The Budget came, and went, even as the manufacturing sector succumbed to the infant industry thesis one again. For starters, the infant industry thesis says fledgling units need protection until they gain economies of scale that match their older, bigger rivals. Unfortunately, as many think, segments such as mobile phones, TVs, automobiles are no longer nascent industries by any standards in India; still they received an incentive in the form of a customs duty hike. Sadly, this age-old prescription to boost production does not help the cause of ‘Make in India’; rather, it would only alienate investors.

The Government could have considered lowering corporate income tax for select hi-technology sectors to attract investments. The loss in revenue may be only transitory in such cases. The US recently introduced a massive corporate tax cut, to 21 per cent from 35 per cent, which China has countered by temporarily exempting foreign companies from paying tax on their earnings.

Vulnerable exports

Inward looking measures have made Indian exports vulnerable as it has failed to evolve. India often unfairly attributes its export movement to global slowdown. For example, while on the one hand India’s exports exhibited a negative growth of 1.5 per cent in 2016 over 2015, Vietnam’s increased by a whopping 35.5 per cent. In fact, Vietnam has a share of 1.4 per cent in global exports as compared to India’s 1.6 per cent — this despite that India’s GDP is close to ten times of Vietnam’s.

India’s imports during April-December 2017 grew 21 per cent vis-à-vis an export growth of 12 per cent. The trade deficit, perennially, as is mostly the case, increased by $3.6 billion as compared to the previous year.

This vulnerability is largely due to India’s increasing reliability on commodity-based exports, which does not contribute to the global value chain (GVC) and are highly susceptible to price sensitivity, and the situation has not changed for years in spite of the constant debate on this. Today, India faces increasing competition in its core exports segments such as textiles and agri-based products where costs and product compliance are a concern. This Budget definitely was a good opportunity to do a course correction and attract global investors to value-added manufacturing sectors .

The value chain problem

A look at the global value chain (GVC) indices adds to apprehensions about India’s export portfolio. According to OECD-WTO’s TiVA database, India’s GVC participation index stands at 43.1, as compared to 52.3 for Vietnam and 60.4 for Malaysia. The GVC participation index, which takes into account both goods and services, displays a country’s integration into the GVC and is the sum of forward and backward linkages divided by total exports.

When industries of the exporting country provide inputs into exports of industries in the importing country, it is called forward linkages, whilst when industries in the importing country import intermediate products to be used in its exports, it is known as backward linkages.

An analysis of countries’ manufacturing share in gross exports shows India has the lowest share of the countries analysed in Asia. Within manufacturing, the foreign value-added (FVA) component for India remains as low as 18 per cent (29 per cent for Vietnam, 32 per cent for Thailand, and 33 per cent for Malaysia). The FVA exhibits the level of global participation in a country’s exports, and constitutes imported intermediate goods utilised in the domestic industry’s exports. Within India’s 18 per cent share, 25 per cent alone is from ‘coke, refined and petroleum, and nuclear fuel’, which, again, is a resource-based product — the value addition in this case is largely petroleum products.

India’s contribution to GVC, especially in manufacturing suffers from complacency. Typical of most emerging and large economies, India has higher domestic value added (DVA) in gross exports. This has been a huge deterrent for enterprises moving up the value chain in India as producers find it cheap to work with local content while concentrating on the local market.

The manufacturing sector has multiple spillovers, and with it getting more integrated into the GVC, producing specialised items of a finished product, the opportunity to create more employment and contributing to global export is high.

Competition from island economies such as Vietnam, Indonesia, Thailand, and Malaysia places India in a paradoxical situation. On the one hand, it is unable to move up the value chain, and on the other hand, India is losing in its strong areas, leaving Indian trade vulnerable. The textile sector is a good example; with a 12-per cent share, it has the second highest share in India’s exports. But this was was 25 per cent in 2000. That said, the recent Budget has made some amends for the textile industry and it is to be seen how these will eventually help India compete its neighbours.

Today, complex goods such as automobiles, aeroplanes and computers are made of inputs that are produced in various countries, which are finally assembled in yet another country. India in similar vein needs to get integrated in the GVC and produce specific and specialised products. The electronics value chain, whose global demand is almost insatiable, is a great place to start. India currently has a substantial trade deficit in electronics, which has increased from $27 billion to $42 billion in just six years. India’s exports share in machinery and electronics stands at less than 10 per cent, as compared to 42 per cent of Vietnam’s, 41 per cent for Malaysia, and around 31 percent in the case of Thailand.

If India fails to move up the value chain, the products on the lower end of the value chain could be taken up by other emerging economies benefiting from scale and cost. It may be noted that despite India’s GDP being almost eight to ten times as that of Thailand’s or Vietnam’s, there is not much difference in their contribution to global exports.

Ecosystem for GVC

India’s poor performance in the GVC is structural. Importantly, the GVC argument gains more prominence given the negotiations on trade facilitation agreement under the WTO and India’s eagerness to participate in mega trade agreements. It is also important to take cognizance of the fact that China benefiting from its labour arbitrage is over; its strength lies in its vast, skilled manpower, which India is required to generate. Technology is a huge leveller and streamlining mechanisms facilitating movement of goods and services is required.

Indian manufacturing requires being competitive and efficient, and take sustained, holistic reforms to exploit the advantages of integrating with GVCs. Keeping one insulated would harm aspirations of Indian exports. More so when India faces stiff competition from its neighbours.

The writer is an economist with Exim Bank India. The views are personal

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