An expected fallout of the shrinking demand for Indian produce from key western markets has been the demand from exporters for a slew of sops, ostensibly to “minimise the impact of global slowdown”. Their largely fiscal demands, presented recently to the new Union Minister of Commerce and Industry, included increase in the reimbursement rates for various input duty refund schemes and an exemption on payment of service tax on all services used.
The merits of the subsidies and tax setoffs demanded are debatable, given the frequency of WTO actions on some of these measures; the latter have been policies of choice for successive Indian governments unable or unwilling to undertake reforms and procedural simplification that can slash costs of trading and improve competitiveness.
Exports have been one of the worst hit sectors of the economy in this global recession, even though domestic real GDP has managed to weather the financial crisis storm better than expected.
Exports contribute only about 16 per cent of India’s GDP, which is low compared with other regional economies. But it is an undeniable fact that exports have declined for the seventh consecutive month as a result of lower demand in the West, falling by a massive 33.2 per cent year-on-year in April 2009, following a similar 33.3 per cent decline the month before. Imports too shrunk by 36.6 per cent, mainly due to India’s reduced oil import bill which went down by more than half in April 2009 year-on-year.
Testing period
The subdued prospect for global trade in the current year has made maintaining the current year’s exports at even last year’s levels a stiff challenge. It is also true that many of the country’s export-dependent sectors use low-technology and labour-intensive processes, and the sharp contraction in exports has had acute socioeconomic consequences on those dependent on these jobs.
Nevertheless, it needs to be recognised that export incentives can only help so much when demand for the exportables remains depressed. Until the global consumption and investment demand returns to the pre-crisis normal (which even the optimists expect will take a couple of years at least), these sectors will have to be patient and upgrade the quality, efficiency and productivity standards of their output and operating processes. This is a testing period in which only the best and those offering clear value propositions will survive unscathed.
Removal of tariffs
So what can the government do to help exporters? In the early 1980s, in fact throughout the decade, the Indian economy was characterised by high taxes and steep tariffs. Today, clearly, there are far less distortions in policy terms; the economy is more open, and taxes and duties are much lower.
However, India’s taxation and tariff regime continue to remain more onerous compared to its competitors, in particular the Asian neighbours, which impacts India’s export competitiveness.
An important element of the export promotion agenda ought to be the removal of the remaining high tariff rates, in particular on the non-oil intermediary inputs for Indian industry.
For example, all machinery and parts (project goods and machinery classified under HS chapters 84 and 85, accounting for 13.5 percent of imports in the last fiscal year) imported for industrial/irrigation/mining/power purposes face a tariff duty of 7.5-10 per cent per kg (unless imported under notified government projects in which case they are eligible for concessions).
Of India’s top 100 import items (84.2 per cent of total trade), non-oil imports constitute around 47 per cent and these commodities (a large number of which fall in the intermediate good category) face an average 7.5 per cent import tariff. The import-intensive gems and jewellery sector faces a 10 per cent import duty on its imported raw-materials. These anomalies, if removed/reduced will help to enhance the competitiveness of Indian exports and encourage new investment in existing/greenfield projects.
Direction of trade
A quick analysis of India’s direction of exports in the April-December 2008-09 period (the latest aggregate data available) vis-a-vis the corresponding previous period indicate that the share of key import and export products in India’s total trade has remained unchanged, even as volumes have declined sharply due to the crisis. In other words, the receding tide lowered all boats equally. The direction of trade picture is similarly illuminating.
The relative share of EU 27 in India’s total exports remained the same, and the ground lost in the India-North America (about 1.5 per cent) and India-NE Asia (about 2 per cent) exports has been compensated by increased Indian exports to the West Asian and North African (WANA) countries. Moody’s analysis noted that while the sharper decline in imports helped contain the trade deficit, it was the lower global oil prices compared to a year ago that played a role in keeping overall import payments in check, which has started to reverse in the past few weeks.
The moderation in inbound and outbound non-oil shipments on the other hand would be a drag on the performance of various business sectors ranging from trade to transport, since the decline reflects the weak future order book for domestic consumers/producers and exports.
At times like these, price competition for foreign orders is likely to get more severe. In the interest of creating sustainable competitive advantages, the “sector-specific spurs” promised by the Minster should focus on providing enabling conditions for efficiency and productivity gains, and minimising transaction costs.
Source : Business Line