Exports are the answers

The Indian Express     17th November 2020     Save    
QEP Pocket Notes

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.

QEP Pocket Notes