Over the past several years, India has been facing headwinds in its process of integrating with the global economy. It has now become evident that Indian firms are finding it difficult to compete both in the global and domestic markets. The stark reality is that Indian exports have not performed satisfactorily. Export values have not been able to cope with the rising tide of imports, thus expanding the trade imbalance; and this has, in turn, put pressure on the current account deficit (CAD).
These enterprises must become competitive so that the CAD does not become a binding constraint. Under these circumstances, Nirmala Sitharaman’s budget proposals evoked interest for two reasons: one, its ability to address some short-term concerns of trade and industry, and two, the roadmap that NDA 2.0 would be laying down that would enable Indian firms to quickly reverse the prevailing situation.
Over the past couple of years, the Modi government has been using tariff protection for safeguarding the interests of domestic manufacturing. The then finance minister Arun Jaitley had declared his intention of using tariffs for incentivising manufacturing in critical areas like mobile phones by limiting the extent of import competition.
Jaitley’s steps are necessary, but not sufficient for ensuring that India is able to strengthen its manufacturing sector not just for increasing domestic value addition, but to also provide fillip to sagging exports. Without such a strategy, India would be forced to opt out of the global and regional integration projects, including the much talked about RCEP.
Exports must be in government’s focus for at least three other reasons. One, exporters seem to be still struggling on account of refunds that have increased their transactions cost in a market where margins are tight. Two, export subsidies have become passé as the WTO rules do not allow any middle-income country to provide these subsidies. Moreover, the US has ensured that India discontinues export subsidies in a haste, by initiating a dispute in the WTO.
And finally, India’s biggest export destination, the US, has become less attractive after President Trump removed India from the list of developing countries that enjoy preferential market access in the world’s largest economy. Sitharaman’s budget proposals for the current fiscal could have done well to resonate with at least some of these challenges faced by exporters.