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 Article Published in The Hindu Business Line  01 October, 2004

New Foreign Trade Policy How to avoid another miss

THE new Foreign Trade Policy sets an ambitious target of doubling our share of world exports from 0.7 per cent to 1.5 per cent, within five years. This means the total quantum of exports jumping to $195 billion, at a compounded annual growth rate of 33 per cent.

An equally ambitious target set in the euphoric days of 1995 of exporting $100 billion worth of goods by 2000, was missed by a wide mark. Indeed, the history of this country is one of missed targets. The million dollar question is if we are going to be lucky this time.

A look at India's past performance. The country's share of world trade was a respectable 2.2 per cent in 1948, which slipped to 0.5 per cent in 1983, because of the closed economic model that we then followed. Export of goods, however, picked up since the advent of economic liberalisation and went up from $18 billion in 1990 to $55 billion in 2003, with CAGR of 8.9 per cent.


Services exports did better in the same period, up from $4.6 to $28 billion, with a CAGR of 14.9 per cent. Total goods and services exports rose from $22.6 billion to $82.7 billion, at a CAGR of 10.5 per cent.

Now compare that with China's export of goods and services, which rose from $67.8 billion to $482.9 billion with a CAGR of 16.3 per cent in the same period. China increased its share of world exports from 1.6 per cent to 5.2 per cent, with a slew of radical structural changes in trade and tariff policy and bureaucratic changes.

Having raised the bar so high, how do we avoid another `hit-and-miss' story? Bottlenecks in the export sector are well known: Lack of infrastructure-poor roads, deficient power supply and lack of labour market flexibility. Above all, there are innumerable hurdles in foreign investment sanctions and approvals.

Last, Indian bureaucracy has acquired an international notoriety for inaction. Thus, there are few takers for big-time manufacturing in India. Against this, foreign investors are rushing in droves to China, which provides a lure of much bigger domestic market and world-class systems and infrastructure.

China offers more attractive terms for foreign investors for manufacturing garments, leather, electronics and other high-end items like semiconductor chips. As for India, notwithstanding one and a half-decade of tariff and trade reforms, it is still seen as a country with problems of port congestion, poor turnaround time, problems in export clearances and one of the highest Customs tariffs in the world. And, now, there is a lurking fear of reservations in the private sector jobs.

If we are really serious about achieving the target in a time-bound manner, we would need to craft a different strategy and create proper institutional framework to ensure that the new initiatives do not just remain a pipe dream and are actually delivered.

First of all, some bold steps are required for investing in infrastructure. China spends 20.8 per cent of GDP ($260 billion) against 6 per cent of GDP ($31 billion) by India, in electricity, construction, transportation, telecom and real estate.

A focussed approach is needed to attract FDI for scale production in commodities such as agro-products and packaged food, in which India can compete globally. Indian exporters must become more quality-conscious to overcome its image of producing shoddy goods. Then, labour laws will have to be changed radically to allow `hire and fire', to compete with countries that already allow it.

One way could be to transfer issues relating to `labour' from the `Union List' and `Concurrent List' to the `State List' of the Constitution, to allow different States to compete on labour flexibility to attract investments.

Progressive States such as Tamil Nadu, Karnataka, Punjab and Delhi may adopt flexible labour laws that will ensure that investors ready to pump in money in garment and textile sector, post-Multi-Fibre Agreement in January 2005, receive a favourable treatment, or else they will likely flock to China.

Experience of countries which allow `hiring and firing' of labour indicates that they generate more employment in medium-to-long term, than those which follow rigid labour laws.

Higher export is just an outcome of a conscious policy of integrating the local with the global economy and, hence, the competitiveness of Indian industry as a whole will have to go up drastically.

Such integration creates jobs, as is evidenced by opening up of economies in China and India. Now, several important decisions on `big-shift' structural reform to further open the Indian economy will have to be seriously brought out in the agenda. Exports since 1991 have grown at a CAGR of 9.9 per cent (against China's 16.3 per cent in their first 12 years of opening up). But to achieve a CAGR of 33 per cent in the next five years will require us not just to do things differently, but to do different things.

Last, India's famous bureaucracy is due for a tectonic reform. Being serious with bureaucratic reforms will mean more investors coming to this country with dollars to invest in critical infrastructure and manufacturing industries of scale, to provide employment and raise the level of GDP growth.