The long-term hurdles to India's export growth

Can exports power India’s economic growth? This is a question that is being raised after last financial year’s scorching export growth even as domestic private consumption remained muted. In FY21-22, Indian merchandise exports jumped 43.18 per cent year-on-year, going up from $291.81 billion to $417.81 billion.

The government certainly hopes so. Union Commerce Minister Piyush Goyal recently stated that he expected merchandise exports to cross $1 trillion by 2030 — a stiff target. The government has commissioned a consultancy firm to prepare a report on how to restructure export promotion councils to achieve the stiff targets it is setting.

Despite last year’s record performance though, a close look at merchandise export trends of the past decade does not paint a very encouraging picture. India’s merchandise exports had stayed between $280 billion and $315 billion for a decade before its surge last year. Even last year’s record performance did not see much volume growth — it was largely driven by higher prices/values, according to a report by India Ratings. In an opinion piece in Mint, Nikhil Gupta, chief economist of Motilal Oswal, wrote that real export growth had been negligible — the company’s analysis showed that the rise in exports was largely accounted for by soaring commodity price inflation.

India, unlike the Asian Tigers, has never managed to be an export-driven economy. Since the economic reforms were initiated in 1991, private investment and domestic consumption — along with government spending — have primarily driven India’s economic growth. Merchandise exports have played only a supporting role. Service exports —largely IT services — have been a redeeming factor in India’s export story. India’s share in global merchandise trade has firmly remained below 2 per cent — which is abysmal considering the size of our economy.

The failure to become a global merchandise export power is largely because India has not really become a hub for global manufacturing. Foreign manufacturers in India have largely focused on the domestic market, instead of treating it as a low-cost, high-quality manufacturing base for exports. Despite a realisation among global companies that they need alternative hubs to reduce dependence on China, few of them have looked at India seriously.

Three factors have played spoilsport to India becoming a global manufacturing power. One, as I had discussed in my last column, is the rapid changes in policy and the uncertainty that investors have to face. Anyone putting millions to build a plant on the ground would like a stable policy regime, which has been missing for a decade now. Constant changes in tax rates, tweaking of rules and abrupt reversals following policy announcements have spooked many investors. The changes in wheat, petroleum products and steel export policies or tariffs are recent examples, though all of them have been justified by the government as being absolutely necessary given the current domestic requirements of the economy.

The second factor, which is talked about whenever businessmen meet, is the cost and difficulty of doing business on the ground. This includes not only well-known issues such as poor roads, higher cost of power, longer turnaround times at ports, but also other issues like dealing with local level officials, meeting myriad regulations at the state, district and city levels and other such problems. These have often negated whatever cost benefits they have got from government incentives like the production-linked incentive scheme.

The third factor that is almost never talked about but needs to be examined and discussed is the poor quality standards set by Indian regulators and the government in almost every sector —and the even worse monitoring and implementation of these standards. In sectors ranging from pharmaceuticals and drugs to automobiles to food and cosmetics — Indian manufacturers have a lower quality bar to meet than their global counterparts. Worse, there is little monitoring or penalty even if these low standards are not adhered to. For some reason, Indian policymakers have never felt that Indian consumers are being short-changed because of this. An Indian automaker or a generics drug company exports higher quality goods to other countries than it sells in the Indian market. Moreover, there is no real punitive cost of not meeting the standards. Product recalls are almost unknown in the country.

Yet, no country has succeeded in becoming a merchandise export powerhouse unless its quality standards are uniformly high. Some policymakers argue that higher standards are impossible to implement in a country of India’s size and with the number of small and medium enterprises it has. The cost increases, they claim, would make many of these enterprises uncompetitive if they tried to sell high quality products in the country. Moreover, the consumers may not be able to afford it or even care for the difference.

This is faulty thinking. The government should focus on removing hurdles that increase the cost of manufacturing or just doing business in India. At the same time, it should set higher quality standards and monitor them stringently. This is an essential condition if India’s manufacturing needs to meet global standards. That is the only way the country can become a major exporter of manufactured goods, not just software services.

The writer is former editor, Business Today and Businessworld, and founder of Prosaicview.com, an editorial consultancy