On the Issues with Services-led Export Strategy

Source: This post on the Issues with Services-led Export Strategy has been created based on the article “A services-led export strategy holds appeal only up to a point” published in “Live Mint” on 9^th February 2024.

UPSC Syllabus Topic: GS Paper 3 Indian Economy – Indian Economy and issues relating to planning, mobilization of resources, growth, development and employment.

News: The article discusses the issues with services-led export strategy. It also highlights steps that should be undertaken in order to augment India’s manufacturing sector exports.

India’s economic growth has been led by robust consumption, with net exports acting as a drag. The share of private consumption to GDP growth has been at 55.6%, while that of net exports has been at -9.8% for the past 2 decades ending 2023-24.

In this context, a suggestion is made that India should focus primarily on high value-added services rather than low-value-added manufacturing exports to boost its exports.

What is the sector-wise performance of India’s economy?

1) Rise in Share of Manufacturing: In the last decade, the share of manufacturing in India’s real GDP moved up from 17.3% to 17.7%. India’s manufacturing exports comprise 34% of total goods and services exports.

2) Decline in Share of Agriculture: The share of the agriculture sector declined from 16.5% to 14.4%.

3) Rise in Share of Services: The services sector rose from 51.1% to 54.6%. India’s service exports comprise 42% of total goods and services exports.

What are the issues with a service-led export strategy?

According to the author, service exports can’t be an engine of growth due to the following reasons:

1. Deepen the Formal-Informal Divide: India’s labour market has a large informal component. Increasing service exports will harm the low-skilled workers at the lower end of the manufacturing value chain and thereby deepen the divide.
2. Mass Employment Generation: Manufacturing sector employment in India is 11.7% of total employment. This is lower than in developing countries like Vietnam (21.4%) and China (28.7%). Thus, manufacturing-sector growth is required to generate mass employment.

Thus, according to the author, Indian policy can’t afford to focus on service exports at the cost of our current employment-oriented manufacturing thrust.

What should be the way forward for India regarding manufacturing sector exports?

1) Take Advantage of Comparative Advantage: India enjoys a comparative advantage in the case of textiles and clothing, consumer goods, chemicals, footwear, ores and metals.

2) Favourable Policymaking: Policies such as ‘Make in India’ initiative, Production Linked Incentive scheme, Stand-up India, Startup India, National Logistics policy, PM MITRA, FAME India, etc. can transform the manufacturing sector.

3) Focus on Labour-Intensive Sectors: The share of low-skill manufacturing exports (leather, textiles, etc.) in overall exports is declining. This should be increased.

4) Focusing on Services subsectors: Wholesale and retail trade, and transportation and storage sectors contribute the most to value added in manufacturing exports. Those components of service exports should be focused upon, so that manufacturing exports also benefit.

Question for practice:

What are the issues with adopting a services-led export strategy for India? What steps should be undertaken in order to augment India’s manufacturing sector exports?