Thursday, March 28, 2013

Thumbs down to The free ride!

The Indian Government’s Initiatives towards free trade have not been met as Enthusiastically as Expected by The Industry. What is The way forward?

During an informal dinner conversation with a top government official and some people from the industry, we were discussing the big idea that could come up ahead in the 12th Five Year Plan, which could take India ahead in the next decade. Infrastructure was almost unanimously the choice of most people in the group. Suddenly, I decided to play the Devil’s Advocate and brought up the topic of exports. I asked him why exports cannot be that key thrust area, since it has lifted so many economies like Japan, South Korea and China and taken them strongly on the path of development. His answer baffled me. He said that it wouldn’t work, since over 50% of Indian companies are not really interested in exporting, and are rather perfectly happy serving the domestic market.

The domestic market is obviously considered one of the greatest advantages of being an Indian company. India Inc. has been in a typically self congratulatory mode since our companies were relatively less impacted by the economic recession due to staying local. But the cushion of having a strong domestic market is also one of the greatest drawbacks. Companies in nations like South Korea and Japan had such a small domestic market that exports were the most viable option. That encouraged them to move out, and that is why, their companies have been all over the globe. China, on the other hand, had the cushion but choose to ignore it, and we know the other part of that story. When you look at 2009 figures from WTO, India had a 1.3% share of global merchandise exports of $12.18 trillion, while China accounted for a whopping 9.9%. Indeed, there is an urgent need for the government to change that mind set. Kwang Ro Kim, Vice Chairman, Onicra, tells B&E, “The point on having a huge domestic market is a myth. Moreover, it is the best way to create jobs for 70% of India, since everyone is not intellectual enough to work in IT companies.”

Of course, there are a number of initiatives that the government takes from time to time to boost exports, but we are going to discuss a particular one here – the rising number of Free Trade Agreements (FTAs). India has been signing a number of them in the past few years (like ASEAN, South Korea & Japan); and has also consciously followed a ‘Look East’ policy. When asked about the key benefits of such FTAs, Minister of Commerce Anand Sharma tells B&E, “We have been seeing significant shifts in development from Asia and developing countries like India. We need to focus on different FTAs to boost growth.”

When it comes to Asia, in particular, FTAs are becoming a very critical policy tool. Failure of the Doha round of WTO means that FTAs would be a valuable tool to leverage on trade opportunities and also deepen regional networks and linkages. Even Indian firms have relied on Western markets to a disproportionate extent in the past. Looking at figures for the period from April-September 2010, India’s top destination for exports has been UAE with exports of Rs.657.11 billion (growth of 21.48% yoy) followed by US with exports of Rs.539.42 billion (growth of 23.43% yoy) and China with exports of Rs.256.13 billion (growth of 28.73% yoy).


Source : IIPM Editorial, 2012.
An Initiative of IIPM, Malay Chaudhuri
and Arindam Chaudhuri (Renowned Management Guru and Economist).

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