GROWING EXPORTS

The Problems

1. Exports are essential for growth and job creation, as they allow a country to produce for the entire world and not just its own people. But India’s exports have underperformed, not only in comparison to the People’s Republic of China but also to neighbouring countries like Bangladesh.

2. Many exporters, particularly in industries like textiles that create the most jobs, are small and medium enterprises. These find it particularly hard to fit into global supply chains and get loans. They are also the hardest hit by GST.

3. India’s labour force does not have sufficient skills, and labour regulations make it hard for exporters to employ the number of people that would make them more efficient.

4. Our transport infrastructure is insufficient, outdated and badly planned – and bureaucratic red tape makes it even harder for exporters to stay competitive.

India’s Exports

Gita Gopinath* and Amartya Lahiri

Summary

Indian export growth has remained tepid. The constraints appear to be generalized: low scale of production, low productivity, institutional frictions. Policy initiatives going forward need to focus on reforms that encourage greater scale, specifically labour reforms that allow easier separation between firms and workers. Specific manufacturing sectors like textiles and electronics can be catalysts for growth and employment if one can encourage scale. Micro policies such as trade agreements, simpler documentation procedures at ports, improved credit access and infrastructural upgrades will help. The ongoing reset of trade relations between the United States and the People’s Republic of China may be an opportunity as firms seek alternative trade relationships. Labour-abundant India could be an attractive destination.

Exports are not growing fast enough

In the twenty-five years since 1992, when India began liberalizing its trade regime, India’s share of world goods exports rose from 0.5 per cent in 1992 to 1.7 per cent in 2017.

The lethargic pace at which India has increased its exports has constrained its growth, as India has not been able to meaningfully tap external demand for its goods and services. In addition, a tepid export sector has consequences for how productive firms are with their resources. Recent research has shown that firms that engage in exports benefit from increased productivity (Atkin, et al. 2017). Indeed, Indian exporting establishments tend to be more productive than non-exporting establishments.

Relative to world averages, India has a greater share of service exports. While the Indian service sector performance has been very good, it is by no means unique. For example, the somewhat less feted Chinese services sector more than tripled its share of world service exports from 0.9 per cent to 3.8 per cent between 1992 and 2017.

Going forward, however, a combination of rising wage costs and increasing automation of business services may well limit the growth potential of services. In addition, given the relatively low employment generating scope of Indian service sector exports, India has to work towards faster growth of merchandise exports.

The tepidity of merchandise exports does not appear to be related to specific sectoral issues. There are no big non-performers; nor are there examples of stellar performing sectors. Rather, the export landscape seems to mirror the general state of industry in India: a preponderance of small firms operating at low productivity and exhibiting limited growth.

What needs to be done?

A general feature of the Indian production landscape is that Indian firms do not have the domestic environment to compete globally. This can be put down to both macro and micro issues. The macro issues apply to all of manufacturing, with exports being just one sub-sector among many.

Macro issues

· Scale is essential for a successful exports sector. Policies that inhibit growth in firm size and productivity inhibit the ability to trade. Hurdles to land acquisition, labour regulations, inadequate power and other infrastructure support, and shortages of skilled labour, all contribute to limiting firm size.

· Fundamental labour reforms are needed to encourage large scale, labour-intensive production units, while maintaining worker rights. This will help traditional export sectors such as textiles as well as others like leatherworks, footwear and wood products. In addition, labour reforms have to be integrated with a more broad-based effort to better manage India’s human resources and skills.

· Better transportation infrastructure: The government needs to work on improving the integration of different modes of transportation with each other, introducing modern warehousing, streamlining customs formalities and improving integration with logistics and industrial parks. The current state of India’s transport infrastructure renders its exporters uncompetitive on the world market; according to a recent World Bank (2018) study, ‘firms report that while it takes 11 days for a container to travel from Shanghai to Mumbai, it takes 20 days for it to travel from Mumbai to Delhi’.

Micro issues

· Improve credit access: Credit flows to exporters have to be encouraged to grow in order to facilitate exports. The majority of India’s exporters are SMEs with limited access to external financing. Bank credit is often their only source of financing. These flows must be stable, so that SMEs can plan their production properly.

· Simplify the GST: GST export refunds to SMEs must be expedited to help exports.

· Sign a trade agreement with the European Union (EU): Some of India’s major exports such as apparel were excluded from the EU’s Generalised System of Preferences (GSP) while countries like Bangladesh benefited from it (over 50 per cent of Bangladesh exports are to the EU). We need to undo this disadvantage. Negotiations with the EU on a preferential trade agreement (PTA) have been ongoing since 2007. An agreement needs to be signed. India’s export competitors such as Vietnam have also recently concluded a PTA with the EU.

· Increase South Asian trade: South Asia is the world’s least economically integrated region. Intra-regional trade accounts for less than 5 per cent of India’s total trade.

· Tariff: Resist temptations to raise tariff rates in response to temporary economic pressures such as a sudden increase in imports. As most exporters use imported inputs, tariffs reduce the competitiveness of Indian exporters. The tariff reductions from 70 per cent in 1992 to the current 10 per cent level have helped strengthen the economy. Importantly, India has also brought down average tariff rates on intermediate goods to the same level. In fact the only intermediate goods tariffs that remain somewhat high are on food and beverages, where they average 40 per cent. The temptation to reverse the tariff reductions has to be resisted.

In the next two points we raise industry-specific issues that need to be addressed to harness the potential of global supply chains for India’s growth. In this we focus on two industries that have particular potential.

· Globally integrate the electronics industry: This industry has one of the fastest growing global supply chains, albeit one that India has not been able to benefit from – unlike countries like China, Indonesia and Taiwan.

· Revitalize the textiles industry: This industry has ceded ground to countries like Bangladesh, Sri Lanka and Vietnam over the last decade. The issues are familiar: (i) a preponderance of small-scale establishments; (ii) most units use old (sometimes obsolete) machinery operating with outdated technology; (iii) shortages of semi-skilled labour with sufficient training to run modern machines and production lines; (iv) chronic power shortages, which lead firms to use less productive manual machines; (v) land acquisition problems; and (vi) onerous clearance requirements that impede the inflow of imported inputs and export of processed goods in quick time, which is antithetical to international expectations of just-in-time delivery.

References

David Atkin, Amit Khandelwal, and Adam Osman, 2017, ‘Exporting and Firm Performance: Evidence from a Randomized Experiment’, Quarterly Journal of Economics, 132(2).

World Bank, 2018, India - Systematic Country Diagnostic: Realizing the Promise of Prosperity, Washington, DC: World Bank Group, http://documents.worldbank.org/curated/en/629571528745663168/India-Systematic-country-diagnostic-realizing-the-promise-of-prosperity

The Solutions

1. The government will have to make sure that the macroeconomic environment is favourable for trade – by signing trade agreements and by avoiding arbitrary taxes, restrictions and tariffs.

2. Focus on ensuring that SMEs get access to loans, and reform the GST to ensure that it no longer hurts them.

3. Conduct labour reforms together with a comprehensive attempt to raise the Indian workforce’s skills.

4. Upgrade the country’s transport infrastructure and cut red tape so that Indian producers can get goods to its own markets at least as quickly as China’s do.

*Gita Gopinath is Economic Counsellor and Director of Research at the IMF. She contributed to this volume before joining the IMF, when she was John Zwaanstra Professor of International Studies and of Economics at Harvard University. The views expressed in this book are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

¹See Maitreesh Ghatak’s note on land reforms in this volume.

7