What is hurting India's exports engine

Where India's interests are being hurt need to be flagged for several proximate developments, but before that a fact for better perspective. Exports, the fourth engine of growth, remain rangebound since FY15. From 23.9% of the GDP in FY15, they have slid a bit to 23.5% in FY23 – averaging 21% during this period (nine fiscals). After the 1991 trade liberalisation, exports had zoomed from 6-7% of the GDP in early 1990s to 21% in FY07 and averaged 22.7% during FY07-FY14 (eight fiscals).

First India went back to 'import substitution' to promote 'local for global' products, added incentives like the PLIs and DLIs to a long list of tax incentives to promote exports of local products and now it is back to 'licensing' to make the PLIs and DLIs work for local laptops, PCs and tablets.

Setback for trade liberalisation

Take the latest case. On August 3, 2023, the government announced a ban on imports of laptops, PCs and tablets "with immediate effect" and mandated "valid licence" for "restricted imports" of these items. The next day, on August 4, 2023, the ban was put on hold for three months. More than a month-and-half later, on September 26, 2023, IT minister (MoS) Rajeev Chandrasekhar declared "no license" would be needed for such imports as it would be replaced, shortly, with "import management system"; the new system would have a "built-in" mechanism to allow "certain amounts" of imports on the basis of a company's local manufacturing of these items.

Interestingly, the "import management system" already exists under the Ministry of Commerce and Industry to regulate "imports". Under this, "licence or registration" is required in case of any "restrictions or quota" on import of goods; the "modules" (for applications for imports) require importers "to apply for import licences, quotas and other registrations which are issued by DGFT". Some of the "modules" listed include "Import License for Restricted Items", "Import License for Tariff Rate Quota (TRQ)", "Registration Certificates". In short, there is no escape from "license".

Licenses/registrations are now routine part of trade because of frequent bans and "restrictions" not just on laptops or other electronic items but also a host of agriculture produces like wheat, rice, sugar and pulses.

There are three contradictory claims in the statements: (i) the government "never" believed, "doesn’t believe" and "will certainly not believe" in a license regime (ii) the ("immediate") ban was "not taken in haste" and was "not abrupt" but came after consulting industry on the PLI for hardware and (iii) the government wants a "trusted supply chain".

The contradictions would be apparent by the fact that (a) importers cried foul at the sudden ban, pointing out that 90% of laptops, PCs and tablets sold in India are imported – forcing the government to immediately defer the ban and (b) global suppliers like Apple, Samsung, HP immediately stopped supply, on August 4, due to the ban and warned of supply disruptions and price rise.

However, the key to the puzzle lies in another parallel development. Four days before the "immediate" ban, the Reliance launched JioBook, about which the Amazon's listing said it was being "manufactured" in China (not India).

Bumper harvests but exports not allowed

Frequent ban on export of agriculture produce like wheat, rice, sugar and pulses, point to yet another policy impulse – data dissonance.

On September 19, 2023, Finance Minister Nirmala Sitharaman called for "real-time estimation" of yields of rice, wheat, pulses etc., stressing that the "country suffers for want of" reliable estimates, unable to "plan" imports or exports of these produces.

On September 25, 2023, food and public distribution secretary Sanjeev Chopra said: "there has been a mismatch between the agriculture and trade figures" on wheat production. He pointed out that while the government was "reporting 112 million ton" of wheat in 2023-24 (October-March), the trade reported "102-103 million ton" – a difference of 10 million ton. He assured that "in the next one or two years" the government would ensure that the estimates are "driven by the ground reality".

To say that India can't estimate its crop yield correctly ("ground reality") despite being the pioneer of statistical standards and systems since 1970s, much ahead of the developed world is difficult to digest. What has gone wrong?

The obvious answer is data dissonance. Particularly since 2018, the GDP numbers are questioned by all independent economists every time fresh data is released. September 2023 saw Ashoka Mody and Arvind Subramanian do it once again. They point to the GDP growth being overestimated by about 2.5 to 3 percentage points.

