INTERVIEWS
SPECIALS
CHAT
ARCHIVES

Business Commentary / Bibek Debroy

Import more to export more

We now have export figures for the first six months of 1998-99, that is, April-September 1998. Total exports were $ 16.27 billion, a drop of 3.28 per cent on the April-September 1997 figures.

Extrapolated for the entire year, we have an export figure of around $ 33 billion, not even $ 35 billion. Now perhaps Commerce Minister Ramakrishna Hegde will finally stop harping about a 20 per cent dollar growth rate in exports. For that to be possible, one needs a 40 per cent dollar growth rate in the remaining six months!

There has not been a balance of trade problem, because imports have also been sluggish. Imports can be divided into oil imports and non-oil imports. The value of oil imports has been low because global oil prices have been soft and the value of non-oil imports hasn't increased because of industrial slowdown.

Despite this, imports for April-September 1998 are $ 21.26 billion, ten per cent higher than the April-September 1997 figure. Extrapolated for the entire year, we have an import figure of around $ 43 billion, implying a trade deficit of around $ 10 billion. This does not sound much, but one must be careful.

There are two sets of import data. From the Directorate General of Commercial Intelligence & Statistics, based on customs data and from the Reserve Bank of India, based on payments data. RBI data are always higher, sometimes by as much as four or five billion. What we now have are DGIC&S figures.

So the trade deficit in 1998-99 can very easily be as high as $ 14 billion or $ 15 billion. Even this does not automatically lead to a balance of payments problem, since there is a net surplus on the invisibles account and there are capital account inflows. The RBI can afford to be smug with $ 30 billion of foreign exchange reserves.

Let me get back to exports. Why has performance been pathetic? I don't buy the government line that this is because of east Asia. East Asia has not recovered yet. So, to argue that competitive devaluation in east Asia has hurt India's exports is non sequitur, unless one is talking about a potential threat. To my mind, the major reasons for an export slowdown are the following, reflecting not necessarily any order of priority.

First, these are dollar figures. They tend to underplay export growth, since the dollar has been appreciating vis-a-vis other currencies.

Second, as exports increase and the base level becomes higher, it becomes impossible to sustain 20 per cent dollar growth rates year after year. A more sustainable rate is something like 10 to 12 per cent.

Third, the real exchange rate has appreciated and I am not making a reference to east Asia. The Indian export basket is in low value segments, with very little of product differentiation and branding. Therefore, exports are price-sensitive.

Fourth, there are problems with cost and availability of credit. Organised industry keeps complaining about the cost of credit. Since so many exporters are small-time, I suspect that availability of credit is the more serious problem.

Fifth, infrastructure is a problem. Containerisation costs in India are three to four times the containerisation costs in United States and Japan. Infrastructure has always been a problem. But as the base level increases, infrastructure becomes more of a binding constraint.

Sixth, procedures are horrendous. I mean import procedures more than export procedures. Contrary to popular impression, one needs to import more to export more. The average import intensity of Indian manufacturing is probably around 40 per cent.

Seventh, there have been internal sector-specific problems, like court intervention closing down aquaculture plants in Andhra Pradesh or tanneries in Tamil Nadu.

Eighth, there have been external sector-specific problems like azo dyes, child labour and the quality of imported rough diamonds declining.

There may be a few others, but I think I have listed the major reasons.

Stated differently, many of the problems that plague exports highlight lack of reforms in the domestic economy. You cannot introduce reforms only in the external sector and assume that exports will immediately take off. Exports account for a little over 10 per cent of GDP now.

A 20 per cent (versus zero per cent) growth rate in exports thus means the difference between a five per cent GDP growth and a growth of seven per cent. Exports can provide the kickstart the economy needs provided we do three things.

First, eliminate quantitative restrictions. Second, slash import duties. Third, let the nominal exchange rate drop and don't support it. Rupee depreciation can also provide domestic production with protection, without attracting the kind of flak that a swadeshi countervailing import duty does.

But we have to realise the urgency of the problem. I am convinced that the Chinese devaluation is months away. East Asia will begin to recover in 1999. If not all the countries, at least some of them. They will try to export their way out of trouble and despite the currency crisis, everyone knows that they have better human resources and better infrastructure. That has not disappeared.

God help our exports then, if we don't do something fast. We have to stop messing around with export processing zones, 100 per cent export oriented units and export houses and kid ourselves that we have done something. In a climate of general liberalisation, such liberalisation in enclaves is irrelevant.

Two years down the line, the following scenario is not impossible. Exports take a beating. Imports increase, once global oil prices harden. There is a flight of non-resident Indian deposits and capital flight is reinforced in various other ways. Remittances become a trickle. We have been through this in 1990-91. Do we have to do it once again? Those who do not learn from history are condemned to repeat it.

Bibek Debroy