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The growing pains of trade

The underlying theme of the annual iteration of India’s trade policy is that our export performance is still wobbly.

india Updated: Aug 24, 2010 23:29 IST

The underlying theme of the annual iteration of India’s trade policy is that our export performance is still wobbly. The additional sops announced this year may add up to a meagre Rs 1,050 crore, but the government is chary of withdrawing the stimulus package that has ballooned to around Rs 44,000 crore in tax giveaways in the aftermath of the financial meltdown. The official assessment that the recovery on display in India’s merchandise trade is “stimulus-fed and stimulus-led” informs its decisions to enlarge the scope of interest subsidy; to retain tax reimbursements on imports that go into exported goods; and to provide fresh financial incentives to sectors like handicraft and leather that are yet to overcome the shock of a severe constriction in Western demand. Alongside, incremental bureaucratic easing should bring down some business costs, although much more needs to be done to bring other sectors like transport on board in this endeavour.

The helping hand from the government may help the country meet its export target of $200 billion, but that still represents a minuscule part of world trade. We imported the financial crisis through our manufacturing exports, which have still not recovered. In 2010-11, India’s merchandise exports will just about reach the target set for them in 2008-09. The share of exports in the gross domestic product has shrunk from 26.7 per cent to 22.3 per cent in under two years, while the fall in imports is even steeper from 32 per cent to 21.9 per cent. India has trailed the rest of Asia in merchandise exports in a growing market, smart policy would have concentrated on expanding our share in a shrinking one. Our trade policy, in keeping with a long tradition of continuity, makes no such radical departure.

Also, we have not been particularly proactive in the broader policy framework of promoting exports through currency management or bilateral trade agreements. The West accuses most of Asia, especially China, of deliberately undervaluing their currencies to maintain trade competitiveness. And India remains a relatively new entrant into the ranks of nations that are stitching up free trade arrangements with their largest trading partners. Our talks with Asean are still in the works over services, where we have the advantage, while South Korea and China beat us to a deal with the European Union. These solutions may be sub-optimal in the global scheme of things, but do help individual countries in their export competitiveness. Asia as a whole may need to rein in its export dependence in the new world order, but India is far from being in that league. Our quest for a larger role in world trade will remain an ongoing one and policy-making must be enlightened by this reality.