FTAs with EU, UK, Canada stuck

There is a third policy impulse to worry: stalled multilateral FTAs and diplomatic row stalling bilateral FTAs.

The negotiations with the UK are stuck just as ahead of Prime Minister Rishi Sunak's visit to India to attend the G20 summit, his spokesman said, on September 7, 2023, that his government won't change its immigration policy to secure trade deal with India. In June, their trade minister Kemi Badenoch was categorical that "there are no plans to change our immigration policy" to allow Indian workers free access to UK's labour market.

Now, the diplomatic chill over the killing of Canadian citizen and alleged terrorist Hardeep Singh Nijjar in its soil has stalled the bilateral FTA. After Canada said it, India has confirmed that trade talks are on "pause" until the situation improves.

India's trade talks with the European Union (EU) are stuck for quite some time. The latest hurdle is the EU's proposed Carbon Border Adjustment Mechanism (CBAM) principles for imposing carbon tax on all imports. In response, India is mulling imposing and collecting its own carbon tax on goods coming from the EU. This is over and above the tussle over the WTO ruling of May 2023 which censured India. The EU, Japan and Taiwan had complained about tariff barriers of 7.5-20% on ICT products India imposed while the WTO mandates 0% tax on these items. This remains a stumbling block and at stake is trade ties with not just the EU but Japan and Taiwan also.

India's diplomatic and trade ties with China remains strained since 2020 – over the latter's intrusion in Ladakh. Though trade negotiations have progressed with Australia, a "comprehensive" deal is expected by the end of 2023.

Now, look at India's top 10 trade partners. All these countries figure in that list.

India also "unilaterally" cancelled 68 bilateral investment treaties (BITs) – which are linked to bilateral FTAs. It has to renegotiate each of the bilateral FTAs to yield intended benefits. Besides, India has avoided all big multilateral FTAs – like the RCEP, IPEF and CPTPP – which are groupings of all big economies controlling most of the global GDP and trade and having overlapping memberships. Instead, India has opted to renegotiate only bilateral FTPs but not one of the three reports (Economic Survey of 2021-22, NITI Aayog of 2018 and Exim Bank of 2022) cited by Indian officials to justify such approach to trade treaties recommends this.

The above moves are linked to two developments:

• Growth in FDI inflows is slowing down from 25% in FY15 to 3% in FY23 and (-)16% in FY24 (up to June 2023) – the latest DPIIT report shows. A Nikkei Asia report explains this slowdown to MNCs finding Vietnam and other competitors more attractive – an indicator that the China+1 strategy of MNCs is not working for India.

• Indian exports share of GDP are lower in FY24. Monthly trade data for FY24 shows, during April-August 223, merchandise exports fell by $23.4 billion from the corresponding FY23 level. Imports fell even more – by $37.4 billion – taking the deficit to -$37.5 billion, which would have been bigger had it not been for the surplus of $61.4 billion generated by services trade.

Injury to services exports

There is a fourth policy impulse to worry: injury to services trade.

Indian trade has generated surplus only twice in post-independent history (since 1949-50) – in 1972-73 and 1976-77 (Economic Survey of 2022-23). The UNCTAD data for 2005-2021 shows, services exports are delivering a surplus since 2010 to cut down trade deficits. As against less than 2% share in merchandise goods, Indian services exports has a global share of is 3-4% (2015-2020).

Yet, the Foreign Trade Policy (FTP) of 2023 is silent on services exports. It exclusively focuses on process improvements and not product improvements; it is silent on global geo-economic fragmentations that the US President Trump-led de-globalisation caused after 2016, further aggravated by the Russia-Ukraine war of 2022.

New Indian education (NEP 2020) and recruitment (UPSC exams) policies will also have a bearing on services exports because they may affect Indians' English skills that led to growth of IT sector and exports of IT services. The emphasis in both is on developing Indian language skills at the cost of English by cutting down English classes in colleges and universities and ending primacy of English in civil services exams.