Looking beyond RCEP episode: Why surge in exports should be an outcome of market forces

By Abhishek Jha & Seema Bathla

India was fiercely negotiating in the Regional Comprehensive Economic Partnership (RCEP) on the issues of its interest, which included trade deficit with China and greater mobility for Indian workers, among others. India has been accused of stalling the deal with last-minute demands, and being overtly protectionist in its stance before opting out of the mega trade deal. There are some facts that cannot be ignored, given the concerns and risks that would be faced by farmers, traders and small business enterprises from the likely reduction in tariffs and import surge.

The question is, whether opting out of the RCEP brings down exports and does it go against the interest of exporters? There is are obvious expectations from policymakers and government bodies that exporters should take exports to the next level by catering to more global markets and diversifying their export basket. A continuous and significant surge in exports makes the economy relatively robust on the global platform in terms of its bargaining and negotiating power. For instance, going by the capability to export, Germany and the US will have more say at any international forum like the WTO compared to Peru, Ghana or Uruguay. Thus, emphasising and strategising on an export-related policy is justifiable.

In the Indian case, policymakers expect exporters to take the leap to transform the export structure, and often extend various incentives such as duty drawback, zero import duty on intermediate goods for exporting finished or through the Merchandise Export from India Scheme. But how far is it pragmatic to expect them to aggressively explore global markets?

With a consumer base of 1.32 billion, constituting almost 17.1% of the world population, India offers huge opportunity to the business community. At the same time, it is ubiquitous that exports have a cost component attached to them, and also exporting is a risky business. Operating in an unfamiliar or less familiar foreign market will always throw up novel challenges that might be tough to navigate, while establishing a business within the domestic market is relatively smooth. Doing business overseas is about having symmetric information about the overseas market and the ability to assess the risk. Identifying such risks ahead of time and putting measures in place to manage these can help minimise their impact on the success of the business overseas.

India has experienced a perpetual improvement in the ease of doing business, owing to an array of reforms implemented by the government in recent years. The overall growth during the last five years has been driven mainly by domestic demand, which resulted in double-digit growth of imports and hardly 5% rate of growth in exports. If this is the case, then it would be unfair to expect exporters to bear risk, cost and uncertainty, and aggressively focus on exporting. For an exporter, the international market is always a better place to explore and expand business. Nevertheless, since exports tend to be slow, the policies are not lucrative or supportive enough, looking at the circumstances for competition that exporters have to deal with the western and European countries.

Going by a high rate of growth of market size of key domestic sectors in India, it will be cogent to see the predilection of exporters to comfortably cater to this, as global imports increased by only 1% per annum in the last seven years. This signals the paucity of opportunity for exporters, maybe due to protectionist policies getting implemented globally. The WTO has already forecast that the world trade in 2020 will grow less than 2% per annum.

Therefore, exporters seem inclined towards domestic markets for realising the promising opportunities, mainly through retail, FMCG and electronics sectors, given the high growth of their respective market size (see graphic). This seems to be purely an outcome of the forces of market mechanism, i.e. the demand and supply factors. A surge in exports has to be an outcome of market forces, and not through an artificial policy.

Since India has opted out of the RCEP, it calls for preparation while negotiating trade deals. Any foreign economy will be delighted to cater to the Indian consumer base, but India’s list of products to offer is more or less static, be it in ASEAN, SAFTA or MERCOSUR. One of the reasons is that exporters never prioritised focusing on global markets, because they too wish to have a promising market for reasonable gains. While exporters may not be dormant in exploring foreign markets, there is definitely a need for a long-term policy where the gap between the opportunity offered by the domestic and foreign markets is abridged.

Here, the focus has to be on quality and competitiveness. If domestic markets also accept quality products that match global standards, an environment of competitiveness will engender. This will make exporters self-reliant and move out of their comfort zone. Undoubtedly, Indian markets will still be lucrative (owing to rising middle class), but the gap will be truncated significantly. Procrastinating with the infant industry argument seems no more a pragmatic defence to continue protectionism. India has not signed a trade agreement with any economy in the last few years.

Our industry, as well as agriculture sectors, have not become mature in facing foreign competition and hence negotiations remain non-lucrative. India’s enervated position will always force her to pull back from agreements unless we work on stringent trade policy measures.

Source: Financial Express