General

Policy Proposals For Export-Led Growth In India In Compliance With WTO Law

________________________________________________________________________________

This Blog is written by Nipa Dharod from SVKM’s Pravin Gandhi College of Law, Mumbai. Edited by Uroosa Naireen.

________________________________________________________________________________

Economic growth is rebounding after the temporary weakness in the third quarter. Rising export prices are providing a huge boost to the economy, which is fueling profits and prompting companies to hire.

– Joseph Capurso

INTRODUCTION

From conventional times, trade i.e. the transfer of goods and/or services from one entity to another has been classified into two types: – Domestic trade and international trade. International trade includes export trade i.e. when goods and services produced in one country are offered for sale in another country. Lately, countries have realized the significance of exports and also the direct nexus between the increasing exports and the growth of the economy. In 2000, the cumulative value of goods exported throughout the world stood at approximately US$ 6.45 trillion. However, this amount increased threefold by 2018, where the total value of goods exported globally stood at US$ 19.5 trillion. Correspondingly, many countries have witnessed an upward trend in economic growth on account of the increased exports.

When a country boosts its exports, its Gross Domestic Product (GDP) increases, since there is a trade surplus. The balance of payments which is an essential factor of GDP suggests that when the exports of a country exceed its imports, there is a trade surplus, and vice-versa when the imports exceed the exports, there is a trade deficit. Trade deficits negatively impact the balance of payments of a country while adversely affecting the ‘country’s current account’ and the ‘Net international investment position’. On the contrary, trade surplus can positively affect the balance of payments, while boosting the economic growth and strengthening the national currency. Thus, exports enhance economic growth while endorsing the exporters through greater revenues and higher profits.

The Union Government in the Foreign Trade Policy, 2015-2020 aims to increase the exports of India until US$ 900 billion by 2020. [1] However, in 2019, India recorded exports worth $330 billion only i.e. much less than the expected growth. Thus, there is a dire need to formulate constructive policies that endorse large scale manufacturing and exports of various goods and services. This article surrounds the various policies that can be adopted by the Government to boost the exports of India, considering the status-quo. Also, all the policy proposals are in consonance with the WTO laws and there is no violation of any of the laws contained in the General Agreement on Tariffs and Trade, General Agreement on Trade in Services and other legislative treaties, conventions, etc.

STIMULATING FOREIGN DIRECT INVESTMENTS

“FDI is a responsibility for Indians & an opportunity for the World. My definition of FDI for the people of India is ‘First Develop India’.”

– Narendra Modi, Hob’ble Prime Minster of India.

Foreign Direct Investments (FDI) are the investments of foreign firms or individuals in businesses located in other countries. FDI can be highly beneficial for developing countries like India since it will bring international practices and advanced technologies to India, which will stimulate the manufacturing sector of India, which will in turn provide employment to Indians. All these things will directly stimulate the economic growth of India while supporting the ‘Make in India’ initiative. India should take inspiration from how Vietnam has increased its exports in the past few years by increasing Foreign Direct Investment, by alluring foreign investors through good infrastructure and favorable policies.

Today, China is the second-largest recipient of FDI in the world with an FDI of $137 billion and considering the status-quo of US-China trade war and where post-COVID, many countries, in opposition to China want to shift their production out of China, this can be the best opportunity for India to liberalize its economy and increase its FDI. For instance, the Chinese Government has decided to reduce its international market share and reduce its activities in the textile and apparel sector. China’s withdrawal from the industry can be a benefit to upcoming countries like India, who can take over the global market. The Indian textile and apparel industry is the second highest employer of labor, employing around 45 million people, and this number is expected to increase to 55 million by this year. However, in 2018-19, India accounted for only 5% share in the global export of textiles and apparel, which is nearly 1/8^th of China’s global market share. Further in 2018-19, the FDI in this sector was only US$ 3.1 billion. [2] If the FDI in such sectors is increased, it will directly increase the exports of India and gradually, we will be in a better position to compete globally and dominate the international market. India should grab such opportunities and formulate investor-friendly policies to boost foreign investment in India.

However, India’s major drawback is it’s high corporate tax rates for foreign companies, which discourages foreign companies to invest in India, as they can get better deals in other countries. In 2019-20, the corporate tax rate levied on foreign companies was as high as 40%, however, countries like Vietnam offer corporate tax rates as low as 10-20%, which is more advantageous to foreign companies. Thus, firstly, India needs to formulate policies such as reducing its corporate tax rate for foreign companies, which is a major driving force for foreign investment. Corporate tax rates need to be as low as 10-20% to increase FDI in India. In the short- term, it will reduce the revenue of India, but in the long term, it will make the country export-oriented and financially strong. Secondly, FDI can be endorsed by developing the infrastructure, which is favorable to companies for setting up industries here. This means that in the annual budget, India has to allot more money on the development of infrastructure. Lastly, India needs to increase its trade openness and liberalize the economy to make the country more feasible for foreign investments. We need to reduce the tariff rates and formulate other policies to open the Indian economy to the global economy, and reduce the trade barriers.

