Q. Exports have been subdued too, in some part due to global trade headwinds. Does India need a different strategy?
A. N.R. BHANUMURTHY
Many argue that India needs an export-led growth strategy, and the policy prescription for this is to allow the rupee to depreciate. But this is an empirical question and the relation between exports and exchange rate is not only ambiguous but also varies with time. Right now, the empirics do not suggest such a strategy. The only thing one can do is to explore the sectoral measures to boost exports and not the exchange rate route.
See answer to last question.
The fall in exports started much earlier than the global trade headwinds. Between 2014-17, exports grew at an annual rate of 1.68%; in the two preceding decades, the rate of growth was 13% and 14% respectively. Global headwinds are not helping, but then companies affected by the US-China trade dispute are relocating their supply chains to Bangladesh and Vietnam, and not India.
In the past five years, India’s export slowdown has been steeper than the global average. This can be attributed to declining competitiveness relative to peers such as Vietnam and Bangladesh. More recently, weak global growth and intensifying trade wars and inwardlooking policies have created new challenges to growing exports. Glitches in the implementation of the Goods and Services Tax also temporarily added to the exporters’ woes. However, rising trade tensions between the US and China have opened the doors for other countries to substitute the export goods impacted by tariffs. India has already seen some gains from China. Its exports to China grew in tariff-hit products such as cotton, organic chemicals and petroleum products. However, in the largest traded items between the US and China—such as electrical machinery and equipment, and mechanical appliances— India still lacks competitiveness to scale up to required trade volumes. Attracting foreign investment in these sectors can help India improve its competitiveness. The US-China war is leading to a shift of production bases out of China and restructuring of supply chains, paving the way for India to plug into new networks. India must be proactive in reaping this opportunity by taking steps to improve competitiveness, attract investment and ink new trade agreements.
In principle, India should be able to improve exports as its share in global trade is minuscule, at less than 2%. However, this may not be the opportune moment to target export growth as a trade war seems to be erupting, on account of Trump’s unilateral abrogation of international trade rules, upending three decades of globalisation.
The global economy and world trade are evolving into a new mode characterised by inward-looking policies of the large developed economies. India needs to realign its trade policies and strategy to the changing profile of world trade.
Yes, of course. But this is not a new issue: it has been around for at least 5 years, but the government does not think it necessary to do anything about it.
“IN PRINCIPLE, INDIA SHOULD BE ABLE TO IMPROVE EXPORTS, BUT IT IS NOT AN OPPORTUNE TIME TO TARGET EXPORT GROWTH AS A TRADE WAR SEEMS TO BE ERUPTING” —R. NAGARAJ