The Domestic Market Mirage

Context: India’s intellectual and policy community has embraced Atmanirbharta as a diagnosis-cum-prognosis strategy. But India does not have the luxury of abandoning export orientation

Problems with abandoning export orientation

• Foreign demand will always be bigger than domestic demand for any country.

• Fundamental asymmetry: 

• If domestic producers are competitive internationally, they will be competitive domestically and domestic consumers and firms will also benefit.
• But being competitive only domestically is no guarantee of efficiency and low cost.

• Rapid and sustained economic growth requires export dynamism: 

• India’s GDP growth of over 6% after 1991 was associated with real export growth of about 11%.

• Pre-1991, a 3.5% growth rate was associated with export growth of about 4.5%

• No known model of domestic demand/consumption-led growth:  that can deliver a quick and sustained rate of economic growth.

• Difficult to implement policies related to domestic demand-led growth: due to bleeding public, financial,  household, and private sector balance sheets

• Increase in household debt: as a result, the consumption growth will be limited

• Government spending is limited: due to the COVID crisis, high levels of deficits, and indebtedness 

• Limited scope for expansionary fiscal policy which may work in the short-run but not as a medium-run growth strategy.

• Due to persistent inflation in India, there was no favourable interest rate-growth differential that supports the expansionary policy.

• Weak financial system: Thus the prospects for investment remain weak

Ways to Increase exports

• Learn from the past performance: 

• India is vastly under-exporting relative to its labour force
• Potential future opportunities: India is producing and exporting about $60-$140 billion (2-5% of GDP) less of low-skilled activity annually than it should be.

• Exploit opportunities in unskilled labour exports 

• As China’s wages are rising, it has vacated about $140 billion in exports in unskilled-labor intensive sectors, including apparel, clothing, leather and footwear
• India should use this opportunity stemming from geopolitics and should set a platform for the Industries leaving China

• Need more openness: Because of high import contribution to exports

• Eg - During their export boom, China and Vietnam were highly dependent on imports (between 40 and 45%). Therefore, India’s current import share of 16% shall be increased

• Eliminate tariff on some Inputs. Eg- In case of clothing, the long-standing tariff on man-made yarn.

• Sign free trade agreements: To reduce high duties on Indian exports

• Eg- We need free trade agreements with Europe that still impose high duties on India’s clothing exports. This is a disadvantage for India as Bangladeshi and Vietnamese exports enjoy preferential access to world markets. 

• Easing of costs of trading and doing business in India

Conclusion: With limited alternatives abandoning export orientation will amount to killing the goose that lays the golden eggs and indeed killing the only goose laying the eggs.