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In March 2016, India's exports fell for the sixteenth month in a row. The continuing slowdown in global growth has wreaked havoc with India's exports. In FY16 India's merchandise exports fell 16% to US$ 261.14 billion. This was the second consecutive year of annual decline in exports. The government is clearly worried. But what can be done?
A large part of the problem is beyond our control. The slowdown of global trade and a shift in importing patterns of global economies are major causes. At the Ramnath Goenka Memorial Lecture delivered recently, the RBI governor Raghuram Rajan said as much. It is a three part problem.
Firstly, as countries get richer, the services sector starts to dominate. Services are not traded. Thus, GDP grows faster than trade. Secondly, capital goods investment is muted because of global overcapacity. Finally, as industrial countries become more competitive, and as China moves up the value chain, more of the inputs going into final products are being sourced from inside a country than from outside. Thus, the days of high double digit growth in exports may be over.
If this is really the 'new normal', then allowing the rupee to depreciate won't solve matters. The crash in commodity prices has kept India's imports, and consequently, the trade deficit in check. But without a rebound in exports, this is unsustainable. Also, the fall in crude oil prices has been a double-edged sword. Petroleum products, which account for over one-fifth of India's exports, were down 47% YoY between April 2015 and January 2016.
We believe multiple approaches are needed to boost exports. The government is busy signing trade deals with many countries. However, it has not done enough at home. Reforms in land, labour, capital, and logistics have not moved fast. The GST bill is still stuck in Parliament.
Almost 60% of India's exporters are micro, small, and medium scale enterprises (MSMEs). Not enough attention has been paid to them. Many are unaware of the incentives that are available to them. The government should pay more attention to their needs in our view.
India's competitiveness is well below potential. This is yet another problem. Reducing corruption and red-tape, streamlining bureaucratic procedures will help mitigate these to a large extent. But it won't be enough. To improve our competitiveness, the country must be part of global supply chains. India also needs world class export-related infrastructure.
There are no quick fixes. It will need to be a long drawn out effort. However, it must be done. If not, 'Make in India' will remain just a slogan. And millions of youth will continue to enter the work force every year with poor prospects for employment.
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