Business

Can trade target be achieved?

The biggest obstacle to achieving the ambitious export target is the dismal state of the country's infrastructure, says N. N. Sachitanand.

DESPITE HAVING the fourth largest GDP in the world in terms of purchasing power, India's share of world trade is a measly 0.75 per cent. One of the main reasons for this anomaly is the inward looking economic growth strategy that India adopted in the first four decades after gaining Independence. This aimed at achieving self-sufficiency rather than export growth. Coupled with a plethora of controls and regulations, high tariff walls and severe foreign exchange restrictions, this strategy led to a non-competitive domestic industry and a thin volume of foreign trade.

No doubt, the liberalisation in economic policy and unravelling of controls introduced in the early 1990s, following a major foreign exchange crisis, has served to double the GDP growth rate from the previous average of 3 per cent per annum and strengthened Indian industry . But the country's share of international trade still remains way below what the size of its economy warrants.

New policy

The new trade policy enunciated recently by Commerce and Industry Minister, Kamal Nath, intends to do for India's foreign trade what the wave of liberalisation in the early 1990s did for the domestic economy. An ambitious target of reaching 1.5 per cent of global trade by 2009 has been set. It may or may not be a coincidence but this quantum change in trade policy is being ushered in when the same man, who is the Prime Minister today, was the Finance Minister who designed the economic reforms package of the early 1990s.

The new foreign trade policy still retains the old carrot strategy of tax breaks and duty-free import entitlements to exporters. But it also brings in a new spin to foreign trade, in that it is not just about exports and imports but a means to enable incremental economic activity in the country. Towards this end, the new policy has brought in such measures as permitting import of second hand capital equipment and duty-free imports of capital goods for the agro-industry sector. This could, however, ricochet by injuring the domestic capital goods industry which is burdened with heavy taxes, poor infrastructure, high domestic lending rates and delayed payments by customers. Indian machine tool manufacturers, for example, could find themselves unable to compete with second hand machines brought in from Europe at throwaway rates.

India as global hub

The new policy has also introduced, for the first time, the concept of India becoming a global trading hub. This will be accomplished by promoting the establishment of Free Trade and Warehousing Zones (FTWZs). Foreign direct investment up to 100 per cent will be permitted to set up such zones. No doubt, the Minister had his eyes on the very successful FTWZs in West Asia, which are patronised to a large extent by Indian companies. But why should traders prefer Indian FTWZs when there are already established and efficient transit ports like Singapore, Kuala Lumpur, Hong Kong and Colombo in the region?

Can India really reach the export trade target visualised by Mr. Kamal Nath? It is a very, very tall order. According to WTO statistics, world merchandise exports crossed $7.27 trillion in 2003 while India's figure was $55 billion (roughly 0.75 per cent). According to calculations by the Commerce Department, a growth of 4 to 5 per cent per annum in world merchandise exports over the next five years means Indian exports will have to reach $175 billion by 2009 to reach a share of 1.5 per cent. This implies a growth of 21 per cent CAGR in exports over the next five years. India has touched 20 per cent export growth levels since 1991 several times, but not consistently for five years at a stretch.

Poor infrastructure

The biggest obstacle to achieving the ambitious export target is the dismal state of the country's infrastructure. India no doubt has the world's second largest rail network. But the efficiency of freight operations of the Railways is going downhill. Long wagon turnaround times, primitive facilities for loading and unloading at the stations, poor security and endemic corruption leading to substantial thefts and losses are the order of the day. The Railways' share of total freight transported has declined from over 80 per cent to 50 per cent in the last three decades. As long as Railways remain in the stranglehold of politicians, this situation will not change.

Unfortunately, road transport is not such an attractive alternative. Although there has been some move to modernise the national highways, the secondary roads are in terrible shape. Inter-State check points have become a major cause of delays which can stretch from hours to even days at each check post. The approaches to ports are narrow and congested, leading to serious clogging of traffic and trucks held up for several hours to even days sometimes.

Indian ports, which handle over 90 per cent of India's volume of foreign trade, are notorious for long ship turnaround times of three to five days

(average) and dock congestion due to inadequate equipment, lack of Electronic Data Interchange facility and truculent labour. This is true of even new ports such as the Jawaharlal Nehru Port Trust at New Mumbai which is currently facing a major crisis due to a container jam. Private major ports like Mundhra on the Gujarat coast are much more efficient but these are few and far between. In 2003-04, Indian ports handled around 460 million tonnes of cargo.

Plans are afoot to increasingly involve the private sector to increase the handling capacity at ports to 680 million tonnes by 2006. But the need by 2009 may be closer to 1,000 million tonnes. How will this be achieved?

The less said about cargo handling facilities at Indian airports the better. Totally inadequate floor space and material handling systems, dwell times of export cargo in days instead of hours, next to no storage facilities for perishable cargo such as cut flowers and vaccines and cumbersome clearance procedures are the norm.

Agro-exports

In line with the agrarian bias in the Common Minimum Programme of the newly elected government at the Centre, the new trade policy talks about giving a fillip to agro-exports. True, India is the largest producer of milk, fruits and vegetables. But it is one thing to produce these items in scattered quantities all over the place to meet the demands of the domestic retail trade and quite another to consistently export large volumes of processed agro-produce according to strict time schedules.

Organised farming systems such as contract farming, big processing units, logistics like cold chains, the quality inspection and Customs systems needed for a major move into agro-exports are still in their infancy or non-existent.

Several times in the past, the Government envisaged boosting the country's foreign trade to over one per cent of the global total. This has never been achieved. Will the Manmohan Singh regime succeed this time? It is doubtful. But the steps taken are to be commended.

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