From UPSC perspective, the following things are important :
Prelims level : Relation between value of rupee with export competitiveness.
Mains level : Paper 3- Why we need foreign exchange and ways to improve exports.
The WTO expects a sharp drop-off in global trade in the wake of Covid-19. But India must not withdraw inwards.
Prospects of the exports
- Impact on global trade: The World Trade Organization (WTO) predicts that global trade could fall by 13-32% this year on account of disruptions and all the turmoil.
- At this point, we cannot even count on a quick recovery after this health emergency is past its peak.
- A trade revival may have to wait till 2022 or later.
- Indian exports have been in a slump for a large part of the past decade, and recent reports point to a rash of cancelled orders from abroad (except, notably, for drugs).
- This, however, should not mean that we slip into export pessimism.
- Opportunity in the crisis: Instead, a crisis such as this could serve as an opportunity to sharpen our competitive edge that has got blunt over the years.
- Rupee and reform: This is best done through reforms, though a rupee on the decline vis-à-vis the US dollar should help too.
Reasons for export orientations
- The relation between growth and exports: No country is an island unto itself, and nations will continue to exchange goods and services so long as it makes economic sense.
- Trade partners are usually better off producing what they’re best at, for all users, and buying from the rest what others turn out better—at a lower cost and higher quality.
- Economies that participate in this game, as the historical record has shown, tend to grow faster.
- There is another good reason for export orientation.
- Foreign earnings: India needs foreign earnings, not just for oil imports and suchlike, but also for overall economic stability, given our reliance on foreign capital for growth.
- In tough times such as these, when we may need to borrow money from abroad to bridge a hugely enlarged fiscal deficit, ensuring a stream of future dollar earnings becomes even more crucial.
- To enable the issuance of dollar bonds and raise our chances of staging a less painful return to form, we need to get our export act together.
Way forward to increase exports
- Structural and policy changes: Export success goes by competitiveness, and for domestic businesses to achieve this, India would need to undertake several structural and policy changes.
- We could begin with reversing the tariff barriers that have been raised in recent years.
- Exposure to foreign competitors would force them to turn efficient and perform better.
- Duties on inputs, especially, need to come down. So do other taxes that hold companies back. Other steps to raise productivity will help, too.
- Good logistical backup is another big requirement.
- The low value of rupee: The rupee’s slump is a plus for exporters, since their output is cheaper in dollar terms, but we may need to pursue a policy that does not let our currency’s value get over-inflated by inflows of foreign “hot money” (when they return).
- Cost of capital: The cost of capital in India needs to be low, too, and this would depend on how well the government manages its finances.
- India’s annual exports currently form less than 2% of the world’s. We should aim for 5%.