India’s 2002-2010 growth boom was underpinned by exports, which grew 18% a year for eight years—twice the rate of headline GDP—but in an era of hyper-globalisation.A vibrant debate is currently underway in India, and indeed across several emerging markets, about the pace of recovery from Covid-19, the extent of any permanent damage, and the nature of the policy response. But, soon, a more important debate will be upon us. What will drive growth in the post-Covid era? With public sectors confronting a mountain of debt, the fiscal will need to be reined in post-Covid across several emerging markets. Furthermore, Covid is only likely to accentuate the prevailing export pessimism, as global potential growth is damaged and protectionist instincts are stoked. What then will drive growth?
In India’s case, what will it take to lift potential growth back to 7%? To say, more reforms are required, is tautological. Instead, the choice and sequencing of reforms will depend critically on the growth philosophy India embraces. This is where Dr Arvind Panagariya makes crucial contributions in his insightful new book, India Unlimited: Reclaiming the Lost Glory (hereafter referred to as “Reclaiming”), where he systematically reconstructs a path to higher growth. It is tempting to believe India’s continental size provide fertile ground for import substitution. But, we have seen that movie before and know how it ends. Therefore, of the many contributions the book makes, perhaps the most significant is to underscore the necessity of export-led growth for India’s future prospects. Indeed, no emerging market has been able to sustain 7-8% growth for any length of time without relying on the Siamese twins of exports and investment.
To bolster this case, Reclaiming first clinically dismantles the underpinnings of export pessimism: growing global protectionism and automation. Global merchandise exports stood at almost $18 trillion in 2017 (more than six times India’s GDP) with India commanding an export share of just 1.7% (versus China’s 12.8%). Therefore, even if the global market shrinks to $15 trillion—an unlikely prospect—India could double its exports by raising its global market share to just 4%. The opportunity is huge. What about the challenge from automation? For many labour-intensive tasks, automation is still infeasible. Adidas, for example, produces only 1 million of its 360 million pairs of shoes in automated factories.
Reclaiming, therefore, makes the often-forgotten case that the opportunity for labour-intensive manufacturing has not passed us by. In fact, the timing couldn’t be more fortuitous. Chinese real wages are rising, the workforce is shrinking, and the embattled relationship with the US appears more structural than cyclical. This is India’s moment to integrate into the Asian supply chain by attracting multi-national companies seeking a China hedge in the region.
What is less appreciated—and what the book crucially links—is the endogenous pressure export-orientation will exert on India’s fragmented industrial structure. It is estimated that almost 60% of India’s manufacturing workforce is employed in firms with five or less workers, and 75% in firms with 50 or less workers. Productivity is inevitably much lower in smaller firms, and it should be no surprise that wages remain low for a large swathe of India’s manufacturing workforce. A litany of small firms, even in the labour-intensive sectors (apparel and footwear), has impeded India’s export potential in these areas. The book dramatically illustrates, based on Hasan and Jandoc’s 2005 work that 92% of workers in the apparel sector worked in firms with less than 50 workers. In contrast, 57% of China’s apparel workforce were employed in firms with more than 200 employees. How can a 20-person firm from India compete with a 200-person firm from China in the global market place? Why are we surprised the apparel opportunity passed us by? Going forward, a renewed focus on exports should endogenously put pressure on firm size to grow, with implications for productivity and wages.
To be sure, generating export growth will not be easy. India’s 2002-2010 growth boom was underpinned by exports, which grew 18% a year for eight years—twice the rate of headline GDP—but in an era of hyper-globalisation. Now, India will have to undertake the harder slog of increasing market share. Reclaiming lays out the package of measures needed: 1. Avoiding the import-substitution trap, recognising an import tariff is equivalent to an export tax (the famed Lerner Symmetry Theorem); 2. Ensuring the rupee remains competitive (we have found the 15% trade-weighted appreciation between 2015 and 2020 hurt export competitiveness); 3. Boosting free trade agreements and trade facilitation; 4. Creating autonomous employment zones (AEZs) where factors of production are less distorted. While factors market reform is crucial in the medium term, the AEZ approach appears most pragmatic in the near term given the narrow window of opportunity emanating from China.
Finally, as Reclaiming demonstrates, the linkages don’t end there. To the extent that exports can create labour-intensive manufacturing jobs, they will serve as a powerful magnet to attract labour away from agriculture and facilitate the much needed Lewisian transformation. By 2030, agriculture will constitute less than 10% of GDP while still employing 35-45% of the workforce. The gulf in per-capita incomes between agriculture, industry and services will only widen. The medium-term strategy must, therefore, be to create higher-wage jobs in industry and services for agricultural workers to migrate to.
A 1000-word essay is never enough to do justice to a book as rich as this. There are chapters on facilitating urbanisation, reforming the financial sector, transforming higher education and improving governance. My personal preference would be to front-load financial sector reforms, a sector that will have a crucial bearing on India’s prospects emerging from Covid.
What about concerns that economists are always fighting the last war? Given how Covid has accelerated technological disruption, a focus on low-end, labour-intensive manufacturing exports seem archaic? Almost dinosauric? It isn’t. While Covid will spawn creative destruction, it won’t alter the basic tenets that exploiting comparative advantage, boosting productivity through structural transformation and improving allocative efficiency are the keys to boosting potential growth and creating productive jobs. Here, there are no silver bullets or quick fixes. Only a well-thought-out and sequenced reform plan. One that “Reclaiming the Lost Glory” lays out meticulously and comprehensively.
The author is Chief India Economist, JP Morgan. Views are personal
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