As FDI increases, the GDP of a country will also increase. The increased FDI will also boost the exports of the country which will contribute substantially to the economic growth of the country. Also, FDI will improvise the manufacturing sector, which will again lead to quality exports. Thus, Foreign Direct Investments are highly beneficial to the host country as they boost the production and the exports of the country while ensuring the economical, technological, and infrastructural growth of the host country.

BOOSTING THE GROWTH OF MEDIUM AND LARGE COMPANIES

India has been importing largely from China for years, however, during COVID-19 pandemic and amid tensions between India & China, there has been a lot of opposition to buying Chinese products. There has been a wave of nationalism with many supporting ‘Made in India’ movement, which means boycotting foreign products and giving a stimulus to indigenous products and industries. The Government has come up with many schemes to uplift the traditional cottage industries and agricultural products of India. However, these small industries lack the land, labor, capital and entrepreneur to carry out large scale production at compelling prices.

Also, India imports a lot of electronic equipment, especially from China. However, in the last few years, India has introduced schemes to boost the manufacturing of electronic goods in India. Consequently, the imports of electronic goods have decreased, and India is now being recognized as an exporter of electronic goods. The export-oriented policies of India, schemes to boost local manufacturing of goods, tensions amid US-China, etc. have made India the 2^nd largest producer of mobile phones. However, a drawback is that India doesn’t produce the components, and thus it has to import those components. Nevertheless, few companies have started the manufacturing of such components as well in India, which will in turn boost the exports. The question is “If there is such huge scope in the electronic industry of India, then why more than half of the engineers are unemployed?”

Today, many countries globally, rely on China for the components or inputs of various products. However, recently due to the COVID-19 outbreak, China has been unable to produce components and inputs of various products of sectors such as machinery, automotive, communication equipment, etc. Considering the status-quo with China, India should take advantage of the situation by setting up new electronic industries that manufacture such components and export the electronics. India can also boost its economy if we export the assembled electronics even from the imported components.

Thus, we need to set up industries in various sectors to increase our exports by taking advantage of the current situation. A major drawback is, that India has a lot of small and micro industries, which are not efficient in carrying out large scale production at competitive prices and they are hardly capable of fulfilling domestic needs. India requires the development of new indigenous medium and large companies that carry out large scale production and are capable of competing with companies globally. Only medium and large companies can stand in the global markets and boost up the exports of India. Various measures need to be taken such as firstly, the government should use the tax revenue for increasing the grant and loan programs provided to businesses. Also, low prime interest rates can encourage businesses to borrow more money and invest more capital in development and expansion projects while increasing the labor force. Secondly, tax incentives can give a boost to entrepreneurs and new-comers, thus stimulating certain industries. The Government can grant incentives such as subsidies, low-cost loans, etc. to encourage the formation and expansion of large businesses. Thirdly, free-trade zones, and relaxed trade restrictions enable businesses to reduce their cost of production. Lastly, the state should come up with business-friendly policies and provisions which encourage the formation of new large scale industries in India.

The Government needs to stimulate the growth of new indigenous industries while amending the labor laws so as to provide compulsory employment to local laborers, artisans, craftsmen, artists, etc. in the respective companies. A result of that will be, India will have highly developed and strong companies promoting the Indian culture and its indigenous goods, with such skilled people on its board. Thus, the Indian workers will get proper payment for their work, and also the companies will be able to produce on a large scale with huge labor and capital. A good labor force supported by advanced technology can boost the production of different products and 5 – 10 years down the line, India will be self-sufficient in various prospects and will start cutting down on its imports, thus reducing its current account deficit and increasing its GDP. The same money, if invested in the infrastructure or expansion projects, can further boost up the production to unachievable levels, thus entering into a phase where ‘India standing on its strong labor force and capital, will prosper as one of the major exporters of the world.

DUTY DRAWBACK SCHEME

The ‘Duty drawback scheme’ is a refund given on the duty or tax charged on the import of goods or input services, used in the manufacturing of goods to be exported. Thus, the duty paid while importing can be claimed back during exports as ‘Duty Drawback’. The duty drawback scheme serves to be an incentive to exporters and has proved beneficial for increasing exports. India in the past years has increased its duty drawback rates for several commodities. However, there is a need to further increase the drawback rates on certain products until 6% which will encourage the exporters, and it will enable the Indian exporters to stand in the international market and compete with the other countries, especially the ‘Preferential trading area’ countries.

