The long-term hurdles to India’s export growth

Source: This post is based on the article “The long-term hurdles to India’s export growth” published in Business Standard on 4th Jul 22.

Syllabus: GS3 – Indian economy – Issues related to growth and development

Relevance: India’s exports and related issues

Context: In FY21-22, Indian merchandise exports jumped 43.18% year-on-year, going up from $291.81 billion to $417.81 billion.

In this backdrop, the govt hopes that in the long term, exports can power India’s economic growth.

But, despite last year’s record performance, a close look at merchandise export trends of the past decade does not paint a very encouraging picture.

India’s merchandise exports trends

India’s merchandise exports stayed between $280 billion and $315 billion for a decade before its surge last year.

Even last year’s record performance did not see much volume growth — it was largely driven by higher prices/values, according to a report by India Ratings.

India, unlike the Asian Tigers, has never managed to be an export-driven economy.

India’s share in global merchandise trade has firmly remained below 2%.

What factors have primarily driven India’s economic growth?

Since the economic reforms were initiated in 1991, a) private investment b) domestic consumption,and c) government spending — have primarily driven India’s economic growth.

e) Merchandise exports have played only a supporting role.

f) Service exports —largely IT services — have been a redeeming factor in India’s export story.

Why has India failed to become a global merchandise power?

It is largely because India has not really become a hub for global manufacturing.

Foreign manufacturers in India have largely focused on the domestic market, instead of treating it as a low-cost, high-quality manufacturing base for exports.

Despite a realization among global companies that they need alternative hubs to reduce dependence on China, few of them have looked at India seriously.

Why India failed to become a global manufacturing powerhouse?

Three factors have played spoilsport to India becoming a global manufacturing power.

One, – rapid changes in policy and the uncertainty that investors have to face. Anyone putting millions to build a plant on the ground would like a stable policy regime, which has been missing for a decade now.

Constant changes in tax rates, tweaking of rules and abrupt reversals following policy announcements have scared many investors.

The changes in wheat, petroleum products and steel export policies or tariffs are recent examples.

Secondthe cost and difficulty of doing business on the ground.

This includes issues such as poor roads, higher cost of power, longer turnaround times at ports, dealing with local level officials, meeting myriad regulations at the state, district and city levels and other such problems.

These have often negated whatever cost benefits they have got from government incentives like the production-linked incentive scheme.

Third – poor quality standards set by Indian regulators and the government in almost every sector, and the even worse monitoring and implementation of these standards.

In sectors ranging from pharmaceuticals and drugs to automobiles to food and cosmetics — Indian manufacturers have a lower quality standard to meet than their global counterparts.

Worse, there is little monitoring or penalty even if these low standards are not adhered to. Product recalls are almost unknown in the country.

An Indian automaker or a generics drug company exports higher quality goods to other countries than it sells in the Indian market.

Way forward

The govt should focus on removing hurdles that increase the cost of manufacturing or just doing business in India.

At the same time, it should set higher quality standards and monitor them stringently. This is an essential condition if India’s manufacturing needs to meet global standards.

That is the only way the country can become a major exporter of manufactured goods, not just software services.

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