The Economic Survey pegs exports growth in FY18 at 12 per cent. Growth in exports has been anaemic for the past couple of years. In FY17, export growth in dollar terms was 5.2 per cent and growth had fallen to a negative 15.2 per cent in FY16. Therefore, the estimates for FY18 at 12 per cent are on the higher side. More importantly, the question is: will this growth be sustainable in a world turning protectionist and where Indian manufacturers have little incentive to export?
After the GST rollout on July 1, 2017, exporters were affected adversely as they had to pay tax upfront and claim refund later. This sucked out liquidity and affected working capital requirement. Exporters represented this problem to the government. And, the GST Council quickly gave a hem reprieve. Now liquidity is not a problem. But, the reduction in duty drawback rates still pulled down the margins of Indian exporters. In October 2017, export growth turned negative though it bounced back in November, after the tweaks carried out by the GST Council.
Exports are always about price and for that, not just economy of scale but global economy of scale is needed, China’s model of exports is based on creating global scale through state incentives. Once global scale is achieved in a product category, factories across the world become uncompetitive and may be shut down due to the pricing pressure. And, Chinese companies become the sole global supplier. This method is well known but Indian companies do not seek global scale or exports as the driver for their companies. Most Indian firms are happy serving the Indian market. This is not just a lack of ambition but a status quo difficult to change.
The Economic Survey also points out, “India’s exports are unusual in that the largest firms account for a much smaller share of exports than in other comparable countries. Export concentration by firms is much lower in India than in the US, Germany, Brazil, or Mexico. The top one per cent of firms accounted for 72, 68, 67 and 55 per cent of exports in Brazil, Germany, Mexico, and the US, respectively, but only 38 per cent in the case of India. Similarly, the top 5 per cent accounted for 91, 86, 91 and 74 per cent in those countries, compared with 59 per cent in India.” The disaggregation of exports and lack of export leaders in India is the biggest reason that India cannot depend on exports to drive its economy.
Unless corporate India looks at creating global scale and Indian government and banks help them achieve this ambition, it looks difficult how the vicious circle of low investment and capacity utilisation will be broken in the near future.
While the Economic Survey strikes an optimistic note, “With world growth likely to witness moderate improvement in 2018, expectation of greater stability in GST, likely recovery in investment levels, and ongoing structural reforms, among others, should be supporting higher growth. On balance, the country’s economic performance should witness an improvement in 2018-19. “
The improvement, if any, will be limited as there seems no solution in sight for the twin balance sheet problem. A 12 per cent export growth is chimera at best and unlikely to be sustained.
The writer is a policy analyst based in Delhi. He tweets @yatishrajawat