Export: A key to economic growth

Context: Arvind Panagariya’s new book, India Unlimited: Reclaiming the Lost Glory, discuss systematically how to reconstructs a path to higher growth.

What is the present scenario?

• Public sectors confronting a mountain of debt, the fiscal will need to be reined in post-COVID across several emerging markets.
• COVID-19 will accentuate the prevailing export pessimism, as global potential growth is damaged and protectionist instincts are stoked.
• The choice and sequencing of reforms will depend critically on the growth philosophy India embraces.

What are the possible strategies?

• India’s size provides fertile ground for import substitution. However, this approach was not successful in the past.
• The most significant is to underscore the necessity of export-led growth to India’s prospects.
• No emerging market has been able to sustain 7-8 per cent growth for any length of time without relying on the Siamese twins of exports and investment.
• Dismantle the underpinnings of export pessimism.

Why there is need to focus on exports?

• Prospects in exports: Global merchandise exports stood at almost $18 trillion in 2017 (more than six times India’s GDP) with India commanding an export share of just 1.7 per cent (versus China’s 12.8 per cent).
• Doubling exports: Even if the global market shrinks to $15 trillion, India could double its exports by raising its global market share to just 4 per cent. India’s 2002-2010 growth boom was underpinned by exports, which grew 18 per cent a year for eight years.
• Labour-intensive manufacturing: For many labour-intensive tasks, automation is still infeasible. Adidas, for example, produces only 1 million of its 360 million pairs of shoes in automated factories.
• Geopolitical reasons: Chinese real wages are rising; the workforce is shrinking and the embattled relationship with the US.
• Integration: integrate into the Asian supply chain by attracting multinational companies seeking a China hedge in the region.
• Create jobs: exports can create manufacturing jobs which will serve as a powerful magnet to attract labour away from agriculture. By 2030, agriculture will constitute less than 10 per cent of GDP while still employing 35-45 per cent of the workforce.

What are the challenges that lie in front of India?

• India’s fragmented industrial structure: It’s estimated almost 60 per cent of India’s manufacturing workforce is employed in firms with five or less workers, and 75 per cent in firms with 50 or less workers.
• Low productivity and low wages: For example, 92 per cent of workers in the apparel sector worked in firms with less than 50 workers. In contrast, 57 per cent of China’s apparel workforce were employed in firms with more than 200 employees.

What needs to be done?

• Avoiding the import-substitution trap.
• Reduce Import tariff which are equivalent to an export tax.
• Ensuring the rupee remains competitive.
• Boosting free trade agreements and trade facilitation.
• Creating autonomous employment zones (AEZs) where factors of production are less distorted.
• Reduce the gulf in per-capita incomes between agriculture, industry and services.
• Create higher-wage jobs in industry and services for agricultural workers to migrate to.