Investment in R&D has been low, in addition to underinvestment in physical and human capital.
A sterile debate sporadically rages on the desirability of the country’s export-led economic growth. Even if economic growth may not primarily be export-driven, exports signify the competitiveness of efficiency, quality and pricing of its products and services. India’s trade stakeholders remain addicted to shibboleths like small-scale, sops and stimulus. Recall how the mid-term review of the Foreign Trade Policy (FTP, 2015-20) cheered the industry with additional incentives of Rs 8,450 crore under the Merchandise Exports from India Scheme (MEIS) and Service Exports from India Scheme (SEIS).
The 2015 FTP stated that “change has been a constant in the global economy, not least in the international trading landscape.” The FTP review laudably hinted at the move “towards more fundamental systemic measures, rather than incentives and subsidies alone” as a future strategy for exports. There are already big challenges of increasingly difficult global economic landscape.
Mandated to contain trade disputes and prevent retaliatory pile-ups, the WTO itself faces a grave danger. India faces the obligation to phase out its export incentives under the WTO Agreement on Subsidies and Countervailing Measures, having breached the $1,000 gross national income (GNI) per capita.
Exports in India are seldom construed as a national quest generating an environment to excel in quality, reliability and customer care. Most of country’s exports happen only in a few states. Maharashtra and Gujarat together accounted for half of country’s total exports in 2014 (27% and 22%, respectively); Tamil Nadu and Karnataka together contributed another 18%.
India’s export strategy needs to intensify its reach in wider geographical areas for export production, with relentless diversification of markets, such as Africa. The avowed target of $90 billion two-way trade between India and Africa by 2015 has been eluding—trade with Africa actually fell from $72 billion in 2014-15 to $56.7 billion in 2015-16, whereas the China-Africa trade jumped to $215 billion in 2014. Albeit external economic environment and factors like occasional sluggish global demand and falling commodity prices impact foreign trade, the crux of export promotion remains the supply side.
For example, 50-60% of the country’s demand for electronic products and 70-80% of the components are imported.
A Deloitte Touche Tohmatsu report warns that the value of India’s electronics imports could overtake oil imports by 2020, pointing to urgently installing indigenous production capacity to target not only the burgeoning local market, but also a reasonably large pie in the $1.75-trillion global market.
For a breakthrough in industrial manufacturing, essential for an export jump, India needs to identify product sectors conforming to what Carlos Ghosn, Renault-Nissan CEO, lauded India’s “austere engineering”, or frugal engineering, and simultaneously craft USPs with a ceaseless focus on a couple of items amenable to the country’s comparative advantage in terms of cost, quality, supply lines and logistics. Let India remember that its capital goods industry in 1990 equalled the size of China’s, while the latter, within 20 years, became 50 times larger, and exports to India large quantities.
For India, agriculture is a big export potential area; exports jumped from $13 billion in FY10 to $24.5 billion in FY17. Even so, the share of agriculture and allied products in India’s total exports fell from 17.9% in FY92 to 13.5% in FY02 and 12.1% in FY17. Its farm trade weathers unpredictability. As long as local prices are low, exports are fine; once they rise, exports are restricted or banned.
India’s exports growth in labour-intensive sectors is, indeed, a cause for concern. With fully-loaded manufacturing wages averaging $1.8 per hour in Thailand, $0.49 in Vietnam, $0.38 in Indonesia and $0.35 in Cambodia, several industrialised countries have attracted a significant transfer of work in labour-intensive products.
McKinsey (2011) found that several global clothing firms wanting to shift sourcing from China favoured new destinations like Bangladesh, Vietnam, Indonesia and Cambodia, not India. The vision of India, with its acknowledged resources—material and human—becoming world’s clothier as also shoemaker, has been belied. More than 70% of India’s manufacturing workforce remains employed in tiny, low-productivity firms with less than 20 workers each, most of which neither grow nor exit.
They contribute just 12% or less of manufacturing output. The country lacks the mega-factories where thousands of workers could make garments or mobile phones, as elsewhere in Asia. It’s imperative for MSMEs to scale up with respect to accessing capital, hiring workers and acquiring land to be able to achieve lower per unit cost. Whereas, currently, India is ill-equipped to aspire for a meaningful share in the $220-billion global top-100 luxury goods brands, it must strive to recreate the romance of a traditional heritage and tribal craft, its handicrafts and handloom, aligned to contemporary high-value relevance, involving world’s leading designers, integrating the country’s traditional exquisite and alluring craftsmanship with newer skills for presentation, labelling and packaging.
India may break new grounds and garner its growing prowess in emerging technological segments. By 2022, digitisation is expected to help Indian businesses to unlock a potential $39-billion worth of export opportunities, up from $16 billion in 2017 (KPMG and Google). Travel, media and entertainment, SaaS, consumer brands and real estate are suggested as key verticals with high potential international opportunities. Some out-of-the-box initiatives will help make a dent in highly complex and competitive milieu, for example the Walmart-Flipkart combine to become India’s battering ram to break into the Chinese market.
As the World Bank emphasised the urgency to improve productivity of firms to create jobs and reduce poverty, its Global Competitiveness Report, 2013, showed India slipping to 60th rank in competitiveness, 31 places below China. CRISIL found that the revealed comparative advantage of gems and jewellery fell from 6.38 in 2006 to 3.96 in 2016, for leather from 3.12 to 1.97, and for readymade garments from 2.43 to 2.22. For rendering Indian industry truly competitive, it is imperative to sternly and stoutly minimise government, dismantle layers in administration, free labour laws of known rigidities, and generate a general commitment to “zero defect”.
Following the Parkinson’s law, the government needs to implement what—in its 1991 comprehensive reform agenda—it avowed to dismantle the Directorate of Foreign Trade itself. Notwithstanding debilitating transaction costs over decades, trade documentation, procedures and processes continue to be labyrinthine, complex, costly, time-consuming.
There is no relief from a plethora of trade rules and notifications. Quality control (QC) and production processes have been professed, but not practised; globally-accredited testing and QC laboratories have been planned, but little has happened in reality. Investment in R&D has been low, in addition to underinvestment in physical and human capital. Despite rampant crackle of ideas and initiatives like Customs Electronic Commerce Gateway, Risk Management System, On-site Post-Clearance Audit, 24×7 operations et al, there is little sustained change towards helpfulness and efficiency.
In 1824, American senator Henry Clay proposed, inter alia, “internal improvements” like roads and canals to strengthen the economy of the young country. Transport and logistics costs more often pose a barrier at least as large, and frequently larger, than tariffs. Not merely costs, even the timelines of delivery are affected. Proliferation of departments such as of logistics helps little.
Why must India’s exports and imports get stalled at gateways beyond 24 hours? Have the mandarins from the department of commerce or the state government moved out of their cloistered confines to know why, for example, trucks carrying India’s exports to Bangladesh via the Petrapole-Benapole land border station (which handled Rs 18,800 crore in 2017-18, i.e. 35% of the $7.5-billion India-Bangladesh bilateral trade) snail through a scandalous 10-day journey over some 80-km Kolkata-Petrapole stretch, including the long wait 10-km short of Petrapole, at Bongaon on Jessore Road, where extortionist business thrives?