Exports – India’s window of opportunity

Topic: GS3 – Indian Economy and issues relating to planning, mobilization, of resources 

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Context: Possibility of a sharp recovery for Indian economy can only be realized through a strong focus on exports. 

Export-led growth of global economies 

Since World War II, we have seen many countries grow on the back of rising investments and exports.  

• Japan, South Korea, China, and to some extent, Thailand and Malaysia, are all examples of economies where exports played a major role in driving economic transformation.  

Hence, it has been clear for some time now that strong exports are crucial in driving development. 

What are some key learnings from Asian experience that we can implement? 

• Exports and imports go hand in hand: Experience of Asian countries, like Japan, China etc, illustrates that imports and exports grow hand in hand.  

• Example: Automobile industry – India imports $6.1 billion worth of auto components, but using these imports, our automobile industry exports $18 billion worth of products. 
• This holds true for India as well. For example, between 2001 and 2010, India’s trade-to-GDP ratio nearly doubled from 26% to 49%. Both imports and exports grew during this period. In nominal terms, both imports and exports grew at rates close to 20% in this decade. 

• Focus on intermediate goods: Almost half of China’s imports consisted of intermediate goods, which were then instrumental in raising their exports. Important to note is that a liberal import regime was followed for such intermediate goods, with duty-free imports allowed. Hence, India should not increase tariffs or raise non-tariff barriers on intermediate goods. This is because: 

• Goods that come into India flow into goods manufactured for exports. Any increase in the cost of such products indirectly increases production costs and hampers our exports.  
• By raising the cost of these critical inputs, we end up further eroding our competitiveness, already burdened by a high cost of logistics, credit, and power. 
• Present situation – Presently, a large proportion of our imports, 32%, consist of intermediate goods. Almost 70% of all anti-dumping duties are levied on intermediate goods. This needs to change. 

• Proper incentive structures: Incentive structures were put in place to ensure higher relative profitability of exports compared to the rest of the sectors.  

• The incentive structures ranged from subsidised bank credit, export targets linked to long-term credit, export subsidies, and incentives for research & development, amongst others.  

• Phasing out of import substitution: An important lesson is that while import substitution may have been in place, it was gradually phased out.  
• Developing capabilities in manufacturing: Another important lesson is that these countries having developed their capabilities in labour-intensive industries gradually moved up the manufacturing value chain.  
• Public investment in infrastructure to reduce the cost of logistics is another key policy intervention. Several strategic sectors were identified for promotion.  

The lessons from the experiences of Asia indicate that export promotion, rather than import substitution, drives development. 

Has India been able to replicate the above policies followed by Asian countries? 

No. This can be seen from the following facts:  

• Dismal share in global merchandise trade: According to the World Trade Organization, India’s share in global merchandise trade stood at less than 2%, despite having the inherent strength and potential to do much better. 
• Manufacturing as a share of GDP and employment remained stagnant between 1990 and 2020. Whilst exports have increased, they are dwarfed in scale by China.  
• Low global share in food processing exports: Even in traditional sectors, like food processing where India has one of the largest raw material bases in the world, we command a 2% share in global exports. 

Why couldn’t India replicate the Asian experience? 

Several factors explain this.  

• Availability of credit: We lag in credit availability to the private sector. Domestic credit to the private sector, as a percentage of GDP, stood at 50 per cent in India, compared to 165 per cent in China and 123 per cent in other upper-middle income countries.  
• Low private debt-to-GDP ratio: Our private debt-to-GDP ratio is extremely low and there is immense possibility of enhancing it for manufacturing and exports.  
• Cross-subsidization of power 
• Higher cost of logistics 
• Labour laws  
• A traditional export basket: Similarly, the composition of India’s exports needs to undergo a radical change. Our export basket is predominantly traditional and does not comprise cutting-edge products. As much as 70% of India’s exports target 30% of world trade comprising items with a declining global share. 

What steps should India take and what reforms have been implemented? 

The need is to promote our domestic manufacturing industry to drive exports and growth. Several important policy steps have been taken in this regard over the past few years.  

• Lowering of corporate tax: The decision to lower the corporate tax rate to 22% for all firms and 15% for new manufacturing firms, will encourage the domestic manufacturing sector.  
• PLI Schemes: The introduction of the production-linked incentive (PLI) schemes in several key sectors, for the first time, incentivize production, rather than inputs. These schemes will help domestic manufacturing achieve size and scale. 
• Rationalization of labor codes: As many as 29 Central labor laws were rationalized into four codes.  
• Definitions of MSMEs revised: The definitions of micro, small and medium enterprises (MSMEs) have been raised upwards, allowing them to grow in size, whilst maintaining the benefits of MSMEs.  

All these steps should help domestic industry achieve size and scale. 

Conclusion 

The possibility of a sharp recovery for the economy can only be realized through a strong focus on exports. The opportunity of India integrating itself into global value chains cannot be allowed to pass. Strong and coordinated policy action, across all levels of governments, is needed to realize this opportunity. 

Terms to know 

• Import substitution 
• Intermediate goods 
• Cross-subsidization 
• Production-linked incentive (PLI) schemes 
• Rationalization of labor codes 
• Revision of definition of MSMEs 

Source: Business Standard