Foreign Trade Policy: Very Ambitious Targets

The government wishes to double India’s exports in five years. The bad news: This will be enormously challenging. The good news: The government is acknowledging the problems.

Can the Narendra Modi government manage to double India’s exports during its term? The government’s Foreign Trade Policy 2015-2020, unveiled by Commerce Minister Nirmala Sitharaman on April 1, aims to double India’s exports from $465 billion to $900 billion in five years. This also means taking India’s share in world exports from 2 per cent to 3.5 per cent.

Business chambers and export promotion bodies may have sung hosannas to the policy, but even they admit that this looks like an extremely tough call. It will require a growth of at least 18 per cent per annum, every year. The last time India saw double-digit growth was in 2011-12. The following year, exports declined by 1.8 per cent before recovering to 4.7 per cent in 2013-14. Full year figures for 2014-15 are not yet out, but the picture is bleak. Merchandise export growth in the first 11 months (April-February) was flat at 0.88 per cent.

Sure, it is possible to make a smart recovery. Twice before – in 2002-03 and 2010-11 – India has achieved double-digit growth from a decline. But, international conditions do not seem favourable enough as of now. The World Bank’s Global Economic Prospects report predicts a moderate rise in global growth, averaging 3.3 per cent from 2015 to 2017. Of this, growth in developed countries is likely to be only 2.2 per cent during this period. There’s no getting away from the fact that it is the developed countries which form the biggest chunk of India’s export markets. If economic recovery there is going to be weak, then the $900 billion target could prove to be extremely difficult.

In any case, these markets also pose significant challenges to Indian exports. The Foreign Trade Policy statement itself mentions issues related to intellectual property rights, American immigration, skill and labour policies as irritants. There are similar problems with regard to Europe. Indian exports are faced with several non-tariff barriers, especially those related to sanitary and phytosanitary as well as technical standards. Even in the case of services exports, especially information technology/information technology-enabled services (IT/ITES), the European market is not an easy one, because of the European Union’s regulations on data security as well as movement of skilled professionals.

There are daunting challenges in each of the new markets the Foreign Trade Policy seeks to tap. In Japan, for example, there are market access problems because of language as well as stringent product and service standards and regulations. There are institution-building issues in Africa.

Apart from tapping new markets, the Policy also identifies sectors where India has enormous potential which has not been adequately tapped. Here too, there are multiple challenges, many of them purely domestic. Take engineering exports, for example. India’s share in the global pie is a mere 1.2 per cent against China’s 12.3 per cent. India, the Policy laments, does not have a dominant position in any of the 34 product categories in the engineering sector. What’s more, Indian exports are mainly of low and medium technology intensive engineering goods. High technology engineering goods account for less than 6 per cent of the engineering export basket. What are the main issues to be addressed to boost engineering exports? High energy costs, high interest rates, physical infrastructure deficit, outdated manufacturing processes, all of which make Indian exports uncompetitive.

Pharmaceuticals is another sector with high growth potential and one where India ranks third in terms of volume and tenth  in value. Despite that, the sector faces non-tariff barriers, regulatory hurdles as well as perception issues in export markets.

This government is setting great store by service exports. Importantly, it is at least making the right noises about reducing the over-dependence on IT/ITES exports and pushing other services, notably healthcare, education, logistics, professional services, printing and publishing and entertainment services, to name just a few. But ensuring that the potential of service exports is realised will mean countering protectionist measures in the target markets and, more importantly, addressing domestic issues like regulatory weaknesses, talent gap and infrastructure constraints.

The Policy also underscores the importance of India getting integrated with global value chains. At the same time it is frank about what is holding it back from doing so – inadequate trade-related physical infrastructure, the lack of an appropriate regulatory regime for transport services, improving the efficiency and predictability in border procedures, complicated administrative requirements that lead to delays in ports.

Fortunately, the Foreign Trade Policy frankly acknowledges problems affecting various sectors with export potential and the fact that much of it is in-house.  Admitting to a weakness is half the battle won. The government needs to now get down to actually addressing all of these.