ECONOMIC HIGHLIGHTS

New Delhi, 16 March 2006

Need To Raise Exports

PUT FOREX RESERVES ON SOUND FOOTING

By Dr. Vinod Mehta

In March 1991 India’s foreign exchange (Forex) reserves were as low as $ 2.4 billion, just enough to pay for its 15 days’ imports. Within twelve years of economic reforms, the foreign exchange reserves crossed $100 billion mark in 2004.  At the end of March 2005 India’s foreign exchange reserves stood at $141.5 billion. 

This has, however, to be taken with a pinch of salt. The increase in the foreign exchange reserves is not due to increase in exports (over imports) but due to other factors. The trade balance increased from - US $ 13718 million in 2003-04 to US $ 36629 million in 2004-05. That is to say, we have been importing more than we are exporting.  But as the growth of foreign exchange reserves shows that this deficit in trade was taken care of by inflow of foreign exchange through exports of invisibles (services), inward remittances from resident Indians working abroad as well as money brought in by foreign institutional investors.

If the exchange reserves had been due to exports exceeding imports then this would have been considered a real achievement. Since it is not so, we will have to pay more attention to increasing our exports of merchandise vis-à-vis imports. Only then can we be sure that India will never face foreign exchange crisis as it did in 1991.

With the opening up of the economy and its possible integration with the world economy, we shall have to make conscious efforts to increase our exports. This is only possible if our exports are competitive both on price as well as quality front. At the moment, India is not a leading player in international market. In fact, India’s total share in the world trade has gone down over the years. Its share in the world exports has also gone down. Only recently India’s exports as a percentage of world exports has risen from 0.67% in 2001 to 0.8% in 2003. Before 2001 it was 0.65%.  Compared to this, China’s exports as a percentage of world exports is 3.9%.  

Therefore, India will have to work very hard at increasing its share of exports. At one level we will have to make our exports competitive and at the second level we will have to fight the developed countries in international forums like WTO where the attitude of the developed countries to import from developing countries has been usually negative.

Delivering the 19^th Annual Des Raj Chaudhry Memorial lecture in December, 2003, the, then, Union Cabinet Minister for Commerce and Industry and Law and Justice observed:  “In the quest for globalization, the developed countries are unwilling to accommodate the developing countries in some respects. The developed countries want free flow of capital into the developing countries and they also want the developing countries to open their financial market for institutions of developed countries but the developed countries create all sorts of tariff and non-tariff barriers when developing countries want free flow of goods and services from their countries into the developed market”.

Apart from this, the developed countries, while favouring free movement of capital from developed to developing countries, are not in favour of free movement of labour from developing countries to developed countries. As a result, the terms of trade are always against the developing countries. India has raised this issue on many international fora but has not succeeded in getting free movement of labour on the agenda. However, we must continue to raise this issue at all the international fora till the developed countries see our point.

At the second level, given the situation, India must chalk out a strategy for the next 10 to 15 years to realize its objective of exporting more manufactured goods and processed food than it is doing at the moment.  As a result of economic reforms many of the manufacturing units are consolidating their position and changing management style to achieve the competitive edge. However, one has to go a little beyond this. For instance China, our competitor, is able to manufacture goods at much cheaper costs; its strategy is to import raw materials on a large scale when prices are very low and store them.

India may also develop a similar kind of plan which encourages the setting up of the raw material base and sell it to the domestic industry. For this it may be useful to change our approach to import tariffs. For administrative purposes goods may be classified into three categories: i) raw materials; ii) components or parts which are used to make a complete product; and iii) final or finished goods.

As far as raw materials are concerned, materials which are not available in India as well as other raw materials may be allowed duty free in the country. Imports of component and parts may have duty structure which encourages competitive production of goods. The duty on finished imported products could be kept very high so that the import of finished products is discouraged but products like raw materials and components which help in the production of a particular good within the country is encouraged. The net result would be that the manufacturing sector will get a big boost and export base will get strengthened. Relatively high duty of imports of finished products would divert the Indian consumer to buy Indian products while their mass production will make it competitive in the world market.

As stated in this column earlier, we need to have a policy for the export of agricultural products. Agricultural exports have a huge potential. A few years back, the Government of Punjab had sought the permission of the Centre to export wheat to Pakistan. Such attempts to export agricultural products need to be carefully nurtured. The world market for agricultural products is very high and India has the potential to emerge as an important market player in the international agricultural market.

As we try to engage significant exporters, the Government must ensure that the exporters don’t indulge in malpractices which may damage the image of Indian products. Once our products get a bad name in the international market we shall never be able to approach that market again. Why Japanese goods are preferred all over the world is because of their quality which has been maintained for years.

At one point of time, the Korean goods were looked down upon by the foreign consumer but, like the Japanese the Koreans made every effort to improve and maintain the high quality of their goods and over a period of time Korean goods came to be regarded as quality products. The Korean Government played an important role in this. Now the Chinese are following the same model. The Indian exporters would need a similar approach by being consistent in their quality and relatively low prices.

The exports cannot be increased overnight but their growth will have to be carefully nurtured where all the players -- the manufacturers, agriculturists, exporters and the Government -- have a vital role to play. Once we are able to export more than we import over a considerable period of time our foreign exchange reserves would be truly on sound footing.---INFA

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