Sweeping reforms to boost exports PDF Print E-mail
Tuesday, 05 November 2019 00:00
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The HLAG rightly identifies several domestic constraints as the main problem; the question is whether govt can fix these quickly


Close to two decades ago, a top global consulting firm made a presentation to then prime minister Vajpayee on raising India’s growth to 8% or more. Half a percentage point could come from fixing land titling, for instance, another three fourths by ensuring contracts were honoured … the list was exhaustive, and impressive. When the presentation was over, most in the room were quite exhilarated with the prospect of India’s growth accelerating, even the PM seemed moved; he then said to the gentleman making the presentation, “Yeh sab to theek hai Guptaji, lekin yeh sab karega kaun?” (this is all very well Mr Gupta, but who is going to do all of this?).
Much the same thought strikes you while reading the excellent report of the High-Level Advisory Group (HLAG)—chaired by economist Surjit Bhalla—on how to increase India’s exports. The amnesty scheme for funds stashed abroad, though, is odd, both because HLAG gives credence to bizarre estimates of Indian money lying idle overseas and because decades of failed amnesty schemes haven’t dampened its ardour for one more. HLAG, however, rightly identifies many of the hurdles to India’s exports as being domestic ones—bad labour laws, high cost of capital, etc—and offers valuable solutions. But, as the late PM had asked the consultant, who is going to fix all of this?

Perhaps the most telling table in the report (see graphic) is the one on India’s falling rank in global exports, from 10 in 2003-11 (when global exports rose 11.5% a year and India’s by 20.5%) to 33 in 2012-17 (global exports grew just 0.3% and India’s exports 1.5%); the collapse in India’s rank makes it clear that the current slowdown is more India-related than driven by the global slowdown.


So, while it is surprising HLAG still believes India’s target of doubling exports by 2025 is achievable, the report is a combination of good macro strategies and sector-specific ones. The good news here, and one on which HLAG justifies its optimism about the government undertaking sweeping reforms, is the corporate tax cut two months ago; HLAG had made this suggestion, to align India’s tax rates with global ones.

If HLAG’s recommendations spurred the tax cut, that is indeed a big win, but the question is whether the government will move on other important recommendations. Five years ago, the Shanta Kumar panel recommended moving towards area-based cash incentives for farmers in place of the complicated MSP-cum-subsidy regime that actually hurt farm growth, but, till recently, there wasn’t even a half-hearted attempt at doing so.

Rigid labour laws,which have pushed India’s wages to globally uncompetitive levels, are something that HLAG wants reformed. In the case of readymade garments, where countries like Vietnam and Bangladesh continue to gobble export-share, India’s minimum wage is 2-3 times that in Bangladesh while the productivity is similar; India’s wages are around 10-20% higher than Vietnam’s, but the latter’s productivity is around 30% greater, power costs are 40% lower, and lending rates are around half those in India.

In addition, HLAG points to the need for a complete rejig of India’s policies. While HLAG talks of the need to build scale to get globally competitive—keep in mind India is most competitive in the spinning sector where most units are large-scale ones—India’s textiles/garments policies tend to favour SMEs. And, while global textiles markets use more man-made fibres than cotton, India’s tax structure favours the opposite. Essentially, HLAG is asking for a reversal of decades-old policy if textiles/garments exports are to boom.

Interestingly, while Bhalla told Hindu BusinessLine—the interview appeared on the morning before the official announcement was made—that India needed to ‘put our house in order’ before joining RCEP, the report generally plumps for India joining RCEP-type FTAs as India needs to be part of trading groups when multilateralism under the WTO is being replaced by FTAs; and, in any case, if putting our house in order has to come first, India will never sign on any FTA since these reforms have been pending for decades.

For the same reason of boosting trade, HLAG recommends India wooing the Samsungs and Apples of the world if exports of mobile phones are to grow (bit.ly/2Nc5WFX and bit.ly/32eZxOo)—the two firms comprise the major portion of the global smartphone market—instead of the current policy that distributes incentives over hundreds of firms, and has resulted in a huge hike in imports of mobile-phone components from China. But, despite working on this for well over a year, the government has not been able to make up its mind on wooing a few majors in the manner countries like Vietnam have done. In which case, as in the past, when China exited the low-end textile/garments market, India could lose this China opportunity as well. Indeed, HLAG is critical of India’s rising protectionism; the decision to not join RCEP, will likely end up increasing protectionism.

One of the HLAG’s big concerns, not surprisingly given Bhalla has been voicing this for decades, is the need to cut the cost of capital. But, RBI reducing repo rates, desirable as it is, alone, won’t help. For one, government-mandated small savings rates act as a floor for bank deposit rates; also, till NPAs are high, banks will keep margins high. Risk-premiums, too, will remain high till banks can trust borrowers more; the large number of funds-siphoning and corporate downgrades make it clear this premium isn’t going away in a hurry.

Also, as this newspaper has argued for a long time, even if lending rates were to fall dramatically along with corporate tax rates, firms will not invest till government policy remains hostile. And, whether it is telecom or taxation or e-commerce or oil/gas, etc, there are too many recent and ongoing examples of policies that the government needs to convince investors are a thing of the past. Doing that isn’t going to be easy.


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