The current environment for international trade presents India an unprecedented opportunity to chart a China-like, labor-intensive, export trajectory and thereby create unparalleled job opportunities for our burgeoning youth.
- By integrating “Assemble in India for the world” into Make in India, India can create 4 crore well-paid jobs by 2025 and 8 crores by 2030.
- Exports of network products, which is expected to equal $7 trillion worldwide in 2025, can contribute a quarter of the increase in value-added for the $5 trillion economy by 2025.
Network products (NP): Are those where production processes are globally fragmented and controlled by leading Multinational Enterprises (MNE) within their ‘producer-driven’ ( where large, usually transnational manufacturers play the central roles in coordinating production networks ) global production networks. Examples are computers, electronic and electrical equipment, and telecommunication equipment, among others.
Potential of the export sector
Growth in exports provides a much- needed pathway for job creation in India.
- For instance, in just the five year period 2001-2006, labour-intensive exports enabled China to create 70 million jobs for workers with primary education.
- In India, increased exports explain the conversion of about 800,000 jobs from informal to formal between 1999 and 2011, representing 0.8 per cent of the labour force.
Opportunity for India
- The US-China trade war is causing major adjustments in Global Value Chains (GVCs) and firms are now looking for alternative locations for their operations.
- As no other country can match China in the abundance of its labour, India must grab the space getting vacated in labour-intensive sectors.
The present scenario in India
- Merchandise exports remained consistently lower: Post the 1991 reforms, India’s share in merchandise (goods) exports has grown at 13.2 per cent per annum and our share in world exports has increased from 0.6 per cent in 1991 to 1.7 per cent in 2018 (China -12.8 per cent). Further, merchandise exports as a percentage of GDP remained consistently lower for India.
- Merchandise imports have grown faster: Imports of merchandise have grown faster (at the rate of 14.9 per cent per annum during 1993-2018) than exports, resulting in increasing trade deficits.
- Services: On the other hand, exports of services generally grew faster than imports, providing some cushion to the current account deficit.
In this situation the key questions that need to be addressed
- What type of policy interventions would help achieve faster export growth?
- Should policies target export growth through specialization or diversification?
- Is it in India’s interest to promote strong local linkages for domestic industries or to participate in GVCs wherein linkages are globally dispersed?
- Which are the industries that hold the greatest potential for export growth and employment generation?
- Are free trade agreements beneficial to India?
Reasons for India’s underperformance in exports vis-à-vis China
- Specialization versus Diversification: Overall, high diversification combined with low specialization implies that India is spreading its exports thinly over many products and partners, leading to its lacklustre performance compared to China.
- Low Level of Participation in Global Value Chains: India’s participation in GVCs has been low compared to the major exporting nations in East and Southeast Asia. This is because India has failed to increase its export basket related to products concerned with unskilled labour (which is in contrast with China – from unskilled labour-intensive to skilled capital intensive).
Fig: Gains from participation in GVC
- Low Market Penetration in High-Income Countries: The dominance of capital-intensive products in the export basket along with a low level of participation in GVCs have resulted in a disproportionate shift in India’s geographical direction of exports from traditional rich country markets to other destinations.
Reaping gains from participation in global value chains
- A higher level of participation in GVCs implies that, for any given country, the share of foreign value-added in gross exports is higher than when most inputs are sourced locally.
- However, owing to the scale and productivity effects of selling in the world markets, participation in GVCs can lead to higher absolute levels of domestic value-added and domestic job creation.
- For instance, Chinese dominance of assembly in iPod and iPhone illustrates this phenomenon. The scale effect creates millions of jobs and is therefore particularly suited for implementation in a labour-intensive economy such as India.
- The bottom line is that India can reap rich dividends by adopting policies aimed at strengthening its participation in GVCs.
Which Industries should India specialize in for job creation?
Given our comparative advantage in labour-intensive activities and the imperative of creating employment for a growing labour force, there are two groups of industries that hold the greatest potential for export growth and job creation.
- Textiles, clothing, footwear and toys:
- There exists a significant unexploited export potential in India’s traditional unskilled labour-intensive industries.
