First, ‘Make India’!

Steven Philip Warner | The Dollar Business

How would you feel if someone asked you to gulp down (without due respect to your five senses) a bowlful of hot boiling soup on a blistering summer evening? That was precisely the ‘discomfort-mixed-with-annoyance’ emotion that many across India felt on the second day of June – the day when India’s export numbers for the last financial year were made public. But despite the upsetting revelation of Indian exports having fallen well short by $30 billion of its annual target for FY2014-15 (with merchandise exports having contracted by about $4 billion and total exports by $11 billion), no one blew a gasket. Other than sparing amounts of ridicule on the subject, even the Twitterati avoided landsliding on the guardians of India’s exports.

It’s not that stakeholders of India’s foreign trade have given up on being yeasty anymore. Not to forget, there is also the obvious lot of critics in our democracy who’d affectionately come down like a ton of bricks on any given opportunity. But none did. In fact, that this announcement got as much attention from as large a section in India as did February 19th this year (do check if that day was special), only testifies that onlookers and the Indian export-import communities overlooked the announcement as a gesture of special sympathy on their part.

Much because after eleven months of lackluster performance in exports last fiscal, nobody expected a rabbit to pop out of any policymaker’s hat and weave magic to elbow India’s exports past last year’s level. [To cross the $340 billion in exports target, the mean monthly export performance desired was $28.3 billion, which was just about marginally surpassed only in September 2015.] And also because even the educated lot in India has become quite used to the idea of either spellbinding manoeuvres used to fabricate growth on paper (even when those responsible are caught with their arms cradling their bent knees all-year-round), or some ambitious theoretical masterplan that supposedly guarantees (through word and intent) to play the doctor post announcement of any below par macroeconomic performance.

How India was glorifyingly crowned the fastest growing major economy in the world during the last quarter of FY2014-15 with an on-paper GDP growth of 7.5% (7.3% during FY2014-15), by changing the base year for calculation to FY2011-12 (as per the previous base of FY2005, as projected by RBI, the growth for the quarter was a lower 5.5%), is an example of the previously mentioned ‘spellbinding manoeuvre’ that planners of our economy have mastered. Can you imagine a nation growing at 7.5% – the fastest amongst all major economies in the world – and its central bank choosing to reduce repo rate to pump liquidity into the economy and stimulate inflation, and revive MSMEs and businesses like real estate, airlines, consumer electronics, etc. The faster-than-China growth has come during a time when manufacturing and mining sectors grew by a Lilliputian 1.4% and 2.3% respectively. For those in love with detail, here are some digits to analyse: during the past fiscal, the General Index rose by just 2.8%, production of Intermediate Goods budged only just slightly by 1.6% and most shockingly, output of Consumer Goods fell 2.8% (consumer durable category shrank by a massive 12.2%; TV and communication equipment by 62.8% and computing machinery by 39.4%; source: Growth of Index of Industrial Production – Central Statistic Office). And to top it all, both exports and imports contracting during the period!

What will have sane economists laugh till their belly hurts is that while the base year of an economy for calculating its GDP has been altered to 2011-12, that for calculating IIP has been maintained at 2004-05; and when the same governmental department is in charge of both indicators! Either principals at CSO have bats in the belfry so the logic for two different base years stands far beyond common sense, or they did so for lack of time – like we said earlier, most Made in India humans are born to assume that a majority of those responsible for the nation’s social and economic well-being, are to be found with their arms cradling their bent knees all-year-round.

As for some ‘ambitious plan’, there is one strategy that will apparently come to the rescue of India’s exports, given that it’s the one most spoken about since the dismal export numbers were made public: Improve upon ‘India’s Ease of Doing Business’ rankings. Going by announcements made during the second week of June by the Ministry of Corporate Affairs (notification issued in respect of both private companies and PSUs under Section 462 of the Companies Act, 2013 – changes to the Act include some real and some cosmetic privileges to make way for more flexible and efficient functioning of the said companies) and Department Of Industrial Policy & Promotion (to rank our states on parameters of business-friendliness and their attractiveness to foreign investors, thereby encouraging competition amongst them), expectations abound that India may be able to climb the ladder in World Bank’s “customised perception” of India’s business friendliness. But given that possible outcome, there is the other side too. And some questions come to mind.

What if World Bank (WB) decides to change its methodology next year or two years hence? If that happens, will India’s policymakers again go about amending the recently released Companies Act? At present, of the ten broad parameters used by WB, India ranks below 100 countries on eight counts. How many years will it take before we can actually move into the top 50 on all 10 parameters (as PM Modi’s team envisages)? Will improving on India’s ease of doing business rankings make us China 2.0?

For once, let’s have you close your eyes to what may be and focus on what is. China.

If improving on ‘Ease of Doing Business’ was the one sureshot tactic to making one’s economy grow both internally (we’re talking about real GDP; in the true sense) and externally (exports), China would have neither been no.1 on exports, nor been the global benchmark for GDP growth! Its overall Ease of Doing Business rank is a lowly 90. In five of ten parameters it ranks below 120. And only in two parameters does it rank below 50 (with it being in the top 30 in zero cases). Why is it then the world’s largest exporter? [And I hope we are not looking at Singapore as our model, because despite being no.1 on the WB rankings, bad that it is not amongst the world’s top ten exporters, and too bad that being a victim of geography, 40% of its exports are plain re-exports.]

Ease of Doing Business is a factor that will affect FDI. Agreed that it’s perception-play that matters. But FDI isn’t the be-all and end-all to growing India’s share in world trade. Forget the unfriendly tax structure, if basic problems like electricity shortage and infrastructure continue to plague manufacturing and services sectors in the country, even foreign investors will continue to remain shy. Allow us to apprise you of some specific issues. How good are food and fruit processing clusters in Dirang, Bordumsa, Bhalukpong (Arunachal Pradesh) and textile manufacturing plants in Solapur (Maharashtra) without power? Why is Kanpur, the epicentre of leather tanneries and the ninth-largest local economy in India, without an airport? Why should export temples like Morbi (in Gujarat; that accounts for 75% of India-made ceramic tiles) and Jodhpur (that exports handicrafts worth Rs.1,500 crore per year) lose their competitive edge due to logistics costs and poor connectivity to ports? Why should India’s very own jeans manufacturing cluster in Bellary grapple with difficulties just because a project of developing an SME cluster has either been delayed or lays dead in some file that is either useful for beating flies or collecting dust? Why do we cry hoarse about hot rolled steel products killing our steel industry and cheer about anti-dumping duties on foreign imports, when news of coal shortage affecting steel manufacturing plants is (oh!) so common in India?

Truth is: There is more to growing India’s export-manufacturing prowess besides just focussing on a subjective analysis called ‘Ease of Doing Business’. And the need to realise that is urgent. In the decade leading to FY2012, India’s GDP grew at a CAGR 9% on the back of 25% and 30% growth in manufacturing and service exports respectively. Considering that far too much hasn’t changed in four years – except the ruling government – for India to grow at 7-8% each year, you will need exports as a whole to grow at least 20%-plus on average.

If we are to continue growing without too many clever pen-and-paper tricks, to make India a truly manufacturing superpower and continue basking in the glory of our competence in the service sector, our exports will need to grow faster than planned. How fast? Cross the $900 billion total exports target before 2020.

Now that, after all the talk about a report called “Ease of…[whatever]” sounds a task not so easy! Given our current challenges, we need to ‘Make India’ to ‘Make in India’. And that superset of tasks should be the focus, not just a sub-set called ‘Ease of...[again, whatever!]’.