NEW DELHI: India is losing comparative advantage in leading export sectors, according to a recent report. In fact, the country’s external trade performance has grown to be so acute that the current account deficit in the first quarter of the current fiscal year reached a four-year high of 2.6 per cent.

What is more worrisome is that this trend is continuing despite favourable trade conditions in the global markets.

Only domestic factors can explain the widening trade deficit. Clearly, the uncertainty surrounding the implementation of the Goods and Services tax (GST) has had a major role to play. Data due this month will show whether the situation has improved in the second quarter.

However, the chances of any significant improvement remain bleak as issues in processing of refunds to exporters under GST has been affecting trading activities.

Therefore, the sops given in the mid-term review should help in pumping up exports to an extent.

In a massive relief to Indian exporters, the government announced liberal incentives of Rs8,450 crore ($1.3 billion) in its mid-term review of the five-year foreign trade policy (FTP) that was rolled out in 2015 and aimed at increasing the export of goods and services to $900 billion by 2020. Exports, meanwhile, declined from $468 billion to $437 billion between 2014-15 and 2016-17.

FOREIGN TRADE POLICY

Basically, labour-intensive sectors under the Merchandise Exports from India Scheme and Services Export from India Scheme, which were introduced in the foreign trade policy, were given an incentive raise of two per cent each. Under the scheme, exporters are granted credit scrips based on the said percentage of the total value of their exports.

These scrips can be used for payment of duties on procurement of further inputs. Additional incentives of two per cent are expected to boost the subdued export activity of the last few quarters.

Even though such an incentive was crucial in the short run given the circumstances, it always remains pertinent to ask if we are doing enough. After all, no country in history has sustained a growth rate of seven per cent without an export growth of 15 per cent or more and, according to World Bank data, Indian export growth of goods and services has not even crossed 10 per cent since 2011. Therefore, there seem to be larger structural issues at work that are impeding the growth of India’s external sector.

In order to further reinforce this fact, we can look into the long-term trends of India’s leading export sectors - gems and jewellery, leather and textile. It is quite disconcerting to realise that India’s comparative advantage in all of these sectors is nowhere close to that at the turn of the century. Moreover, all of these sectors are highly labour-intensive and losing comparative advantage in them is quite inimical to the economy’s employment-generating capacity.

A common argument made to improve India’s trade competitiveness is that the rupee is strong and needs to be depreciated to make exports competitive in the world markets. However, this argument falls flat in the face of recent trends in both the exchange rate and the real effective exchange rate over the last few months. Both of these indices have remained stable in the last fiscal and, in fact, fell slightly in August while exports continued to show a downward trend. There was not much strength in the argument anyway, since export competitiveness is not defined by currency but by productivity of the workforce.

Indian policymakers need to recognise that the trade challenge for India is structural in nature and cannot be done away with quick-fix solutions. Cost incentives are an acceptable approach to deal with immediate challenges like the impact of GST, but they need to be supplemented with more long-term solutions.

Indo-Asian News Service