- The GVCs in these industries are controlled by “buyer-driven” networks wherein the lead firms that are based in developed countries concentrate on higher value-added activities such as design, branding and marketing.
- Network products:
- India has huge potential to emerge as a major hub for final assembly in a range of products, referred to as “network products” (NP).
- The GVCs in these industries are controlled by leading MNEs such as Apple, Samsung, and Sony etc. within “producer-driven” networks.
- Within the production network, each country specializes in a particular fragment of the production process; this specialization is based on the country’s comparative advantage.
- Learnings from Integration into GVCs by Indian Automobile Industry.
- Following the entry of Suzuki, other major Japanese automobile manufacturers (Toyota, Mitsubishi, Nissan, and Mazda) arrived.
- Several Tier 1 automobile parts suppliers (such as Denso, Aisin Seiki, and Toyota Boshoku) and global automobile parts producers arrived (such as Robert Bosch, Delphi, Magna, Eaton, Visteon, and Hyundai Mobil).
- Assembly of mobile phones in India: India toppled Vietnam to become the second-largest manufacturer of mobile phones globally following China in 2018 with a world share of 11 per cent.
The key learning from the successful case study of the Indian Automobiles sector is that domestic firms graduate up the production value chain by first starting with low-technology operations such as assembly and then moving to the manufacturing of components. In the process, imports of components increase in the short run. Following a policy of import substitution right from the outset does not enable the process of graduation up the production value chain.
- Strengthening exports in NP: India can reap rich dividends by adopting policies aimed at strengthening its involvement in the export market for network products (NP). Given India’s vast manpower with relatively low skill, India’s current strength lies primarily in the assembly of NP.
- Large scale expansion of assembly activities: By making use of imported parts & components. Assembly is highly labour intensive, which can provide jobs for the masses, while domestic production of parts & components can create high skill jobs.
- Boost to domestic production: Giving a boost to domestic production of parts & components (upgrading within GVCs) should be the long term objective.
- Raising India’s export market share: A highly feasible target of raising India’s export market share to about 3.5 per cent by 2025 and 6 per cent by 2030 would create about 38.5 million additional jobs in the country by 2025 and about 82 million additional jobs by 2030.
- Reduction in import tariff rates: For a country to become an attractive location for assembly activities, it is imperative that import tariff rates for intermediate inputs are zero or negligible.
- Creating an ecosystem for specialization: Realignment of India’s specialization patterns towards labour-intensive processes and product lines. The ongoing reform measures to provide greater flexibility in the labour market should continue.
- A pro-active FDI policy is also critical as MNEs are the leading vehicles for the country’s entry into global production networks while local firms play a role as subcontractors and suppliers of intermediate inputs to MNEs.
- A low level of service link costs: That is costs related to transportation, communication, and other tasks involved in coordinating the activity in a given country with what is done in other countries, is a prerequisite for countries to strengthen their participation in GVCs.
Are free trade agreements beneficial?
Given the recent debate about India joining the Regional Comprehensive Economic Partnership (RCEP) agreement, questions have been asked about the general efficacy of free trade agreements (FTAs).
- Worked in favour: An apprehension is that most of the FTAs that India had signed in the past had not worked in “India’s favour.”
- Worsened trade deficit: The argument that is put forward is that the agreements led to worsening of India’s trade deficit with the partner countries with which the agreements have been signed.
This is the mercantilist way of evaluating the gains from trade. Basic trade theory teaches us that a country’s gains from free trade arise from the fact that it leads to a more efficient allocation of a country’s resources.
When the impact of India’s trade agreements on the overall trade balance is made by accounting for all confounding factors;
- India’s exports have increased by 13.4 per cent for manufactured products and 10.9 per cent for total merchandise
- While imports increased by 12.7 per cent for manufactured products and 8.6 per cent for total merchandise.
Thus, India has clearly gained 0.7 per cent increase in trade surplus per year for manufactured products and 2.3 per cent per year for total merchandise.
Policy measures should focus on reducing input tariffs, implementation of key factor market reforms, providing an enabling environment for the entry of lead firms into the country and reducing the service link costs.
Also read: Growth Rebounding To 6% - Economic Survey