Till India isn't competitive, exports aren't going to rise
The government has done well to streamline the process of export incentives, so while they have been reduced, they are more in line with WTO rules—this means, over a period of time, the incentives have to be phased out. As a result, while the Merchandising Exports from India Scheme (MEIS) seeks to replace 5 existing schemes, the benefits under it will range from 2-5% as compared to 2-7% earlier. And in the case of the Services Exports from India Scheme, the benefits will range from 3-5% as compared to 5-10% earlier. In order to compensate for the reduction in benefits that were also difficult to encash earlier, the schemes have been made simpler. The export credits under MEIS and SEIS, for instance, are freely transferable and can be used for payments of all taxes ranging from customs duties to service taxes. In the case of EPCG, the export obligations have been reduced. And since the finance ministry has refused, so far, to budge on eliminating MAT and DDT on SEZs, units in these zones have been given the benefits of MEIS and SEIS. While the government has not given any target for manufacturing exports—targets over the past few years have been missed by a huge margin—it has set an overall one for both manufacturing and exports. At $900 billion by FY20, this is roughly doubling of exports in the next 5 years. While services exports rose from $142 billion in FY12 to just $151 billion in FY14, manufacturing exports rose from $306 billion to $314 billion.
Global growth collapsing, and especially in trade, has been the biggest reason for this poor performance. There are, though, equally important other reasons as well. Of the major export groups, only agriculture has seen its exports share rise—from 7.1% of all exports in FY10 to 10.3% in FY14, before falling to 9.6% in Apr-Jan FY15—but on-off export policies have prevented this sector from achieving full potential. Ore exports have collapsed, from a share of 4.9% in total exports in FY10 to a mere 0.7% in Apr-Jan FY15, a response to both mining bans in the country as well as the collapse in Chinese demand. The share of textiles in India’s exports basket has risen a bit, but by and large, the market that China has vacated due to its appreciating currency has been captured by other countries.
The lesson, an obvious one, is that exports cannot be driven by sops, they need a lot more. To begin with, until India’s infrastructure and labour productivity deficit is not addressed, there is a natural ceiling to growth. Two, the rupee is just too strong and the problem here is that the government seems to prefer a stronger rupee rather than a weaker one. SEZs and NIMZs have been seen as a way out of the infrastructure/ labour problem, but the government seems unwilling to go the whole distance on this as evidenced from the MAT/DDT imbroglio. While the Budget did well to try and address the issue of inverted duties, the fact that India let the Nokia plant shut down indicates how the export effort needs to be very coordinated between all arms of the government. And finally, since exports are driven by companies, it is important that India be a part of global value-chains—that means trade policy has to focus on being a part of big regional trade pacts like the TPP; being a high import duty-zone is no longer an option.