Top politicians of India’s ruling coalition boast that China’s economic crisis should be viewed as an opportunity for India to capture a bigger global export share in manufacturing, and grow faster. With India being the only BRIC nation growing by 7 per cent plus, it is not long before India will overtake China economically, they argue.
In 2014, China’s GDP at current prices was $10.38 trillion — roughly five times India’s GDP at $2.04 trillion. Even if India grows at CAGR of 10 per cent (best case scenario) and China at 3 per cent (worst case scenario), it won’t be able to overtake China before 2038. Yet, India can take on China, but not by blindly following the now obsolete export-led growth model that made China the world’s factory.Export prospects recede
Why? Because India is not China, and today’s world is quite different from what it was when China embarked on its export-led growth path. India is a multi-party democratic with all kinds of pulls and pressures that make effective implementation of the Chinese growth model difficult.
Export-led growth strategy — aided by artificially undervalued currency — won’t work when world trade grows at slower rates than world GDP. Each country is relying on currency devaluation to capture a bigger slice of the sluggish global demand. Mega trade pacts such as the Trans Pacific Partnership (TPP) and the Transatlantic Trade and Investment Partnership (TTIP) will further deprive India from accessing overseas markets.
Moreover, India can’t compete with LDCs in low-cost-labour-intensive manufacturing for long. Its labour cost is lower than in China but far higher than in countries such as Bangladesh, Ethiopia or Myanmar. India’s badly conceived trade pacts will kill low-tech manufacturing that depends upon labour cost advantage.
Well, it doesn’t make much difference to India’s growth ambition, as there isn’t much money left in low-tech manufacturing, such as leather footwear or apparel-making. Instead, it’s the pre- and post-manufacturing services that capture maximum value in the global value chain. Pre-manufacturing services comprise R&D, design and testing. Post-manufacturing services capture value through branding, marketing and retailing.
Creating and building brands is a long-drawn process that India can’t afford either in terms of time or money. Many of India’s key exports such as . apparel are low-margin contract manufacturing that does not make much money for manufacturers, because manufacturers don’t own the brands. A suit being retailed for $2500 in Tokyo or London gives just $250 to its makers in Tirupur. Logistics related inefficiencies further squeeze margins. Moreover, India also has to deal with manufacturing through robotics and 3D printing that are going to take away the advantage that comes from labour abundance.For a new approach
India should focus on high value jobs in pre-manufacturing services such as research, engineering and design by capitalising on its comparative advantage — actual or potential — given the availability of low cost technically qualified manpower. The Internet of Things is another big opportunity to tap.
That, in turn, calls for overhauling of the education system which is focused on rote learning and scoring high marks in exams, and not on questioning and critical thinking — prerequisites for innovation. Further, the government should focus its energy on five or six strategic sectors that have strong backward and forward linkages with other sectors. These sectors are automobile, defence, housing and infrastructure, pharmaceuticals, electronics, and agro-processing and retail.
India’s automobile sector depends on duty protection. Defence production is so shackled that private sector participation is nil. The infrastructure sector is marred by under-bidding and difficulties in getting land and environmental clearances. Housing is a good example of how lack of effective regulation can limit the growth potential of a sector. Unscrupulous builders are taking their customers for a ride without any accountability. That reduces its multiplier effect for India’s overall economic growth.
The pharmaceutical sector depends upon on generics. With the US pushing for a tighter IPR regime through data exclusivity and patent linkages under its mega-regional trade pacts, it would make things difficult for Indian pharma companies, with their poor R&D base. Electronics manufacturing is hampered by inverted duties — lower duty on finished products, as against higher duties on components.
The agriculture and food processing sectors remain largely untapped because of poor regulation and poorer compliance that impedes growth of manufacturing ( demand for equipment and chemical fertilisers) and services (such as retailing and transportation).Entrepreneurial spirits
With the right policy environment, these sectors can grow at a CAGR of 20 per cent plus, and pull up a number of upstream and downstream industries without government support.
Double digit growth will require an ever growing number of entrepreneurs. The government can help unleash India’s animal spirits by making it easier for first-time-entrepreneurs to start and run businesses. This will require actions beyond getting a higher rank on ease of doing business, even if the improvement in the country’s ranking is genuine.
Going forward, India will not benefit much from access to global markets primarily because of slower expansion of world trade, and also because of its being blocked out in mega-regionals like the TPP. It makes sense for India to tap its large but somewhat fragmented domestic market.
Given the size and complementarities of its provincial economies, early implementation of GST will create a pan-India common market of $2 trillion GDP and 1.2 billion people — a big attraction for investors — and add as much as 2 per cent to GDP by freeing up interstate trade.
World trade in services is growing faster than merchandise trade. Yet, India remains hesitant in joining the pluri-lateral agreement on trade in services (TISA) that can open up immense possibilities for pushing export of non-IT services and reduce over-dependence on remittances and IT exports for managing current account balances.
India needs a bolder FDI policy. An overcautious approach of raising FDI caps — from 0 to 26 to 49 to 51 per cent — won’t work. Tax terrorism, including the practice of retrospective taxation has to end. There is a long way to go before India overtakes China, but let us at least give China a serious fight.
The writer is a corporate economic advisor based in Mumbai. The views are personal