“India’s Export
Competitiveness and Finance”
Citation: Ganesh-Kumar, A., K. Sen and R.
Vaidya. 1999. “India’s Export Competitiveness and Finance”. In K. S. Parikh
(Ed.) India Development Report: 1999-2000,
Oxford University Press, New Delhi.
India
has in the past used exchange rate depreciation as an export promotion tool and
this has had its share of success in boosting export growth in the 1980s and
early 1990s. With reforms taking the country from an “administered” exchange
rate regime to a more “market-determined” exchange rate regime, continuous
depreciation has not taken place in the mid-1990s and in fact some amount of
appreciation has occurred in real terms. This is possibly a reason for the
recent slow down in export growth. The real exchange rate appreciation in
recent times is basically a short-run problem affecting India’s export
competitiveness.
From a
long-run perspective, a country’s export competitiveness has to be rooted in
micro level competitiveness, in terms of productivity growth and technological
upgradation. One can examine the competitiveness of Indian industries by
looking at their comparative advantage as revealed by their export performance.
If a commodity’s export shares in the total global exports of
that commodity grows faster than the country’s overall export share in
the total global exports, then one can say that the commodity is gaining
competitiveness. The picture that one finds at the sectoral level is rather
bleak with India being just not competitive in a large number of sectors and
losing competitiveness in some. Only in about 46 commodities out of a total of
404 commodities (Standard International Trade Classification, SITC, 4-digit
level of classification), is India gaining competitiveness.
Productivity
growth and technological upgradation requires firms to undertake investment on
a regular basis. In this context, the efficacy of the financial sector in
allocating resources to efficient industries and firms therein comes into
question. Here one finds an optimistic picture in which the financial sector
reforms undertaken so far have had the desired effect of allocating resources
to more efficient firms. Exporting firms with a proven record in fiercely
competitive international markets are treated favourably by capital markets and
they face lesser finance constraints than firms that operate mainly in domestic
markets that have been largely protected. Thus, the financial markets have
offered an enabling environment for exporting firms to grow.
What
can the government do to improve productivity, up-grade technology and enhance
the delivery capacity of the country? The government needs to ensure that firms
do not thrive merely on protected domestic markets but are made to operate in a
competitive environment that forces firms to strive for productivity
improvements. This calls for greater trade liberalisation that exposes Indian
firms to greater competition from foreign firms than is prevalent currently.
Simultaneously, the government should also make it easier for Indian firms to
operate and to expand. Many of the bureaucratic controls at the central, state
and local levels, that still plague the economy should
be done away with so that Indian firms are better able to concentrate their
resources and efforts in building their competitive strengths. These should be
complemented with an all round systemic improvement, especially in key
infrastructure industries such as power, roads, railways, ports, etc., to
improve the delivery capacity of the country as a whole. Many of these
infrastructure industries continue to remain with the public sector and thus as
things stand are the responsibility of the government.