Exports are the answers

Context:  While COVID is only likely to accentuate the prevailing export pessimism, a focus on export-led growth with a well thought out and sequenced reform plan provides a way to post-COVID resurgence.

Challenges before India Economy:

• Strain on fiscal resources: due to huge debt in public sectors.
• Issue with import substitution: While India’s size provides an opportunity for import substitution, a neglect of the Siamese twins of exports and investment have failed to create expected growth.
• Prevailing export pessimism: due to a decline in global trade growth and rising automation.
  • Global merchandise exports stood at $18 trillion in 2017 (> 6 times India’s Gross Domestic Product (GDP)) with India having an export share of just 1.7% ( vs China’s 12.8%).
• Fragmented industrial structure: Almost 60% of India’s manufacturing workforce is employed in firms with five or fewer workers, and 75% in firms with 50 or fewer workers. This has adverse effects –
  • Low productivity and low wages.
  • Impeded India’s export potential in labour-intensive areas (apparel and footwear).
• Concentration of labour in Agriculture: By 2030, agriculture will constitute less than 10% of GDP while still employing 35-45% of the workforce, leading to widening of the gap in wages between the sectors.

Way Forward for India: “To Reclaim the Lost Glory”

• Focus on the potential of exports: Avoiding the import-substitution trap, India could still raise its global market share of exports.
• Automation is still infeasible in labour-intensive sectors: For E.g. Adidas, produces only 1 million of its 360 million pairs of shoes in automated factories.
• Integration with Asian supply chains: Since the Chinese wages are rising, Indian labour-intensive manufacturing could provide an alternative for attracting multinational companies.

• Putting pressure on the firms to grow: with implications for productivity and wages. (a 20-person firm from India can’t compete with a 200-person firm from China in the global marketplace)
• Macro-economic policy measures:
  • Recognizing an import tariff is equivalent to an export tax (Lerner Symmetry Theorem);
  • Ensuring the rupee remains competitive;
  • Boosting free trade agreements and trade facilitation;
  • Creating Autonomous Employment Zones (AEZs) where factors of production are less distorted. (more pragmatic that factor market reforms in near term due to adverse Chinese exports.)
  • Create higher-wage jobs in the industry to help agricultural workers to migrate;
  • Front-load financial sector reforms, a sector that will have a crucial bearing on India’s prospects emerging from COVID.

Conclusion: Exploiting comparative advantage, boosting productivity through structural transformation and improving allocative efficiency are the keys to boosting potential growth and creating productive jobs.