From Trying To Export What It Makes, India Must Switch To Producing What The World Imports

These challenges severely affect the productivity and competitiveness of Indian exporters and limit their participation in the world of value-chain-led trade. They need to be addressed and successfully resolved if India is to achieve its ambitious export target of US$2 trillion by 2030. It is imperative for India to make focused and coordinated efforts to realign its trade policy priorities with the ever-changing global trading system.

Inward Oriented Policy

India has introduced a number of traditional trade policy instruments to regulate imports of goods. These measures include hike in import tariffs, import-licensing requirement, a blanket ban on imports, quality and technical standards. 

The average applied tariffs on industrial products imported from countries enjoying the status of a Most Favoured Nation, meaning all member nations of the World Trade Organisation, have increased from 9.7 per cent in 2014 to 14.7 per cent in 2022. 

This underpins the importance of rationalising import tariff structure to facilitate competitive imports for export manufacturing. In the globalised economy, goods cross several boundaries before reaching their final customers.

A marginal increase in import tariffs has deleterious effects on the long and complex value chains. High tariffs not only escalate the cost of manufacturing and affect the competitiveness of downstream export manufacturing, but also increase the cost of imported goods for domestic consumers. 

Productivity and competitiveness of the manufacturing sector take a hit, which, in turn, breeds economic inefficiencies. The rationalisation of import tariffs can help domestic firms source competitive imports for their exported goods, thus enabling their entry into the value chain of global trade.

Lack Of Diversification

India’s exports continue to depend on developed economies such as the United States and the European Union. The lack of export diversification is a major challenge. 

It is pertinent to mention that India’s export share in the top 100 globally imported products at the Harmonized System (HSN Code) 4-digit level is just 6 percent for the five product categories. 

These products include refined petroleum oil, unmounted or unset diamonds, pieces of jewellery and their components, t-shirts, knitted crochets, and pesticide and herbicide items. India’s exports constitute 85 percent of the top global imported products at the 4-digit HSN code level, but its contribution is only 1.5 percent.

HSN Code system is used by more than 200 countries to classify almost 98 per cent of the merchandise traded globally in a sytematic manner. It has about 5,000 commodity groups, identified by a 4-or-6-digit-code, arranged in a logical structure and supported by well defined rules to ensure uniform classification across countries.

The meagre share of India's exports in top 100 globally imported products implies its export basket is not aligned with global demand, thereby reflecting a significant mismatch. In other words, India’s exports of goods are driven more by supply factors than by demand.

There is a need for India to shift its export basket to product categories in which there is global demand. This requires making the trade policy much more dynamic to address the changing geography of international trade, shaped by global supply chains realignments.

Labour-intensive Exports

The declining share of  labour-intensive industries – textiles, garments, leather products, marine, gem, and jewellery – in India’s export basket has emerged as a matter of serious concern. Exports from labour-intensive sectors declined from US$90 billion in 2018 to US$86 billion in 2023. Their share in total exports fell from 29.8 percent to 19.5 percent during the same period. (see chart)

This is worrisome for the economy, given the  adverse impact it would have had on jobs, especially the semi-skilled and unskilled workforce. 

The decline in labour-intensive exports could be attributed to lack of cost competitiveness, rising labour costs, market access barriers, slow progress of freed trade deals with the EU and the UK, and the disruptions arising on account of the Red Sea crisis.

There is a need to undertake a comprehensive analysis of sectoral policies to understand critical areas of reforms to boost the competitiveness of labour-intensive industries. These reforms further need to be complemented by speeding up FTA negotiations with the EU and the UK, to provide a level playing field to Indian exporting firms in developed markets.

For instance, India’s garment exports are subject to 9 percent import tariffs in the EU market, whereas Bangladeshi garments attract zero import tariffs. This disadvantage can be offset by signing an FTA with the European Union (EU).

States Can Be Catalysts

The role of states in exports has been an area of concern for a long time. There is a significant variation in terms of the states’ contribution to total exports.  Coastal states such as Tamil Nadu, Gujarat, Karnataka, and Maharashtra account for more than 65-70 per cent of total exports.

On the other hand, landlocked states such as Uttar Pradesh, Madhya Pradesh and Chhattisgarh invariably face challenges in exporting goods to the world market because of poor logistics and trade infrastructure.

The absence of dry ports and inland container depots in landlocked states not only increases logistics costs but also limits the potential business opportunities. The establishment of dry ports/inland container depots at critical export nodes of these states can certainly help them access international markets more efficiently.  

Fixing Factor Markets

Trade policy and factor market policies are intertwined and complement each other. Inadequate factor market reforms affect firms’ competitiveness and undermines their abilities to reap the benefits of the trade policy.

Factor market reforms include reforming land acquisition rules, enhancing access to finance, labour market reforms and access to technology. These reforms are vital to enhance firm level competitiveness and productivity. India’s consistent efforts to address factor market obstacles have partially addressed administrative and operational challenges.

The scale, scope, and efficacy of factor market reforms have not yet reached the level at which they actually shape the factors of production and firm-level competitiveness and efficiency. 

Shifting Focus

In the view of above, it is important to understand that trade policy is by and large conducted at a macro level. It is challenging to narrow down trade rules at the firm level because of their varying commercial considerations. 

There is a need to shift the focus of trade policy analysis to the firm level to make it more congruent with trade transactions. Therefore, it is imperative that India overhaul its trade policy in such a manner that it focuses on firm-level transactions. 

It would require capturing firm-level export data to understand nuances of export-import business that shape competitiveness, productivity, and efficiency. Further, trade policy must focus on establishing trade rules that facilitate the integration of domestic firms in global production networks. 

Pursued with the right intent and the necessary political will, these can certainly help the country achieve its trade policy objectives and gain insights from the ever-evolving nature of international trade, with the objective of enhancing the dynamic capabilities of firms’ competitiveness, employment generation, and consumer welfare.

(Surendar Singh is Associate Professor, FORE School of Management, New Delhi. Views expressed are personal)