Reforms badly needed in India's trade policies

India's export share in global trade has been close to 2 per cent now for over five years, points out Amita Batra.

Illustration: Uttam Ghosh/Rediff.com

The prime minister's emphasis in his Independence Day address on the need to boost exports is a clear indication of policy priority for the Indian economy.

However, the chief economic adviser's optimistic statement last week that India's goods export share of less than 2 per cent of global exports is indicative of a huge potential calls for a reality check.

India's export share in global trade has been close to 2 per cent now for over five years.

After having registered negative rate of growth in fiscal 2015 and 2016, export growth gained some ground in the following two years, but lost momentum in fiscal 2019 and continues to be a major cause of concern.

Further, India's export competitiveness, measured as the ratio of market share in top 20 partner country markets in 2017 over that in 2012, has seen little change with a less than 5 per cent increase.

A more detailed analysis of India's export trends against major global export/ trade trends and developments reveals other significant weaknesses and suggests a more sober perspective.

First, international trade is predominantly trade in goods, with trade in services being less than one-third of the total value of goods trade.

Almost half of world trade in goods comprises intermediate goods and even though volumes in other categories (consumer goods, raw materials, capital goods) may have increased over the years, proportions have remained unchanged.

Second, over the last two decades, world trade has been propelled mostly by global value chains (GVCs), particularly those that require goods crossing borders multiple times.

The underlying fragmentation of production processes has extended the scope of international specialisation from between products to different stages of production of individual products.

Consequently, new sources of comparative advantage (and hence opportunities) for developing countries to integrate with GVCs have emerged.

Participation in GVCs is linked with export diversification, sophistication and higher productivity.

Third, value chains are largely regional with Asia, Europe and North America being the three global production hubs.

In the last decade Factory Asia, essentially reflecting upgrade and transformation of the Chinese economy and ASEAN countries, has been the most dynamic production hub in the world.

It has consistently registered increase in intra-regional trade, essentially indicating the positive correlation between level of economic integration and ease of cross border movement of goods.

Europe and North America, the other two production hubs in the world, centered around Germany and the US, have shown slight decrease in intra-regional trade but stronger inter-regional linkages with Factory Asia.

As against global export trends, India's share of global services exports is double its share of global merchandise exports.

The ratio of services exports to merchandise exports increased from 35.8 per cent in 2000-2001 to 58.2 per cent in 2016-17.

The largest merchandise export category for India is consumer goods (44 per cent) followed by intermediate goods export (33 per cent).

India's integration with GVCs is among the lowest in G20 countries.

Compared with the ASEAN group of countries, India's GVC integration is not just far lower but it has also experienced a decline in both its backward (that is, import content of exports) and forward (domestic value added embodied in other country exports as a share of gross exports) GVC linkages.

In comparison, for ASEAN, backward GVC linkages have declined but from a higher level and by a slightly smaller magnitude while its forward linkages have remained constant (see chart).

The experience of Vietnam, another lower-middle income country, offers a striking contrast: It has a much higher level of GVC integration and has experienced a steady increase in its backward integration over the same period.

Furthermore, India's value chain integration with East Asia/Southeast Asia (E&SEA), the most dynamic hub of GVC activity, remains weak.

Value added (VA) originating in India entering E&SEA's exports to the world, is only a fraction of the VA contributed by ASEAN and Vietnam.

India's VA contribution in 2016 was only a fourth of Vietnam's contribution and a measly 3 per cent of ASEAN's contribution.

The same is true of India's GVC linkages with the sub-region of ASEAN.

VA originating in India and entering ASEAN's exports to the world is 11 per cent of Vietnam's VA in ASEAN exports and 1.6 per cent of intra-ASEAN VA.

These low relative shares indicate that demand for India's exports is not being driven by demand from E&SEA/ ASEAN, either for foreign final demand or for further movement in the global value chain.

Understandably, India's manufactured goods exports to ASEAN have shown little change in composition or share in over a decade.

Finally, motor vehicles and textiles and apparel sectors, which are among India's top export sectors, are also among sectors with highest levels of value chain integration, globally and for India.

However, in recent years, India's GVC integration in both these sectors has declined.

Import content of exports in textiles and apparel, which was 15.3 per cent in 2005, has declined to 13.4 per cent in 2016.

In motor vehicles, the import content of exports fell to 23.5 per cent in 2016 from 25.3 per cent in 2005.

Simultaneously, India's share in global exports has declined significantly in textiles and apparel and remained stagnant at insignificant levels in the motor vehicles sector.

Recent government policy of higher import duties on inputs for these sectors (textiles and apparel in 2018; auto parts in Budget, 2019) may result in domestic substitution of imported inputs possibly by inferior goods or higher cost of production, leading to continued loss of competitiveness and market share.

India's trade policies, therefore, need to be significantly reformed towards (1) enhancing growth of merchandise trade through increased integration with GVCs, with special focus on regional value chains in the dynamic East and Southeast Asia, and (2) avoiding protectionist tariff hikes/ trade measures that threaten loss of existing comparative advantage of its top exporting sectors.

Amita Batra is professor, School of International Studies, JNU.