India has achieved a remarkable turnaround in its export performance, clocking a 11 per cent growth in comparison to the dismal negative four per cent growth registered in the previous year. But, can this be sustained?

In January 1999, India's trade deficit rose to touch the $7 billion and export growth recorded a miserable negative 4 per cent while imports rose by 9.5 per cent. This disastrous performance on the export front saw the country's trade deficit more than treble compared to a mere $3.4 billion in the previous year. But since August 1999, the scenario started changing and exports started showing signs of a modest pick up registering a 30 per cent growth in January 2000 touching a high of $3.5 billion.

This was despite the traditional high weight sectors such as leather, agriculture and iron ore not doing well. Ironically, despite inflation rising with the manufacturing prices falling, it was export of manufacturing products that was providing the necessary fillip to export growth.

Out of recession
The world economy that experienced three years of a severe demand-pull recession is now recovering. Domestically, firms seem to have got their act together in the recession- afflicted years and are now capitalising on parking up in the overseas markets. The revival in demand of the South East Asian economies was one of the basic reasons for the export boom. The commerce minister took steps in the right direction and is currently taking full advantage of the prevailing favourable situation. Learning from its past mistakes, it has rightly tried to improve on the existing export infrastructure and give more freedom to exporters in the future.

Lessons from China
Despite the Indian economy being democratic in nature and even though the country has an established judicial system, foreign direct investment (FDI) is pouring into red China. This has spurred that country's exports and made it impossible for India to achieve the $10 billion investment target set for year 2000. For, every year China attracts nearly $40-45 billion worth of actual FDI and over 30 per cent of China's exports has been possible by FDI. In comparison, India, which is equally endowed with rich natural resources and boasts of a high labour force, managed to attract FDI worth a mere $2-3 billion. This has significantly contributed towards the country's export growth. Where then lies the fault?

In China, FDI flowed in bulk towards the export-oriented industries which had a high growth multiplier. But in India, the picture is vastly different with FDI flowing into infrastructure and other industries which could not match the domestic supply and were reeling under a severe shortage. Despite both the countries offering a high domestic market, why then this difference ?

Well, Hong Kong which became a part of China was a hub of huge trade activity which helped China to achieve a high export growth. Hong Kong has been the largest foreign investor in China along with being the biggest importer of Chinese goods. Hong Kong is the largest contributor to China's FDI. More than half of the $47 billion FDI which China receives, more than $20 billion is sourced from Hong Kong.

A vital lesson that India should learn from China is this: before it frames a trade policy it must build the necessary infrastructure. And beginning 1979, China began its coastal development policy resulting in a marked shift in terms of producing for exports. In 1979, nearly 60 per cent of China's exports were to OECD countries and constituted primary goods. In 1997, over 80 per cent of Chinese exports comprised manufactured goods. Of this, 40 per cent is attributed to FDI. This is where India should take the tips and change to make its export policy more FDI-oriented. Focus of FDI in India is mainly on sectors such as infrastructure, power, capital goods and food processing, all of which do not fall under export-oriented units.

The Shenzen Model
Better late than never. The Exim policy 1999-2000 has taken the initiative to set up special economic zones (SEZs) in various parts of the country which is a step in the right direction. The Chinese model Shenzen has been copied here. Units operating in these trade zones will be provided with lot more incentives and given more flexibility in their operations.

Not only will the government provide them the necessary infrastructure but they would be able to import raw materials duty-free and would also be able to access those from the domestic tariff area (DTA) without payment of terminal excise duty. Within the SEZ, no permission would be required for inter-unit sales or transfer of goods.

In a further boost to the export promotion schemes and in an effort to rationalise and improve availability of raw materials for exports, the commerce minister has announced the post-export duty-free

replenishment scheme for over 5,000 export products. Under this scheme, exporters would be able to obtain transferable duty-free replenishment certificates for importing inputs used in export products as per the standard input and output norms.

Focus on FDI
A look at India's export breakup will show that more than 60 per cent of its export comes from the small scale sector where the FDI policy is restrictive. Importantly, it is the lackadaisical attitude of the Indian entrepreneurs that adds to the misery. This year's 13 per cent export achievement was mainly due to traditional sectors such as gems, leather, fabrics and textile yarns which fall under the small scale category where FDI is not known of.

In contrast, China gets an upper hand. In the apparel industry, which accounts for nearly 22 per cent of China's exports, FDI accounts for over 50 per cent of sales.

India should thus learn from the Chinese experience and lay more stress on its FDI policy. The Indian Government should try and boost the investment climate and encourage the export trading houses and multinationals should be given more freedom and incentives to perform well which will help boost the export potential of the country. Today, India has a vast ocean of natural resources which remains untapped due to lack of necessary infrastructure. If import restrictions are eliminated in a phased manner, India has all the potential of becoming a world leader in exports.

In view of the WTO commitments, India's commerce ministers have time and again announced that India will become an open market by 2003. But for this, India needs to focus on an investment-friendly environment to foster MNC-oriented trading houses in the second generation of reforms. All these to bring in the much required export growth. FDI and exports will be the trendsetters for the new millennium.

What went wrong
It is quite sad that despite the government taking all the required steps to improve the country's trade infrastructure, India's share in world trade is still negligible at less than one per cent today.

A historical analysis of India's trade reveals that its share in world exports declined steadily from a negligible 2 per cent in 1950-51 to a measly 0.2 per cent in 1995-96 and further low to 0.1 per cent in 1998-99.

Who is to blame for this, industry or the government? Traditionally, it is always the government which shoulders the responsibility for faults in applying quantitative restrictions, high tariffs on imports, an over-valued exchange rate, stringent norms on FDI and portfolio investments, et al. But nobody talks about the real reasons for the fall in exports. When in May 2000, the Rupee took a beating for no real fathomable reason, the RBI was the first to announce that it was speculative attack that was moving the Rupee down and that it would come to the rescue of the market. It also announced that it would not favour devaluation of the Rupee to favour exporters‘ interests.

It added that it would maintain the Rupee at the present level and warned exporters that they would have to bring in their export proceeds which they had parked abroad on which it levied a 25 per cent surcharge. So, it is a known fact that every trading house has cash deposits stacked abroad which do not find route into India. Another aspect was the over-invoicing of goods particularly of garments, dyes, watches under the DEPB scheme resulting in the country not getting the money but the government landing up paying huge subsidies to unscrupulous traders.

Policy relook
The commerce minister has tried his best in announcing sector-specific policies. But, with a democratic setup unlike communist China, we will have to look into the legal aspects and labour laws to make such policies operative. The government needs to take a closer look at the policies as there exists many loopholes. Otherwise, it will have to pay a heavy price for its liberalisation efforts.

To boost exports, the government will not only have to liberalise its trade policies but also set aside funds to build the required infrastructure. It will have to take a firm decision on Rupee value which has been rock steady and only recently showed an upward movement.

Such a relook at policy initiatives is necessary if India has to compete with its South East Asian neighbours.