPT Chief told another newspaper that Indian ports are working at 90%-100%load bearing capacity against the international norm of 60-70%, indicating high levels congestion. This has also led to high logistics costs for traders (14-15% as against 7-8%) thus reducing competitiveness.Furthermore, plans to augment port capacity at India’s major ports to 1229.24 mtpa by 2017 from 696.53 mtpa appears to be a ‘distant dream’ says a Parliamentary Panel.
2) Complex procedures & red tape
Ease of trading across borders is significantly tardy and complicated in India as compared to good practice economies. The average Indian exporter needs to sign at about 130 places to finish an export transaction. We need 8 documents as compared to 2 in a country like France, an average of 16 days as compared to 5 in Denmark and spend $1095 per container as compared to $ 450 per container in Malaysia to export our goods. This is also significantly above the global average of 9 days & $700 spent per transaction according to an RBI study. The government had mooted a single-window clearance system for exporters last year, but that has failed to take off yet.
3) Multiple tax regime
Exporters also complain of multiple & cascading taxes across segments. Calls for expeditious implementation of the GST regime are thus growing. A Finance Commission study done by NCAER estimates a 10-14% increase in exports if GST is brought into practice.
4) Global demand pangs
A slowdown in global demand over the past couple of years limits India’s ability to rely heavily on exports. The WTO in an interview with CNBC America has said world trade growth estimates for this year would be revised down to 2.5% next week from the previous estimate of 3.3% percent. And speaking to Reuters, Aditi Nayar, Economist at ICRA says "With only a moderate improvement in demand conditions in key destinations such as the U.S. and Europe over the last six months, foreign buyers will attempt to squeeze the margins being earned by Indian exporters."
5) The diversification challenge
The 2011-12 Economic Survey points to the challenge in diversifying our products basket. It points out that while India has been fairly successful in diversifying its markets, product diversification needs a lot more attention. The survey says “In the top 100 imports of the world at the four-digit HS level in 2011, India has only 6 items in the top 50; it has only 5 items with a share of 5 per cent and above and 18 items with a share of 2 per cent and above.” It also recommends that India “reposition itself in its traditional areas of strength like textiles and leather & leather manufactures where it has lost considerable ground, while at the same time making forays into new areas.” The survey says “a gold mine of opportunity in sectors like tourism including health tourism is waiting to be tapped.
These challenges clearly point to the fact that boosting exports is going to need serious initiative from the government & its agencies. Depending solely on the ‘depreciation advantage’ will lead us, in the long run, to the same scenario that we find ourselves in right now; where growth propelled by a global liquidity wave wasn’t followed up with a simultaneous set of reforms leading to an eventual collapse.
India will need to build a conducive exports ecosystem to take full advantage of the rupee depreciation.
