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India’s Untapped Export Opportunity
India must reform factor markets to attract large businesses that can help substitute China’s exports to the US and EU.
Photo Credit : Reuters
Former IMF chief economist, Kenneth Rogoff, predicts that the global economy will take at least five years to return to 2019 levels of GDP per capita, as a fallout of the Covid-19 pandemic. Developing countries like India may take longer, unless they exercise the right levers for accelerated recovery. The RBI has confirmed fears of negative growth this fiscal. A school of thought is that India should attract industries that want to relocate from China. However, industries are unlikely to relocate, simply for a share of India’s strained consumer economy. Even as India embraces the Prime Minister’s mantra of economic self-reliance, it must look outwards for new openings.
The pandemic has reinforced pre-existing economic trends. For instance, global goods trade had contracted by 0.1% in 2019. The World Trade Organisation expects it “to plummet” by anywhere between 13 and 32% in 2020. Similarly, India’s export dependence on EU and US markets, will only grow as incomes shrink more rapidly in developing markets. Despite decades of trade policy rhetoric to diversify exports to markets in Africa and Latin America, India could not achieve such goals in the past. There is no reason to believe it can do so now. It must instead find ways to enhance exports to its primary markets.
The US and the EU are quite dependent on Chinese goods. Since the pandemic has reinforced their political positions against China, India has an opportunity to account for a larger share of their imports. China accounts for over 18% of US good imports and nearly 9% of EU goods imports. Substituting for even a fraction of this trade, can yield large dividends for India. If the US and the EU import 10% less Chinese goods in favour of Indian goods – it could increase India’s exports by USD 100 billion. This would be a one-third jump in value from existing goods exports. The multiplier impact on the Indian GDP could be up to USD 200 billion.
EU and US imports from China largely consist of electrical machinery and equipment; machinery and appliances; furniture, mattresses, bedding and toys; and apparel. Of these categories, the first two account for around half of total imports from China, and represent future-proof markets. Growth of India’s small export share in these goods would require that strong private industrial groups with a global footprint, invest in local production. India has begun to operationalise export incentives to lure them in. But, firms producing in India face cost disabilities in the range of 5-7% in areas such as mobile phone manufacturing, compared to China. With stressed revenues, India will struggle to finance the gap without economic reforms.
What helps India’s case is that China runs its highest negative trade balances with countries like Taiwan, South Korea and Japan, on account of imports of electronic components that go into their exports. This is particularly visible in high value components such as semiconductors, essential ingredients in most modern electronics. East Asian countries would benefit from enhanced cooperation with India in such segments, because of the supply chain insecurities that stem from geopolitical concerns in their region. Japan’s government has already launched a subsidy programme for Japanese businesses relocating out of China to Southeast Asia, as part of its fiscal stimulus.
India must reform factor markets to attract large businesses that can help substitute China’s exports to the US and EU. The moratorium on labour laws by state governments of Uttar Pradesh and Madhya Pradesh is perhaps a recognition of this. However, the cost of finding and hiring labour post-lockdown, will far outstrip any compliance expenses that these state governments hoped to dispense with. Moreover, stimulus plans for industry must address the reality of low domestic demand. Loans to small businesses, that form India’s industrial backbone, will not automatically resolve demand-related insolvency concerns. Consequently, the self-reliance of such businesses is also premised on ability to tap into global markets.
Lastly, India must signal openness, for the US and the EU to readily import more and for East Asian majors to invest here. A calibrated message is best relayed through better trade strategy. While India has not capitalised on as many of its Free Trade Agreements as it would have liked to, it’s time to revisit some unfinished agendas in light of new economic realities. This includes revisiting the prospects of a trade agreement with the EU, strengthening agreements with East Asian countries, and affecting a comprehensive US-India trade deal. India could also explore new investment protection agreements to give greater sanctity to contracts and private property. The country cannot hope to make economic gains without a stronger commitment to rules-based commerce than China.
Disclaimer: The views expressed in the article above are those of the authors' and do not necessarily represent or reflect the views of this publishing house. Unless otherwise noted, the author is writing in his/her personal capacity. They are not intended and should not be thought to represent official ideas, attitudes, or policies of any agency or institution.
Vivan Sharan is a Partner at Koan Advisory Group, a boutique consulting and policy advocacy firm. An economist by training he is also a Visiting Fellow at the Observer Research FoundationMore From The Author >>