'Indian industry has never taken a positive stance'

Last Updated 23 January 2016, 18:33 IST

In an otherwise depressing global environment, where the global economic growth has dipped to 2.4 per cent, India presents a bright spot.  Two years ago, India was considered to be the poster child of vulnerability. In contrast, today, India is the only large country with an impressive growth performance, with a relatively stable external environment.  On the external front, the current account deficit has sharply declined from $88 billion in 2012-13, to an estimated $22 billion in the current year.

Nevertheless, the steady decline in commodity exports, even in absolute terms, is a cause for worry.  The reasons for the decline must be found in the global environment.  The global growth has been dismal at just about 2.4 per cent.  Although there are signs of recovery in the United States, the revival is not strong enough to push up the demand. The Eurozone continues to be vulnerable with the additional problem of surging refugees. The volatile financial market and the slowing exports in China has not helped matters. The sharp decline in commodities, particularly oil prices has constrained the demand for imports in Australia, Canada, Russia and the Middle East. In this situation of declining global trade, steady fall in Indian exports is not surprising. 

Indeed, the government has been projecting itself as pro-business, but export performance depends on the competitiveness. Despite the ‘Make in India’ campaign, very little has been done to improve the competitiveness of Indian manufacturing.  Perhaps, 20 months are not enough, and this is the time to embark on structural reforms to improve the competitiveness of Indian industries.

There are a variety of factors responsible for shrinking exports. The government or the industry can do little when the global demand is shrinking. Again, if the oil sector is taken out, the export situation does not present such an alarming picture.  The fall in oil prices has made exports of oil distillates mom-competitive, and to that extent, the import bill is also lower (Reliance Industries imports crude, and exports distillates, from its Jamnagar refinery). However, the long-term solution to improving the exports will depend upon imparting export competitiveness and this requires reforms in policies and institutions. Thankfully, the prudent monetary policy, besides low oil prices, has helped contain inflation, which is important.

  Low inflation will also help reduce the diversion of household savings into buying gold and real estate.  But it is important to improve the long-term export competitiveness through the policy and institutional reforms. It is important to peg the exchange rate at a realistic level. The exchange rate has to be determined to ensure export competitiveness and not any emotional issue. Indeed, no one likes the rupee value to erode, because that devaluation will also increase the prices. But the rupee can be stronger only when the underlying structure of the economy and exports are strong.

The tightening monetary policy stance in the United States and devaluation of the yuan by China have added to a measure of uncertainty in global trade. However, their impact on India’s exports is not very significant.  First, the former impacts the flow of institutional investments, and much less, exports.  As far as the latter is concerned, the decline in commodity exports was seen even before the Chinese devaluation.  Indeed, the yuan devaluation may result in further decline in the export of engineering goods, but the effect is not very significant as India has not yet moved up the value chain in exports as China has and therefore, is not a major competitor.

The ‘Make in India’ campaign is important if it results in structural reforms to improve the competitiveness and not continued production for the protected domestic market. These involve both macro- and micro- level reforms. Not much has happened in improving competitiveness. The major interventions in this regard, include ensuring efficient infrastructure, competitive exchange rate and governance in terms of fast clearances at both Union and state levels. Slogans can help raise awareness, but what is needed is real reform.

As mentioned above, pegging the exchange rate at competitive levels is important.  To determine the realistic exchange rate, we need to look at the information on both commodity trade and invisibles, including the net export of services, and investment flows. 

The RBI flows the system of crawling peg which implies that it intervenes only to even out day-to-day volatility and not structural issues. In the prevailing scenario, it is quite possible that in the coming year, the Indian rupee may depreciate to Rs 70/ $.

It would be incorrect to state that the government has failed in its task of arresting the fall in exports. Indeed, structural reforms cannot be accomplished overnight, and it would take considerable time. Furthermore, these reforms, particularly the improvement in infrastructure and institutional reforms for improving the ease of doing business, have to be carried out at both the Union and state levels.  There have been some initiatives like the passing of the bankruptcy law, improved governance at the Union level, in terms of faster clearances, reforms in the coal allocation and power sector,  and allowing the states to deal with labour laws. Indeed, surge in labour-intensive exports is possible only when we have more flexible labour laws. The impact of these measures will not be seen immediately, but over time. 

As I mentioned, the government will have to embark on structural reforms in a systematic manner to improve the competitiveness of the Indian industry. 

A labour-abundant economy like India has failed to increase labour-intensive exports, which means that there is something is wrong with the labour market.  Imparting greater flexibility is a part of the solution.  In fact, it is important to impart skill and productivity to the labour.  Similarly, competitiveness of manufacturing requires efficient infrastructure. 
The problems in the power sector continue to plague, and these require holistic solutions. Despite improvements in governance, there are vast areas where institutional reforms are necessary.  Therefore, improving export competitiveness requires reforms in policies and institutions, besides providing competitive levels of infrastructure at both Union and state levels.

Unfortunately, industry in India has been reactive and has never taken a proactive stance.  The attitude is to ask the government to help their specific industry and not to improve the overall competitiveness. They are content to increase their businesses by a given percentage, but not to leapfrog. This is the legacy of the pattern of development strategy followed in the past, where the industry prospered in a sheltered environment and never bothered to make its presence felt in the international market. The exception to this is the services sector, which emerged from an entirely different environment.

The time is opportune for them to give up their ‘cheerleader’ posture and tell the government what is needed to improve the productivity and competitiveness.

The specific measures they need to take are to come out with positive suggestions on how to improve the labour productivity and partake in imparting skills. They should make positive suggestions to improve infrastructure. Rather than harbouring cronyism, they should work on suggestions for industry as a whole, and not any specific one.

(Govind Rao is a member of the fourteenth Finance Commission)

(Published 23 January 2016, 17:16 IST)

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