Problems in export led growth

JAYSHREE SENGUPTA

EXPORTS

The new Commerce Minister Mr. Suresh Prabhu has shown keen interest in reviving
exports and is pushing for export led growth. Many economists have also been
commenting on the recent export growth slowdown in India. In July 2017 exports
contracted to 3.9 per cent. Indeed, GDP growth will remain lower than optimum if
exports stagnate. Also one of the main drivers of manufacturing growth has always been
high export growth but today export led growth is no longer such an attractive option as
in the past. In the 1960s and 70s the Asian Tigers South Korea, Singapore, Hong Kong
and Taiwan transformed their economies rapidly from developing countries to becoming
middle income countries through high export growth but today the whole global
environment has changed.

For example South Korea was a poor country in the 1950s after the Korean War but it is
now among the developed countries and a member of the OECD which is a big exporter
of cars, electronic goods and smart phones. Initially, through labour intensive exports like
leather goods it worked its way up and with the help of transfer of technology from China
and Japan, it transformed itself into a producer of quality state of the art manufactured
goods under the brand names of Samsung, LG and Hyundai that can be found the world
over. Its population is only 50 million so the domestic market is not big enough. Like
South Korea others were forced to go for export led growth due to their small size. They
are still reliant on exports but are facing a slowdown in today’s global climate.

China’s rapid economic growth since 1979 was also export driven manufacturing growth
which was made possible through FDI inflows mainly from the US. American companies
outsourced production to Chinese factories and exported them back to the US. Today
China is facing flak from the US for robbing American jobs and may face trade barriers.
Luckily it has a huge domestic market on which it has decided to concentrate.

The first requirement for export led growth is an educated and disciplined labour force
which is healthy and diligent. All countries that promoted export led growth invested
heavily in human capital and ensured that a regular, cheap food supply and housing were
available for the labour force. It requires a very good infrastructure with ports, roads,
airports and railways. Unless there is a well- functioning infrastructure, delays in delivery
will lead to cancellation of orders. Various trade facilitation measures like easier customs
clearances and less paper work and bureaucratic procedures also led to higher export
growth. The Tigers also ensured that there was below market rate of interest for easy
credit. They maintained a stable currency which was not overvalued.

When the Tigers were exporting to the West, there was a huge demand for cheap
products. Today the low labour cost advantage of the Tigers and China is fast eroding
with a rise in wages in all these countries. Now the new destination for foreign
investments for setting up shop and seeking cheap labour are the smaller ASEAN
countries like Vietnam and Cambodia. In garments, the sweat shops of Bangladesh are
without parallel and are cutting into India’s garment exports. Yet the conditions of work
of the garment workers are deplorable--this was evident in the terrible Rana Plaza
disaster when over 1100 workers, mostly women perished.

On the whole increase in exports through cheap labour by global South and increase in
outsourcing has caused resentment in the western countries because they have led to job
losses. As a result US is turning protectionist and EU has in place many barriers to
developing countries’ exports. The developed countries are increasingly turning to high
tech to produce cheap consumer goods like bicycles which require fewer workers and are
therefore cost effective. American manufactured goods are slowly replacing the cheap
imports from developing countries (Trump’s ‘buy American’ is helping!)

Global trends are changing rapidly especially tastes and this is also causing problems.
India’s diamonds exports are not taking off because of change in the preferences of
young people today. The Millennials don’t seem to care much for diamond jewellery,
handicrafts or handlooms. In every western country the youth is hooked on branded
products. Thus according to experts, Indian goods have to be in the ‘global value chain’
in order to survive competition but there is a major problem in India because of the
nature of production. Many goods in India are produced in the medium and small
enterprises and have poor quality control because the labour involved in production is
lacking adequate training in skills, education, and is less disciplined than in India’s
competitor countries. There are other problems also like access to credit, power and
water. It is thus very difficult for India to enter the global value chain like other smaller
neighbours like Thailand or Sri Lanka though we are producing automotive parts and
electronic components for multinational companies.

To be in the global value chain requires efficient infrastructure which India is striving
hard to acquire. Unable to enter the global value chain in a big way, we are selling mostly
raw materials to China, Korea, Japan, and ASEAN comprising of animal feed,
agricultural wastes, plastics, aluminium, iron, slag ash etc. which are bulky, low value
products. We have to improve the quality of products of exports in order to become
reliable sources of imports for countries around the globe.

The hardening of the rupee due to the massive inflows of short term foreign institutional
investment (FIIs) recently will also make Mr. Prabhu’s task harder because it will make
Indian goods more expensive in dollars terms than the competitors. The introduction of
GST is creating additional problems for exporters as it is blocking their funds for advance
payment of GST which they can claim only later. Previously they were not required to
pay such taxes which also involve additional paperwork. While exports are important for
job creation, there are problems of high inventory and lack of new investments and
innovations in the export sector that need to be addressed by the Minister. A tough task
ahead for him!

This commentary originally appeared in The Tribune

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ECONOMY AND GROWTH INDIA INDIAN ECONOMY