Opinion | Govt must break out of the export stagnation trap

  • 31-May-2019
  • Opinion | Govt must break out of the export stagnation trap

In an increasingly globalized world, foreign trade is an important contributor to economic growth. Unfortunately, India’s merchandise trade has clocked slightly negative growth between 2011- 12 and 2017-18. The only silver lining was a better-than-average export performance in 2018-19. The economy has grown at a healthy clip in the past eight years, but foreign trade growth rate has lagged behind gross domestic product (GDP) growth rate. Evidently, the contribution of trade to GDP has also reduced with every passing year. All these portend ill for the economy and may seriously slow down our growth, unless robust remedial steps are taken.

India’s main export items comprise petroleum products, gems and jewellery, engineering products, pharmaceuticals, and textiles and clothing. Some of these products are labour-intensive but low-technology items, while the rest are medium-technology items with lower labour intensity. One of the imperatives for breaking out of the stagnation trap of exports would be to diversify into high-technology products, while enhancing the competitiveness of our existing export basket.

Moving into high-technology and high value-added items would require the acquisition of such technology. The short-term solution to this is to identify a few champion sectors and provide attractive incentives to transnational corporations, which own advanced technologies, to set up their manufacturing bases in India. The long-term plan should be to invest significantly in research and development so that we could, eventually, be the owners of cutting-edge technology and one of the global industry leaders. Obviously, because of the resource constraint in providing incentives, we will have to select only those sectors that are going to occupy a significant chunk of global trade over the next few decades. Electronics, including medical instrumentation, is one such sector. New=technology storage batteries and renewable energy, and pharma and biosimilars could be the other two.

Let us take a quick glance at textiles and clothing, which provides the largest employment after agriculture. Our clothing sector suffers from a lack of scale. While export-oriented factories in China, Vietnam and Bangladesh employ more than 5,000 people under one roof, our largest factory barely reaches 5,000 workers. Obviously, when it comes to servicing large export orders, buyers look at our competitors. The other factor is fragmentation and technological obsolescence of the sector, which is a major supply side constraint. With growing wages, China is relocating many garment factories involving low investments and technology to Vietnam and Cambodia (and to some extent Bangladesh). However, for the time being it is retaining its more capital-intensive textile mills, which yield higher value addition, to supply fabrics to these countries.

This shift poses an opportunity for India to overcome its deficiencies. First, we need to undertake land and labour reforms in close collaboration with the states so that we can attain global standards of scale. Second, we must radically modernize our textiles sector by providing incentives to our weaving mills to invest in modern shuttleless looms. A modification of the amended technology upgrade funds scheme could be very useful to attain this objective. Third, we need to enhance worker productivity by undertaking more training programmes.

Providing a larger ceiling to banks (especially public sector banks) for financing exports and providing appropriate instruments to reduce the risks are needed to present Indian exporters with a level playing field. More infrastructure such as roads, railways and ports can reduce transaction costs. There are a plethora of procedures and clearances to be negotiated by an exporter to effect a shipment and to get his dues from the government. All these need a deep and objective look so that the processes could be streamlined and the extra burden on exporters removed.

Source :- Livemint.com

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