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Will Government Incentives revive the “Dying Export Numbers” in India

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In order to revive the growth in exports, India announced incentives. The move came after the country recorded a high trade deficit. The country is known to be an import driven economy currently. It needs to revive in the export, so as to lower the fiscal deficit and put the country’s current account balance and currency stable, which is currently under pressure. As a part of the revival package, the government extended a 2-percentage-point interest subsidy on rupee-denominated export loans for labor-intensive and small-scale industries by one year, to the end of March 2014 to cushion the impact of weak demand in developed economies.

Exports and its impact on the Economy

Industry Minister Anand Sharma also announced interest subsidy to the engineering sector, which has been the biggest contributor to Indian exports. Looking at the current prospects of the engineering sector, revival was one of the most sought after demands for the economy. Engineering sector is directly linked to the productivity, job creation and sustenance and it is thus, very important to ensure proper growth in the sector to ensure high employability ratio. Also it was reported that a sharp decline in the labor intensive industries is severely impacting the employment ratio, which is taking a toll on the job creation. Thus the reform of incentive was a right move in order to provide some push to the sector for growth and sustainability.

The merchandise exports, which contributes nearly 20% in the country’s economy have shown slow to no growth in the recent past by growing only once in the past nine month period. Underperformance of the sector has resulted in severe pain for the World’s fourth largest economy and has resulted in worst slowdown in a decade.

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The economic growth for the economy is forecasted to be around 5.9%, one of the slowest growth rates since 2002-03. The falling exports have been a matter of concern and on the contrary the rising import of the finished goods is creating and imbalanced burden on the economy. This is resulting in high trade deficit which is not a positive sign for the economy and not for the rupee in the international market as it continues to decline. Reports stated that the country’s export has declined by nearly 6% between April and November from the same period of last year. This decline has resulted in a trade deficit of over 125 billion USD. The contraction in the export figures has raised a doubtful mark on the government’s target exports of 360 billion USD for the fiscal 2012-13.

Reasons for Slowdown in the Exports

Some of the reasons for such slowdown in the exports of Indian economy are:

  • Global slowdown, particularly in the Euro Zone has led to such huge contraction in exports for the Indian economy
  • Widening trade gap has resulted in India’s trade deficit touch a record high pushing rupee sharply lower
  • The Current account gap stood at 3.9% of gross domestic product (GDP) in the April-June quarter
  • The reported figures are slightly lower than the all time high deficit of 4.5% for the previous quarter
  • The recently announced BoP Current Account Deficit for the recent quarter stood at whooping 5.4% of the GDP, which is an all time highest for the economy
  • The high number was a result of high non-oil imports.

Due to the underperformance of the international trade (mainly exports) current account deficit has deteriorated significantly. This has resulted in rupee to be one of the worst performing currencies in Asia this year. Thus it is expected that the ongoing reforms to boost the exports will help the country achieve better level of BoP and help strengthening its currency.

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Niraj Satnalika

Niraj is an MBA in International Business (Finance). Prior to this he completed B.Tech in Electronics and Instrumentation. He is currently working with Confederation of Indian Industry (CII), Kolkata in capacity of Consultant. Satnalika is actively involved with an NGO and works towards promoting education among the underprivileged.

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