In order to obtain 7 per cent growth, among other things, India has to tackle the stagnation in exports and the next Budget can make a beginning
India’s economy is projected to contract around 7 per cent in FY21. It may record a positive gross domestic product (GDP) growth of 9 to 10 per cent in FY22. If things are as usual, the new normal medium-term GDP growth could be 5 per cent per annum. In order to obtain 7 per cent growth, among other things, India has to tackle the stagnation in exports and the next Budget can make a beginning.
It is well known that exports are one of the main engines of growth and employment creation. When India had high growth, during 2000-2011, exports grew at an annual rate of 21 per cent and 24 per cent, respectively, for goods and services. However, exports of goods completely stagnated with an annual growth rate of nearly 0 per cent during 2012-19, while the growth rate of services exports declined noticeably to 5.9 per cent. India accounts for less than 2 per cent of the world exports of manufactures, while the share of China is a whopping 13 per cent.
India’s exports of goods and services as a percentage of GDP increased consistently from less than 9 per cent in 1991 to 25 per cent in 2012 but declined to 19 per cent in 2019. Between 2012 and 2019, imports of goods and services as a percentage of GDP also declined from 31 per cent to 21 per cent. The decline of India’s trade openness since 2012 is not a compulsion imposed by the conditions prevailing in the world, as global trade-to-GDP ratio remained unchanged at around 30 per cent during this period.
However, more recently, the Covid-19 pandemic has impacted world trade negatively. The World Trade Organization now forecasts a 9.2 per cent decline in the volume of world merchandise trade for 2020. Trade volume growth may rebound to 7.2 per cent in 2021 but will remain well below the pre-crisis trend. During April to October 2020, India’s overall exports (merchandise plus services) declined by 14.5 per cent, while overall imports declined by 32 per cent. The non-oil exports and imports seem to have reached the pre-Covid levels in November.
Another worrying aspect of India’s export performance during the post-reform period was the failure in raising the share of labour-intensive products in the export basket. This is an anomaly for a labour-abundant country like India. The relatively fast growing commodity groups in India’s export basket are capital and skill intensive (such as pharma, auto, and software) while the traditional labour-intensive groups (textile, garments, footwear etc) recorded lacklustre performance. As reported in last year’s Economic Survey, the share of traditional unskilled labour-intensive industries in India’s non-oil merchandise exports declined by almost half from 30.7 per cent in 2000 to 16.3 percent in 2018. The reform process since 1991 mostly focused on product market liberalisation, while rigidities in the factor markets (labour and land) remain largely unaddressed. In other words, reforms have not been comprehensive enough to remove the bias towards capital- and skill-intensive industries. Rigidities in the factor market are also one of the major reasons for India being cut off from global value chains (GVCs) in labour-intensive industries and product lines.
Given the imperative of boosting GDP growth, the 2021-22 Budget should give a big push to exports. A study done at IGIDR argues that there are two groups of industries that hold the greatest potential for export growth and employment generation. First, there is a huge unexploited potential in traditional unskilled labour-intensive products, such as textiles, clothing, footwear, toys, and the like. Second, the study also identifies a number of specific product categories for which India can emerge as a major hub for final assembly-related activities within GVCs. At the same time, India has the potential to export a diversified set of parts and components. Greater integration of domestic industries with GVCs must form an essential part of “Make in India”. According to the last Economic Survey, by integrating “Assemble in India for the world” into “Make in India”, India can create 40 million well-paid jobs by 2025 and 80 million by 2030.
The government has announced a performance-linked incentive scheme for 10 sectors, which include pharmaceuticals, electronics/technology products, telecom and networking products and solar cells. By incentivising production, the scheme is supposed to spur investment. But private investment depends on many other factors such as ease of doing business, including honouring contracts, a flexible labour market, availability of land and other infrastructure.
The post-covid situation provides a big opportunity for India. There is a growing realisation among multinational companies that capacities cannot be concentrated in one place. Potential realignment of GVCs in the near future may provide an opportunity for India to attract big multinational companies. However, one problem is that in recent years India’s trade policy has become more protectionist. India’s import tariff rates (most favoured nation-based average) increased from the lowest-ever level of about 12 per cent in 2008 to 15 per cent in 2019. For 2018, China’s import tariff rate was 9.6 per cent, compared to India’s 13.5 per cent. India may miss the emerging opportunity if protectionist policies are followed at this juncture. India has not joined the Regional Comprehensive Economic Partnership (RCEP) due to geopolitical considerations. East and Southeast Asia account for more than 50 per cent of world exports in network products — group of products such as electronics, electrical machinery, telecommunication equipment, automobile etc, where GVCs are most prevalent. Therefore, it is important to integrate our industries with the value chains in Asia. It is in our interest to sign free trade agreements with countries in East and Southeast Asia. We may have to revisit our position and negotiate with the RCEP countries to our advantage. There are several opportunities for India to occupy the space vacated by China to boost exports. The Budget can give a big push to exports by reducing tariffs and improving other export policies, including favourable exchange rate.The writers are, respectively, director and professor at IGIDR, Mumbai