Trump May Have Done Us A Favour By Forcibly Removing The GSP Crutch

People who get used to walking with crutches seldom find it easy to walk without them. Countries dependent on special duty concessions and sops to make their exports competitive will never give them up, unless circumstances force them to. In this context, the US decision to deny India the benefit of low tariffs under the Generalised System of Preferences (GSP) should be seen as a push to improve our overall export competitiveness instead of remaining forever dependent on Uncle Sam’s generosity to sell our products there.

The GSP regime, introduced by the US in the 1970s to promote imports from less developed countries, is a relic from the past, where the rich West felt obliged to help its starving brethren from the Third World by allowing them to export with low or nil import tariffs. Over the years, it has outlived its utility, and possibly encouraged inefficient producers in countries like India.

Even today, as the US posted a 60-day notice period to end GSP for India, the total volume of exports impacted is around $5.6 billion, and the duty relief obtained is said to be worth $190 million – around Rs 1,340 crore at current dollar-rupee exchange rates, nothing to be unduly worried about. Of the 18,770 tariff lines, roughly 27 per cent – 5,111 items – are impacted, and within this lot, around 42 per cent (2,165 lines) had significant tariff advantages of 4 per cent or more. The preferential tariffs under GSP range from 1 to 6 per cent, which thus outlines the margin hits that exporters will have to take if they want to maintain export volumes.

This means, even if GSP goes from May 2019, only a minority of tariff items will be impacted. The entire $5.6 billion of GSP exports will not vanish overnight.

Before we discuss the pros and cons of considering life without GSP, it is worth stating upfront that Donald Trump’s announcement may well be a maximalist negotiating posture intended to drive down Indian tariffs in some product areas important to the US. In the 60-day notice period, the two sides could well work out a compromise under which fewer Indian tariff lines are covered under GSP in lieu of duty concessions by India on imports from the US. A compromise, failing which India may be constrained to impose additional tariffs on 29 items imported from the US, should not come as a surprise when the US is negotiating a peace deal with an even more important trading partner like China.

There are several reasons, apart from the fact that a compromise can still be worked out, for us to welcome the GSP jolt.

First, as stated earlier, if the duty benefit is barely 1 to 6 per cent, a small margin compression and shift in the product mix to higher value items will compensate substantially for the duty benefits removed. So, GSP should act as a goad to shift to higher value products by exporters over the medium term. Additional spends in marketing and branding may yield medium-term benefits that our current price-and-volume-based export mix cannot ever deliver.

If the GSP regime goes, the exports that will be impacted will be handloom garments, leather goods, organic chemicals, gold jewellery, some engineering goods, and sandstone and granite, among other things. At least half these items are amenable to higher value-addition strategies and branding.

Second, most exporters have already benefited from the drop in rupee-dollar rates from a range of 63-65 to around 70. A rate of Rs 72 – a 3 per cent decline from current levels – would substantially compensate for any negative impact from GSP removal. This is the number to keep in mind, not the $5.6 billion trade involved, which too is barely a tenth of our total exports to the US.

Third, improved export competitiveness, not only in GSP-related items, but all export items, will depend on what we do domestically. These steps could include removing excess regulations, offering cheaper export credit, making sure that the export refunds stuck with the GST authorities are paid out quickly, and enabling the small and medium sector to scale up and achieve greater scale and volumes.

The goods and services tax (GST), which has forced small and medium enterprises (SMEs) to formalise, will actually improve our competitiveness in the medium terms, as companies scale up and invest more in productivity growth. The Indian SME sector has been reduced to dwarf status due to our counter-productive incentivisation of smallness. If duty relief and preferential purchase policies force you to remain small and not grow, your productivity will be poor.

Once GST eliminates the weak and allows the surviving small and medium units to grow and achieve scale, Indian export competitiveness will automatically improve. Some bankers are already noticing this change. In an interview to The Economic Times, DBS Bank chief executive officer Piyush Gupta has said that small and medium companies have been “positively impacted by GST. They find moving to the formal system helpful. They are now nationally competitive, can sell anywhere, the octroi process is simplified… so a lot of customers we spoke to are bullish. Everybody I spoke to said the last few months have been fantastic. But I think we need to find the right supply chains.”

The logic is simple: once a small and medium unit adjusts to GST, and also finds the right supply chain to integrate into, it will not only be nationally competitive, but also internationally, as it will be entitled to more formal credit and can scale up production and productivity.

We can view the GSP benefit withdrawal as a disaster and moan about it, or use it as an opportunity to build long-term export competitiveness by scaling up our small and medium sector, who account for the bulk of our exports – around 40 per cent.

We should consciously seek to chuck the crutches away.