The Hindu Business Line : Export strategy: Focus shift called for

INDIA'S exports dipped in 2001-02, largely due to the slowdown in global output and negative growth in trade. Despite signs of recovery in the world economy, international trade is expected to record only a marginal rise of 1-2 per cent in 2002. While demand revival may gain momentum in the US and Europe in the second half of the year, other risks and uncertainties could defeat current expectations of a rapid recovery.

These include the uptrend in oil prices, possible stagnation in business investment and consumer spending in the US, current account imbalances among major industrial nations — especially the US with its near five per cent deficit carrying the risk of a dollar devaluation, and fears of financial collapse in Japan.

World merchandise exports did not grow in 2001. Instead, for the first time in decades, they declined one per cent in volume and four per cent in value to stagnate at $6 trillion. The World Trade Organisation does not think a strong rebound is likely this year because of "sober prospects" for the IT industry.

The largest decrease in value of merchandise exports since l982 was spread over all products — agricultural, mineral and manufactures — but the decline was even sharper in trade in commercial services (especially travel and transportation-related after the September 11 terrorist attacks), lowering turnover to $1.4 trillion.

Trade growth prospects in 2002 are not rated high in any of the forecasts, with the IMF, the UN and the OECD projecting not more than 2-2.5 per cent, after the first-ever contraction in two decades in 2001, attributed to the collapse of ICT investment, the slowdown in capital spending and higher transaction costs (freight insurance). The WTO itself anticipates only a modest recovery of around one per cent in world exports.

Medium-term strategy

It is in this sombre setting that India has framed a new medium-term strategy to raise its level of exports to at least one per cent of global trade by the end of the Tenth Plan (2007) from the present 0.6 per cent. It is a decade-old target but poor performance in the latter half of l990s, except for a couple of years, put paid to hopes of improving the country's share, which stagnates at 0.6 per cent.

The 20 per cent growth in exports in 2000-01 had induced some optimism. An export target of 18 per cent for the next year was set, revised down to 12 per cent and further to 3 per cent while the year ended in negative growth (0.08 per cent). This was despite the rise in individual sectors, notably software exports which recorded a 29 per cent rise. The decline is wholly attributed to the global slowdown though India had always claimed to have weathered unfavourable external factors.

Traditionally, growth in trade has outpaced the rise in output and was as high as 12 per cent against the world output increase of 3.8 per cent in 2000 before recession took hold of the global economy. Even assuming a modest average of 4-5 per cent in world exports over the next five years, it will be no easy task for India to achieve a turnover of $75-80 billion (from the present $43-44 billion) to claim a share of one per cent of the total in value terms. As against the average of the $2-billion increase in the ten years ending 2000-01, it will be a challenge to nearly double the present export turnover by 2007. The latest strategy outlined is to aim at an annual 12 per cent annual growth in exports which the policy-makers, as in the past, consider "achievable".

India has, no doubt, moved away from export-pessimism but it cannot visualise export-led growth, given the size of the domestic economy and the formidable constraints to be overcome to become an efficient producer and dynamic competitor before aspiring to become a regional economic superpower. Let alone China, which is already the world's fourth largest trader and which stands to gain substantially by its accession to the WTO, India has to compete with several smaller developing nations with a higher ratio in world trade.

It has to be seen how far the latest Exim Policy (2002-07) goes in taking India nearer the cherished target. Each edition of the Policy has reflected an incremental approach of procedural simplification and a concession here and there. Two years ago, the Commerce Minister, Mr Murasoli Maran, decided that India should replicate China's example of Special Economic Zones (SEZs), and the new Policy gives a thrust to setting up SEZs that will have offshore banking units, besides a host of incentives for the developers as well as promotion of agri-export zones for a variety of farm products, including fruits and vegetables.

The States have to be fully involved in developing the infrastructure to make these zones operational and successful. It may take quite a few years before significant contribution to the export drive could come from them.

Prospects — 2002

Meanwhile, global conditions do not seem propitious for any major turnround in export growth this year. Exports are linked to the recovery in external demand and also depend on the degree of access to industrial country markets, especially the US and the European Union that account for roughly 50 per cent of Indian exports. International prices of many primary commodities, though recovering, are still at historical lows.

India has for long concentrated on the Western markets and, however important they are, there have not been commensurate endeavours to diversify exports to other destinations. India is yet to build stronger economic relations with the East and South East Asian countries, and China is already seeking a free trade zone with Asean.

Though over 30 per cent of India's exports go to the Asian countries, the efforts to tap the markets of Latin America and Africa and revive the old links to Eastern Europe have been patchy. India must more aggressively seek out markets in regional blocs, such as MERCOSUR, with preferential trading arrangements. After long years, the Export-Import Bank of India is still playing a limited role in providing lines of credit to boost exports to other developing countries.

Much would depend on the joint ventures Indian entrepreneurs set up in Africa, Asia and Latin America, for which the exchange regulations have been considerably liberalised in recent years by the RBI. Indian businessmen, with few exceptions, are not responding to the challenges and opportunities liberalised markets offer. Nor has SAARC been a trend-setter as the seven-nation association is mired in its own internal conflicts and has been unable to move into a full-fledged preferential trading arrangement as a prelude to a free trade zone. Its trade within is less than five per cent of combined trade of all the member-countries, as against 22 per cent of intra-regional trade of Asean.

Focus on value-added

India's export strategy must rely more on production of value-added items, instead of shipping the same kind of goods to the same destinations, taking advantage of prevalent prices.

In the emerging world of competition even among developing countries, and with China posing a challenge not only to low-cost producers in Asian region but also such countries as Mexico, it is time India focussed more on upgrading technology in dynamic export products to enhance earnings through greater value addition. Not that it should necessarily lead to higher earnings, as these depend on global supply and demand for what the country exports.

According to Unctad, with the rapid shift from primary commodities, manufactures now account for over 80 per cent of non-fuel exports of developing countries (including India) combined. The biggest jump is in hi-tech goods, in which developing countries together account for one-third.

The trade pattern shows that markets are fastest for technology-and-skill intensive products (electronic and electrical products).

But the Unctad study comes out with the revelation that developing countries have not benefited by rise in incomes corresponding to the doubling of their share of world exports of manufactures. The ratio of manufacturing value added to manufactured exports dropped from 75 per cent to 55 per cent for developing countries, sharper than in the case of developed countries. That is, the rise in export ratio has not been matched by a similar uptrend in value added ratio. But, it points out, prices have been weakening for the less skill-intensive manufactured exports.

Since there is the risk of excessive competition among developing countries in world markets for labour-intensive products, and resulting terms-of-trade losses, the Unctad Report says the solution depends on faster growth of industrial markets for labour-intensive manufactures, and on the middle-income countries moving out of labour-intensive products and creating space for lower-income countries.

For China and India, the Unctad report says, greater reliance on domestic sources of growth may prove to be a more viable strategy than maintaining the recent momentum in labour-intensive manufactured exports.

With their well-developed skill mix and endowments, they could upgrade technology-intensive sectors to earn the needed foreign exchange. This would make possible the entry of smaller newcomers in labour-intensive manufactures.

(The author is s former Chief News Editor, PTI.)

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