ArrowArtboardCreated with Sketch.Title ChevronTitle ChevronIcon FacebookIcon LinkedinIcon Mail ContactPath LayerIcon MailPositive ArrowIcon PrintIcon Twitter

India's flawed system of export controls needs repair

Preventing manufacturers from making profitable sales overseas makes no sense

| India
A worker sifts wheat before filling in sacks at the market yard on the outskirts of Ahmedabad on May 16: Wheat exports were banned with immediate effect.   © Reuters

Prerna Sharma Singh is an award-winning economist specializing in policy and regulation. She is a director on the board of Indonomics Consulting Private Limited.

Realizing quite late that something needs to be done to rein in out-of-control inflationary pressures troubling India's households and downstream industries, Prime Minister Narendra Modi is increasingly relying on export controls.

But as one half of the government promotes exports in an effort to meet its $1 trillion export target by 2025, the other is trying to penalize them.

Wheat exports were banned with immediate effect last month after a scorching heat wave curtailed output and local prices hit an all-time high. Sugar exports have been capped at 10 million tons despite a bumper output of 36 million tons, while steel will now attract an export duty of 15%. Rumors are flying that cotton will be next to ensure adequate domestic supplies and prevent further price rises.

Despite the good intention of trying to curb inflation, these market-distorting export control measures will damage India's reputation as a reliable supplier and reduce export income at a time when outbound shipments remain the major driver of India's economic growth, with both consumption and private investment underperforming.

Not only will export curbs have the obvious effect of limiting India's ability to meet its 2025 export target, but they will deplete India's foreign exchange reserves and add to existing pressure on the rupee, new all-time lows last month, breaching 77 rupees to the dollar for the first time.

Any further weakening of the rupee will create macroeconomic complications by jacking up the cost of crude oil and chemical fertilizers, and push up the government's subsidy outlays at a time when India's economic recovery is lopsided, at best.

A farmer drives his tractor trolley with harvested sugarcane near a dumping point in Baghpat on Feb. 7: Sugar exports have been capped at 10 million tons despite a bumper output of 36 million tons.   © Sipa/AP

Restricting producers of steel, sugar or wheat from making profitable sales will further discourage investment in these sectors and adversely affect future supplies. This will result in increased import dependency, the very thing Modi has been trying to avoid with his repeated emphasis on Indian self-reliance.

Excessive protectionism in the steel industry has led to excess production capacities in the economy. As domestic demand is not sufficient, India's steel processors are increasingly relying on exports to fill the gap in the market left by China where output has fallen thanks to a regulatory drive to reduce polluting industries.

The other good thing about exports for Indian producers is that they offer higher margins compared to what they can earn in the domestic market.

No wonder news of the export duty on steel led to a sell-off in stocks of major producers such as Jindal Steel and Power, which typically exports up to 30% of its inventory, and JSW Steel and Tata Steel, which usually export 25% and 15% respectively.

Given that steel prices are rising because of increases in the cost of inputs such as iron ore, coking coal and energy, the imposition of duties on Indian steel are unlikely to have any effect on domestic steel prices anyway.

To try bring down the cost of producing steel, Modi removed import duties on coking coal. Sensible enough, but then the government imposed whopping export duties of up to 50% on iron ores and pellets, thus discouraging investment in iron ore mining.

Ad hoc and ill-thought-out, Modi's approach is creating more problems, not less, with leading steel-makers now threatening to rethink their capital expenditure plans.

Further, attempts to control exports could complicate things for buyers, especially when they have no real alternative, such as in the case of essential agricultural commodities such as wheat.

Export curbs on steel and sugar are encouraging demands for similar measures to be applied to other industries. Thus, the textile industry, troubled by rising prices of cotton, wants a ban on cotton exports that will run counter to the interests of cotton growers. Finally, selective use of export-import regulations encourages lobbying, bureaucratic corruption and cronyism.

A far better approach would be to reduce or remove all import duties on inputs as well as steel. Duty-free import of inputs will help Indian steel manufacturers become more cost-efficient while the freer import of steel will check price manipulation and keep steel prices in check.

Instead of imposing prohibitive export duties and creating market distortion, the Indian government should rather promote freer trade. That would be a far better way to ensure price stability in a market economy.

It is important for New Delhi to realize that problems in the Black Sea region and China's manufacturing slowdown have resulted in a surge in demand for Indian merchandise. India should therefore seize this opportunity to project itself as both a reliable supplier, and a dependable alternative to China.

Whimsical export bans on steel, sugar and wheat, or for that matter any merchandise, will make India an unreliable supplier and that in turn, will ruin its export prospects with adverse implications for the growth of gross domestic product.

Moreover, denying business manufacturers the opportunity to make profitable sales, whether domestically or overseas, may prompt Indian producers to slow down their operations. That, in turn, will kill any hope of revival of private investment, especially when interest rates have started to rise.

Sponsored Content

About Sponsored Content This content was commissioned by Nikkei's Global Business Bureau.

Nikkei Asian Review, now known as Nikkei Asia, will be the voice of the Asian Century.

Celebrate our next chapter
Free access for everyone - Sep. 30

Find out more