May 23, 2008 / 8:37 AM / in 9 years

COLUMN - India's trade agenda - dil mange more!

A worker hangs dyed yarn to dry at a textile mill on the outskirts of Agartala, in this April 19, 2008 file photo. REUTERS/Jayanta Dey/Files

REUTERS - The Indian government has set itself an ambitious target - an export figure of $200 billion for the fiscal 2008-2009.

The elephant wants to further grab a five percent share of global trade by 2020. Without commenting on the possibility of achieving such targets, it makes sense to understand problems presently hurting Indian exports.

India’s export growth is mainly stymied by supply side factors - such as government regulations and inability to provide necessary logistics - rather than the demand side factors such as appreciation of Indian rupee, tariff and non-tariff barriers.

While the demand side factors are exogenous, supply side factors are something the domestic government can work upon, to improve India’s exports performance.

In this regard there are important lessons to be learnt from China, the dragon in the neighbourhood which continues to spit fire. It is to be noted, China’s exports figure of $1218 billion is almost eight times that of India which stands at $155.5 billion.

If one takes into consideration items such as iron and steel, chemicals, machines and telecommunication equipment, textiles and clothing, where China and India compete with each other in international market, the former’s share in the world market is much higher.

For the above stated categories, China commands an export share of around 6, 3, 15, 17, and 24 percent, respectively, compared to, India’s share of around 2, 1, 1, 4, and 3 percent, respectively.

The relative success of China lies in its ability to provide a better physical infrastructure and easy availability of cheap credit. China invests around 7 percent of its GDP on infrastructure as compared to India which has allocated just 4 percent towards this crucial growth driver.

Lower transaction costs have also given Chinese exports the competitive edge. For example, it takes around 40 days to book a container for exports in India as compared to just one day in China.

Logistics costs in India are among the highest in the world at 13 percent of GDP. In many instances, Indian exporters of edible items like rice, tea etc., find it difficult to ship their product from the nearest port of exit.

For example, exporters in eastern India are forced to transport edible items by road to Kakinada - a port in Andhra Pradesh which offers mid water loading facilities - to avoid contamination.

The congested Kolkata port handles export of iron ore and other metals scraps, items which cause pollution (read dust particles) and thereby expose edible items to the risk of contamination.

The Chinese government offers other goodies as well. On top of cheaper credit, Chinese manufacturing units also avail cheaper power, water and land. Besides providing these indirect subsidies, the government also gave differential subsidy.

For example, production of staple fibres, meant for domestic consumption, attract lesser subsidy as compared to when it is used as an input for making exportables, like, polyester yarn.

The special economic zones (attracting zero tariffs) were built with the idea of making China the assembly hub of the world - where inputs were imported from neighbouring Asia, assembled in China and thereafter exported to the rest of the world.

Coupled with these, a much larger scale of operation by lowering per unit cost of production, explains China’s much higher share of world exports.

The U.S. - the largest buyer of Chinese goods - has also refrained from objecting to this subsidy game except asking the Chinese government to revalue their currency.

An undervalued Chinese currency meant U.S. multinationals footing more dollar bills to set manufacturing activities in China.

However, a greater subsidy on Chinese exports genuinely reducing their cost makes U.S. consumers happy.

The U.S. administration is also happy as China used up the bulk of its exports proceeds to lap up U.S. Treasury bills. China, along with Japan, has now emerged as one of the largest investors in U.S. Treasury bills.

Unlike China, exporters in India get little assistance from the government. The recent star performers (read sunshine sectors) of Indian exports, items like fertilizers, steel and petrochemicals, were successful because industry leaders in India took initiative on their own.

In terms of scale of operation, these industries are comparable to their Chinese counterparts in size. These were set up a few years back taking advantage of lower cost of capital.

Borrowing cost in India during early part of this decade hovered between 7 to 8 percent as compared to the present rate of 12 to 13 percent. These sunshine sectors are also highly capital intensive and helping them avoid the labour crunch that sectors like leather and garments are presently facing.

The good news is, despite lack of sufficient government assistance, India’s exports growth story can continue as these sunshine sectors generate higher revenue compared to the leather and garments industries.

Nilanjan Banik is Associate Professor at the Institute for Financial Management and Research, Chennai. The views expressed in this column are his own

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