How India Can Improve Its Ca

A common argument made to improve India's trade competitiveness is that the rupee is strong and needs to be depreciated to make exports competitive in the world markets. However, this argument falls flat in the face of recent trends in both the exchange rate and the real effective exchange rate over the last few months. Both of these indices have remained stable in the last fiscal and, in fact, fell slightly in August while exports continued to show a downward trend.

There was not much strength. Indian policymakers need to recognise that the trade challenge for India is structural in nature and cannot be done away with quick-fix solutions. Cost incentives are an acceptable approach to deal with immediate challenges like the impact of GST, but they need to be supplemented with more long-term solutions. An effective measure could be to identify sectors where India has a comparative advantage and work towards making it competitive. This implies helping them with action research for market development and providing R&D support. Such an approach will allow producers to innovate and beget productivity gains. Second, India's poor logistical network is also a factor of concern. Since India is over-dependent on its road networks, the logistics cost as a percentage of GDP amount to almost 13-14 per cent as compared to 7-8 per cent in developed countries. Third, India's trade agreements with other nations are largely deficient in nature.

The country's top exports face tariff and non-tariff barriers in developing economies and various kinds of non-tariff barriers in developed ones. Moreover, most of its free trade and preferential trade agreements are ill-conceived in nature. The India-Japan CEPA is a case in point. India has failed to make any gains out of it simply because it is too cumbersome. For instance, Japan allows duty-free import of Indian apparels only if the sourcing of raw materials is done from either of the two countries with an exception of seven per cent content by weight that can be sourced from a third country. The South Asian Free Trade Agreement, which was signed for geo-political reasons rather than commercial ones, is another example. Multiple issues ail the export sector of the Indian economy, a lot of which go beyond the scope of the FTP. The government should now delve into these structural aspects of trade policy before India loses any more of its comparative advantage to world markets. Now that China is slowly losing its status as the world's manufacturing hub, the time has never been so ripe.