The road towards a $5 trillion economy leads through the rapid expansion of India’s exports. In recent times, India’s export performance, particularly of goods, has not been up to expectations. If one takes a long-term view, India has managed to increase its share in the world (non-oil) goods exports from 0.6% to 1.6% between 1990 and 2018. However, it has been outperformed by China or other APAC countries such as Vietnam.
India’s export’s slowdown has often been attributed to the deglobalization after the 2008 financial crisis and the global protectionist environment. However, this seems to be at best a partial explanation as other neighbouring countries have boosted their exports in the same global environment. Structural shifts in global trade are also creating big opportunities. The world’s largest exporter, China, is shedding some of its industrial activity as a result of moving higher in the global value chain, rising wages and trade tensions with the US. However, the capacity of these countries to absorb the large-scale investments is limited because of their size. This is where an opportunity exists for India.
India has been trying to improve its competitiveness in the global economy as it currently faces a fragmented and informal nature of industry, which limits efficiency, rigidities in land and labour market, and high cost of capital, high costs of inputs such as power and logistics, inadequate investment in human capital, and difficulties in doing business for the manufacturing sector. The government’s ability to use direct export incentives has also been reduced by the recent World Trade Organization ruling and increasing international scrutiny.
One step is to revitalize India’s export zones. India has had an SEZ (special economic zone) policy since 2005 but it has not had the desired impact on the manufacturing sector because of the small size of the SEZs created, their locations, and other regulatory bottlenecks. There is a case for India to learn from experience and create a few large coastal economic zones (CEZs).
State governments need to be brought to the forefront of the export growth strategy. A national one-size-fits-all strategy may not work as different states have differing competitive strengths and, therefore, require different areas of focus. The central government has already started efforts to nudge states to promote exports.
An immediate step can be to use the goods and services tax (GST) filings data to calculate and publish data on exports by each state. This will provide states with a reliable measure to track their progress and set goals and policies that match their comparative strengths.
Third, with considerable uncertainty in US-China trade relations despite a Phase One deal, India should move ahead to firm up its own trade relations with the US. It should focus on opening the lucrative US market for Indian exporters through a trade deal.
Navneeraj Sharma and Chinmaya Goyal are senior professionals with the tax and economic policy group at EY India. Views expressed are personal.