More flexible policies needed to boost trade

Sushma Ramachandran
Senior Financial Journalist

MANY centuries ago, India used to be a major trading nation. The maritime fleets of the Chola rulers in south India travelled to distant parts of Asia and there was a flourishing trade with countries in the region.

The heritage of being a trading country of note has diminished in modern times as the country’s share in world trade is barely 2 per cent right now.

The Covid pandemic worsened the situation and the exports slumped by over 7 per cent in 2020-21 in tandem with the rest of the economy. The scenario is finally looking brighter as exports have perked up in the first quarter of the current fiscal and trade volumes are rising, owing to the growing demand linked to a resurgence in the global economy.

While examining trade issues, it is worthwhile to remember that few economic powers have risen to prominence without becoming notable exporters.

The rise of the post-war Japanese economy was accompanied by a huge export surge that propelled it into superpower status on the world stage.

As for China, little needs to be said, given its enormous clout as the world’s supermarket and the leading supplier of goods to developed and developing regions.

The tiger economies of Southeast Asia along with South Korea followed a similar route, becoming major exporters on their way to rapidly becoming more affluent.

India’s failure to make a mark as an exporter has been due to many reasons, not the least of which has been the comfort of an enormous domestic market available for most manufacturers. Added to this has been the rigours of red-tape faced by exporters, including the rigidity of import-export policies.

The scenario began to change after the 1991 reforms were launched and the then Commerce Minister P Chidambaram revamped the trade policy of the day.

Yet, exports have failed to achieve their potential over the past three decades. There has been a definite upswing both in volume and value, but sustained high growth has eluded the country.

One of the factors constraining trade expansion has been the failure of successive governments to finalise free trade agreements (FTA) in a

time-bound manner. Many such FTAs have been languishing for years, including the one with the European Union. Besides, India has failed to participate in regional trade groupings that might have been beneficial to its interests, like the Asia-Pacific Economic Cooperation (APEC).

India declined to become a member of the Regional Comprehensive Economic Partnership (RECP), even after several rounds of negotiations. The reasons cited have been concern over third country origin imports as well as the looming influence of China over the trade grouping.

These may have been valid, but the fact is that India needs to become more proactive in entering into bilateral and regional trade pacts instead of relying on the beneficial effects of being a member of the World Trade Organisation (WTO). The hesitancy in opening up domestic markets must be removed, otherwise the logjam in concluding trade agreements will never end.

The nature of exports has also been a worrying issue. Despite the addition of numerous manufactured products to the mix, raw materials and intermediates continue to take a disproportionately large share of the export basket. Iron ore as well as iron and steel exports have risen significantly this year, with the bulk of supplies going to China.

Besides, commodity prices have risen steeply recently, enabling petroleum products and iron ore to contribute largely to the rise in export svaluations. The focus on commodities needs to shift to finished products as these provide value and aid in the creation of jobs in the economy.

The future outlook could be promising as more manufactured products are likely to move into the export basket after investments in the production-linked incentive (PLI) scheme bear fruit. The results may be visible in the medium term after projects go on stream. The expected higher output in the auto, textiles, pharmaceuticals, telecom and solar sectors should lead to more exports in these sectors.

The recent good news on the export front, thus needs to be viewed in the context of whether this will be sustained in the long run or remain a short-term phenomenon. Official data shows that exports have risen by 22 per cent in value terms during the four months from April to July this year, as compared to the similar period in the pre-Covid era of 2019.

A record monthly high of $35.15 billion was recorded in July, a rise of 34 per cent over July 2019. With the annual target having been set at an ambitious $400 billion for the current fiscal, export growth so far is on track to achieving the goal.

More ambitious plans are reported to be under way to achieve a quantum jump in exports to key markets like the UAE, the US and Singapore. Another goal is to raise the share of exports in the country’s GDP from 10.2 per cent currently to 15 per cent by 2030 for both merchandise and services.

If these targets are to be achieved, it is clear the policy approach needs to be more innovative. For instance, the biggest potential for export growth is in the area of agriculture and allied goods like seafood. India is already the top rice exporter in the world and the fourth largest cotton exporter. It is also the fourth largest seafood exporter.

This country is one of the biggest global producers of wheat, fruits and vegetables, but remains a minnow on the export front. Processing and value addition of agricultural products has been mentioned as a policy objective by many governments, but little action has been taken to give a push to these in any meaningful way.

So, if India is to take its fair share of world trade in the coming years, the outlook must become more flexible. Entering into FTAs with major trading partners needs to be carried out with a greater sense of compromise rather than the existing protectionist approach.

The agricultural sector also needs to be given enough facilities to ensure faster growth of processed food exports. Such policies could well ensure that India heads slowly but surely in the direction of becoming a leading trading nation yet again.