Lowering duties on inputs, inviting investment by large firms in critical products and eschewing pure assembly, will help
Just a few decades back, artisans made shoes and shirts using locally available inputs. Now, large global firms control the trade. Production is shared across a group of countries. Each specialises in making a part and not the complete product.
This applies not only to high-end electronics and engineering products but also to simple products like shirts, chocolates and bicycles.
For making a shirt, yarn from India moves to China for making of fabric, which moves to Spain for dyeing. Dyed fabric moves to Morocco, Bangladesh, or Vietnam, where it is cut, sewn into a shirt for shipping all over.
Chocolates made in Belgium use hazelnuts from Turkey, palm oil from Malaysia, cocoa from Ghana, sugar from Europe, and vanilla from the US.
High-end bicycles use brakes and peddle imported from Japan, wheels and frames from China, and saddles from Italy.
Where does this leave small firms making products with local inputs? They face competition from large global firms having an advantage of scale, technology and finances.
How can we improve our performance? The product profile of our exports provides good insights on the way forward. Let us place products we export into two baskets. A and B.
Basket A contains products traded in large values globally but in which India has a small share — examples, machinery, electronics and transport products account for 37 per cent of global goods export basket. But the share of our export in global exports of each of these is low. Machinery 0.9 per cent, electronics 0.4 per cent and transport goods 0.9 per cent. More examples of our low share in important products. Integrated circuits (0.03 per cent), computers (0.04 per cent), solar-cells (0.3 per cent), LED TV (0.02 per cent), mobile phones (0.9 per cent).
Export Complexity Index (ECI) measures diversity and technological sophistication of goods exported by 130 countries. India’s rank was 42 in 2000 and 43 in 2019, mainly because of weak presence in Basket A products. China’s rank improved from 39 to 16 during this period due to expansion in Basket A products. A major thrust should be to focus on expanding presence in such products.
Low in value
As for Basket B products, India has a large share in global exports, but the value of world trade in these products is small. For example, India’s share in global textiles exports is 5.9 per cent. But textile is a small category counting for just 1.3 per cent of the global export basket. In marine products, India has a high share of 5.4 per cent. But marine products count for just 0.6 per cent of the global export basket.
Other examples where global export value is small, but India has a large share are: cut and polished diamonds (28.8 per cent), jewellery (13.5 per cent), rice (35 per cent), shrimps (25.4 per cent), and sugar (12.4 per cent).
The small size of the Basket B sets the limit on the growth. Most such products being labour-intensive, low technology, face competition from low-cost countries.
How to expand manufacturing and export of products in both the baskets? Here are five measures that can be taken:
One, lower import duties on inputs. High duty on inputs results in expensive finished product that is out-priced by imported goods both in the domestic and export markets. Low duties make domestic firms competitive. Soon many will start shipping directly. Gradually, with better forward and backward linkages, jobs increase as both exporting and importing sectors grow. In Vietnam, five million workers work with direct exporters while seven million work for firms supplying products to exporters.
Two, increase access to formal finance. Enable top one million small manufacturing firms to get bank finance without collateral at regular interest rates. Less than 4 per cent of small firms in India have access to formal finance. The figure for the the US, China, Vietnam and Sri Lanka is 21 per cent.
Three, simplify process of exporting for small value consignments. Many people buy local sarees, suits, handicraft, ready-to-eat/cooked products and ask the shops to courier to friends and relatives abroad. For such small value exports, we need to simplify and integrate compliances relating to Customs, GST, DGFT and other concerned agencies. Schemes like making districts as export hubs would benefit from such simplification. The simplification will also help exports by small artisans and firms located in class B and C cities.
Four, invite large anchor firms in critical products to set up operations in India. This is a tested strategy for promoting the manufacturing and export of Basket A items. Government initiatives like simplified labour laws, PLI incentives, low corporate tax on new manufacturing operations and scrapping of retrospective tax have enthused many firms searching for China plus-one location to shift base to India. India’s large number of competitive ancillary units and skill base are a big plus over competing countries.
While supporting new firms, focus must be on value addition. China gets only $12 for an iPhone being sold at $700. The lure of incentivising high turnover built on 90-95 per cent of imported inputs must be eschewed. Making of EV batteries from imported lithium-ion cells or solar panels from imported solar cells falls under this category.
Finally, ensure fast entry/exit of containers through the port/customs. Since inputs criss-cross across countries several times as parts and sub-assemblies before the final product is ready, low duties and quick port exit are preconditions for participation in global value chains (GVCs). Any delay at one point disrupts the entire value chain.
While addressing officials and exporters on August 6, Prime Minister said that one of the goals of Atmanirbhar Bharat is to increase the share of India’s export in the GVCs. The suggested measures would complement the existing reforms, set India on the path of accelerated manufacturing and export growth and increase our share in GVCs.
The writer is an Indian Trade Service officer. Views are personal