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India must become globally competitive in manufacturing to boost merchandise exports

Prosenjit Datta     May 2, 2018

As the government never fails to point out, India is the fastest growing major economy, and expects to grow even faster in the coming years. It has liked talking about record FDI inflows, and how India is one of the most attractive investment destinations. What it doesn't like talking about is its dismal track record on merchandise exports.

In 2013/14, India's merchandise exports stood at $314.4 billion. In the next year, it fell to $310.3 billion. And the next year, 2015/16 saw a further fall to $262.3 billion before it improved marginally to $275.9 billion in 2016/17. This financial year, it has clocked $302 billion, which is still lower than what it was four years ago.

Some bit of the export drop can be blamed on falling crude prices. Petroleum products including high speed diesel forms a biggish chunk of Indian exports, and when crude prices fall, so do exports. But beyond that, India's merchandise exports are still in gems and jewellery, agriculture & allied, textiles, chemicals and transport equipment and machinery and base metals. Of these, exports of gems & jewellery, transport equipment and textiles actually fell in the current year.

In the past two years, India has not been able to take advantage of rising world trade. The disruptions caused by demonetisation first, and later the hiccups during the roll out of GST, have been blamed for hitting small exporters in a number of sectors.

The bigger problem though, in my opinion, is India's failure to get become globally competitive in manufacturing. So far, most countries that have grown rapidly have depended on globally competitive manufacturing to power them to high growth. In Asia, especially, Japan showed the way initially when its manufacturing techniques powered it to become a global manufacturing powerhouse in sectors ranging from autos, to consumer durables to imaging. Later the Asian Tigers, especially Taiwan and South Korea grew rapidly because of their engineering and manufacturing competitiveness. Then came the rise of China, which became the production base for all sorts of products from steel to solar panels, and from mobile phones to computers.

India has never managed to get its manufacturing act right despite many tries. At different times, the reasons proffered have ranged from higher raw material and electricity costs, low productivity of labour, difficulties in setting up greenfield factories because of land acquisition and government clearances, and other sundry reasons.

The problem has always been that India has always been proud of its small and medium industries and the jobs it created. For a long time, a range of products were reserved for the SME sector. Thankfully that reservation has gone now, but the natural inclination to look tilt on the side of SMEs and not large scale manufacturing has remained. Even this government continues that mindset probably because of the assumption that SMEs will continue to create more jobs than bigger manufacturers.

There are multiple problems with that assumption. SMEs are generally not globally competitive when it comes to production of high value products. Economies of scale and productivity problems plague them. But merchandise exports will not go up unless the products are globally competitive and can take a bite out of the global market. And that is where the policy makers need to focus on when they unveil the new industrial policy, which has been in the works for some time.

Focusing on giving benefit packages for exporters in textiles, and other such sectors will not make India a big merchandise exporter. And that is something this government will have to keep in mind when it finalises the policy.


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