NEW DELHI: India’s recently unveiled foreign trade policy for the five years to 2020 sets an ambitious target of doubling merchandise and services exports to $900 billion from the current $450 billion. That would require exports to increase at a compound annual growth rate of about 15% over the next five years. Without radical changes, India is most unlikely to meet this ambitious target because of long-term structural impediments and short-term problems that will limit export performance.
The global background is not encouraging. India’s merchandize exports, which account for two-thirds of total exports, have hovered around $300 billion for the last three years, and world trade is growing relatively slowly — it has averaged 5.1% a year since 1990, according to the World Trade Organization. It increased by only 2.4% a year between 2012 and 2014, and is forecast to manage just 3.3% in calendar 2015 and 4% in 2016.
There are many features in the trade policy document that will make life easier for exporters. For example, a range of incentive programs has been clubbed into two schemes, one each for goods and services, and a regulatory liberalization allowing online filing of documents will reduce transaction costs. In another notable move, the government has liberalized the treatment of duty free scrips — certificates awarded under export promotion schemes that allow goods up to a specified value to be imported duty free for use in the production process.
However, India will continue to struggle with a wide range of long-term export impediments. Despite all its efforts at diversification, the country still has a narrow export base. The top 20 categories accounted for 78.5% of total merchandise exports in the fiscal year to March 2014. Exports of services are even more skewed, with information technology and information technology enabled services accounting for almost 50% of the total. More than two-thirds of that goes to just three countries: Canada, the U.K. and the U.S. Poor transport and logistics infrastructure, and an inefficient trade facilitation regime, highlighted by successive Ease of Doing Business reports by the World Bank, also affect India’s merchandise export competitiveness.
A secular decline of the Indian rupee over the years has improved price competitiveness. However, it is not likely to help export performance much because the export base now has more income elastic items such as engineering goods than price elastic ones such as textile and apparel items. Demand for price elastic goods tends to rise when prices fall, but demand for income elastic goods is driven by changes in the buyers’ income and less sensitive to price. As a result, a much bigger fall in the rupee exchange rate would be needed to increase India’s exports. The depreciation also means that more goods and services need to be supplied for each dollar of exports.
