In the post-World War II economic history, the performance of the Tiger economies of East Asia stood out like a beacon. Asian economies like South Korea, Singapore, Taiwan and Hong Kong have transitioned to high-income economies based on an economic model emphasising exports. Similarly, countries like China and Malaysia have transitioned to middle-income economies by replicating a similar policy. However, India is still searching for the path to becoming a trade surplus nation.
After winning a strong mandate, India's Reform Agenda 2.0 should now focus on turning India into an export-oriented, private sector driven economy. The Economic Survey 2019 has rightly identified that no country had ever grown fast without buoyant exports. Currently, the three key engines of the economy are witnessing a slowdown - private investment, consumption and exports; The Finance Ministry has to draw up a plan and a blueprint that would give the economy a strong boost at the earliest.
The big and grand idea of India becoming a $5 trillion economy by FY2024-25 will remain a pipe dream unless India makes progression towards an export-oriented policy. India's export to GDP ratio is high at 20 percent but this has declined since 2014. During the phase of its rapid growth, China's export to GDP ratio was over 30 percent, and the Indian policymakers would do well to follow this paradigm.
Compared to Asian peers, India has run a persistent current account deficit, and in order to contain it, India has at times pursued policies like imposing tariffs, which were counterproductive. It is high time India shuns protectionism and becomes a major exporting nation that caters to the world's demands. Being an emerging nation, it is natural for the country to have a current account deficit which can be met with capital inflows. A level of 2-3 percent current account deficit as a percent of GDP can be sustained, without fear of a BoP crisis.
The government's second term in office has begun with the country's foreign trade policy facing multiple challenges such as withdrawal of the Generalised System of Preferences (GSP) by the US. It has now become a fact that there is a disruption in global trade, but there's a lot of opportunities as well. As Chinese exports are facing headwinds due to a trade dispute with the US, India can fill the space China vacates but unfortunately as it failed to do so, nations like Vietnam and Thailand have taken the lead.
While giving focus to FDIs, India should also encourage and ease rules for homegrown companies to sell their goods within and outside the boundaries of the country. The government was in an election mode for most of the times during the previous tenure and now its main agenda has to be a revival of the economy. Instead of protectionism, effective policies and measures are needed to make India's economy competitive that could give a fresh push to the "Make in India" campaign. China with its cheap exports has made India a dumping ground for its low-quality products. This needs immediate attention as it may lead to premature deindustrialization.
India is at a demographic tipping point, with the dependency ratio becoming favourable. This implies that a younger population is entering the workforce in greater numbers. In order to provide jobs, labour-intensive exports have to be promoted to absorb the workforce. Also, by moving the workforce dependent on agriculture to higher productivity jobs in manufacturing and services, India can rapidly raise the income-generating capacity of the workforce.
The government needs to amend its archaic labour laws as well which are an impediment to investment and employment generation. For a new company, land and labour resources are critical to firm up the investment plans. Reforms in the land laws will ease the process of land acquisition. Rising wages in China is making it uncompetitive and pushing manufacturers to think of alternatives to China. India is one of the few countries with a similar scale but is losing out to ASEAN economies. If we compare with the Asian peers, high land costs make India uncompetitive. Indeed many of India's exports are not labour intensive like petroleum products, auto and auto components. Flexible labour markets would result in higher productivity and ensure greater discipline.
There are other areas that need attention as well. Setting up or winding up of a business has to be easy and not plagued by inordinate delays due to red-tapism. India needs to improve the Ease of Doing Business in many areas. Lastly, Infrastructure needs attention, on a world ranking of Logistics Performance Index, India ranks 44, again behind Thailand and Vietnam. India needs a large amount of investment to upgrade its infrastructure.
While FDI and welcoming foreign companies are important, the government shouldn't ignore domestic companies which are already under stress. Instead of giving more sops to the domestic industries to encourage exports, the government has been busy imposing an export duty and transferring further tax burden.
Indian companies especially MSMEs are forced to borrow capital at a high cost which has been made worse by the ongoing capital crunch. The cost of capital in India is significantly higher compared to other Asian countries. Also, India's corporate tax rates are high, and personal tax rates have been increased recently.
This was Nirmala Sitaraman's golden moment but it seems to have been frittered away. There were no major announcements from the Finance Minister that focused to cut down the tax burden. She has cut the corporate tax rate to 25 percent for companies with revenue of up to Rs 400 crore but the tax rate in many Asian countries is in the range of 15-20 percent. While the government pushed major reforms like GST, RERA and IBC in its first term much needs to be done now. Easing of land acquisition and changing labour laws should be high up on her agenda. This would incentivize the manufacturing sector to set up new plants/expand existing ones. Not only would there be an increase in capital expenditure, but new jobs would also be created.
The US has seen a drop in imports from China due to the tariff war between the two countries. The ongoing trade war is benefitting two apparel manufacturing powerhouses from Asia, namely Bangladesh and Vietnam, along with countries like Taiwan and South Korea which are gaining as Americans are reportedly buying less from China. However, India is yet to cash in on these developments by reformative measures.
The country's growth engine needs stimulus and the centre needs to primarily focus on making India an export-led economy; the Prime Minister has to give importance to reviving the investment cycle and boost exports to put the economy back on track.
I believe these reforms are time-critical on account of the following reasons, firstly, India is at a demographic tipping point, secondly, the current state of Chinese exports provides a rare opportunity, lastly, the world is increasingly investing in robotics and automation, which is a threat to labour-intensive sectors and India needs to develop labour-intensive export-oriented manufacturing base before opportunity runs out.
[Rajiv Singh is the CEO of Karvy Stock Broking. The views and opinions expressed in this article are those of the author and do not reflect those of International Business Times, India]