Currently, the duty drawback rates for most of the products exported lies within 5%. However, if the duty drawback rates are increased until 6% or more, it will attract foreign investors to carry out their manufacturing and run their businesses through India. The duty drawback scheme enables the producers to reduce the cost of manufacturing of the products, as they can procure the imported components or inputs at a comparatively lower cost. [3] This either fetches them higher revenue on the standard rates, or they can reduce the rates and be in a better position to compete globally. Additionally, the duty drawback scheme facilitates the exporters by increasing their revenue and thus the cash flow of the company. For instance, if a company exports its products at a 10% margin, then a drawback of Rs.1,00,000/- is equivalent to an additional sales of Rs.10,00,000/-, thereby increasing the revenue of the company. Thus, the higher the drawback rate, the higher the revenue of the company. Thus, such monetary benefits can be an incentive to foreign investors and local manufacturers to initiate large scale production in India and increase their exports. This will in turn strengthen the Indian economy economically.

TRANSFORMATION OF INDIA FROM A MAJOR IMPORTER OF GOLD TO AN EXPORTER OF GOLD.

India is the major importer of ‘gold’ in the world, thereby importing 800 – 900 tonnes of gold annually, owing to its huge jewelry industry. The huge gold imports have a major bearing on the Nation’s high current account deficits. In 2018-19, India imported gold of $ 32.91 billion and in the last fiscal year, India cut down its imports from 14.23%, thereby importing gold worth $ 28.2 billion. The fascinating part is that in 2018-19, India had a trade deficit of $184 billion, but a 14.23% reduction in the gold imports led to a corresponding reduction of around $32 billion in India’s trade deficits. This is a clear indication of the impact of the huge gold imports on the ‘Current Account Deposits’ and thus also on the ‘Gross Domestic Product (GDP)’ of India. [4]

In 2017-18, India mined just 1.61 tonnes of gold, as contrary to Australia’s production of 300 tonnes and China’s production of 450 tonnes of gold. However, Australia and China, both have similar geological features and similar terrain like India, which has been highly undermining its potential for years. In 2016, the Supreme Court permitted private companies to bid for mining licenses through auctions. Accordingly, the government should license the mining of gold from Kolar Mines to private companies rather than closing the mine. Further, there are millions of tonnes of depleted ore outside the prevailing mines, which can also be used to extract gold, if the waste ore is auctioned. [5]

By 2021, the infrastructural up-gradation of Hutti Mines of Karnataka will enable it to double its annual production of gold. The company plans to create new shafts, ball mills, conduct construction, and expansion projects since the region has nearly 5.4 – 5.8 tonnes of ore. Such technological advancements will increase gold production while reducing the cost of gold production. Additionally, several gold mines have been found in Karnataka by Deccan Gold Mines, but the mining license is pending from the State Government. Further, auctions of two gold mines of Madhya Pradesh are kept on hold. Also, plans to revive the Kolar Gold Fields are going on from one decade with reports suggesting that the KGF has at least 30 lakh tonnes of gold reserves unexploited and measures should be taken to revive the world’s second deepest mine back into operation. With only three gold mines operational in India, reports suggest that can be 50 more gold mines in India.

The Government should make policies that limit the import of gold in India, and invest the same money in developing the infrastructure and the technology used for mining. India imports 800- 900 tonnes of gold every year, but reports claim that Kolar Gold Fields alone have 30 lakh tonnes of gold unexploited, which means that if Mining-friendly policies are made, this will boost gold production in KGF along with India’s several upcoming goldfields.[6] We also cannot forget that mining is labor-intensive and India can, with better policies such as licensing the mines to private bidders, carrying out infrastructural upgradation, and better mining practices, increase the gold extraction and reduce its forex outgo on gold imports.

India currently produces 1.61 tonnes of gold annually and every year, if we increase the gold production by just two times, then 9 years down the line, India would be producing around 824 tonnes of gold and wouldn’t require imports of gold. Now, gradually the trade deficits will reduce, and it will consequently boost the economy. Also, India will save the money otherwise used for importing gold. All this money can be used in hiring more labor force and constantly upgrading the technologies. As a consequence, India will gradually start producing more than its consumption, thereby establishing itself as an exporter. However, the starting point is from developing the goldfields of India and limiting the imports of gold in India. Cause, decreasing the imports of gold will reduce the trade deficits and thus increase the GDP, and increasing the exports will increase the trade surplus and thus, again increase the GDP of India.

CONCLUSION

In the past few years, global exchange and the exports of goods and services throughout the world have increased manifold. Exports play a major role in sustaining the economy and they pave the way for the economic growth of the country. As witnessed by many countries of the world, increased exports have consequentially improved their balance of payments due to the trade surplus, thus resulting in a higher Gross Domestic Product (GDP). Additionally, when a country boosts its exports, it not only leads to the economic growth of the country but also leads to infrastructural and technological advancements in the nation. Thus, constructive policies need to be implemented to ensure that not only the local producers but also foreign investors find it suitable to set up their manufacturing units and industries in India, to carry out large scale production and exports of goods and services, leading to overall development and the economic growth of India.