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GS Paper: GS3-12.Effects of liberalization on the economy, changes in industrial policy and their effects on industrial growth

  • [pib] New Industrial Development Scheme for Jammu & Kashmir (J&K IDS, 2021)

    The Union Govt. has formulated the New Industrial Development Scheme for Jammu & Kashmir (J&K IDS, 2021).

    Tap to read more about: Reorganization of J&K

    J&K IDS, 2021

    • It is a new Central Sector Scheme for the development of Industries in the UT of Jammu & Kashmir.
    • The main purpose of the scheme is to generate employment which directly leads to the socio-economic development of the area.

    Incentives available

    • Capital Investment Incentive at the rate of 30% in Zone A and 50% in Zone B on the investment made in Plant & Machinery (in manufacturing) or construction of the building is available.
    • Capital Interest subvention: At the annual rate of 6% for a maximum of 7 years on loan amount up to Rs. 500 crore for investment in plant and machinery (in manufacturing) or construction of the building.
    • GST Linked Incentive: 300% of the eligible value of actual investment made in plant and machinery (in manufacturing) or construction in building for 10 years.
    • Working Capital Interest Incentive: All existing units at an annual rate of 5% for a maximum of 5 years. Maximum limit of incentive is Rs 1 crore.

    Key features:

    • The scheme is made attractive for both smaller and larger units.
    • Smaller units with an investment in plant & machinery upto Rs. 50 crore will get a capital incentive upto Rs. 7.5 crore and get capital interest subvention at the rate of  6% for a maximum of 7 years
    • The scheme aims to take industrial development to the block level in UT of J&K, which is the first time in any Industrial Incentive Scheme of the GoI.
    • The scheme has been simplified on the lines of ease of doing business by bringing one major incentive- GST Linked Incentive- that will ensure less compliance burden without compromising on transparency.
    • It is not a reimbursement or refund of GST but gross GST is used to measure eligibility for industrial incentive to offset the disadvantages that the UT of J&K face

    Major Impact and employment generation potential:

    • The scheme is to bring about a radical transformation in the existing industrial ecosystem of J&K with emphasis on job creation, skill development and sustainable development.
    • It is anticipated that the proposed scheme is likely to attract unprecedented investment and give direct and indirect employment to about 4.5 lakh persons.
    • Additionally, because of the working capital interest subvention, the scheme is likely to give indirect support to about 35,000 persons.

  • Importance of Resilient supply chains

    What does supply chain resilience mean? 

    • When assembly lines are heavily dependent on supplies from one country, the impact on importing nations could be crippling if that source stops production intentionally (economic sanction) or unintentionally (natural disaster)
    • Example: Japan imported $169 billion worth from China, accounting for 24% of its total imports. Japan’s imports from China fell by half in February 2020 that impacted Japan’s economic activity.
    • In the context of international trade, supply chain resilience is an approach that helps a country to ensure that it has diversified its supply risk across a clutch of supplying nations instead of being dependent on just one or a few

    Recent incidents that led to supply chain disruption

    • Disruptions in supply chains can be natural or man-made.
    • When the novel coronavirus pandemic broke out, it had an immediate and telling effect on supply chains emanating from China.
    • In Japan’s case, a nuclear disaster (Fukushima Daiichi) caused a sharp drop in Japanese automobile exports to the United States.
    • Terrorist drone attacks on oil refineries in Saudi Arabia in September 2019 resulted in a drop of 5.7 million barrels of oil per day.
    • That attack triggered a steep plunge in Saudi Arabia’s stock market and a sharp spike in global oil prices.
    • Tensions with China led the United States government to impose restrictions on the export of microchips to China’s biggest semiconductor manufacturer SMIC.

    Supply Chain Resilience Initiative (SCRI)

    • Geo-politics and geo-economics can never be truly separated.
    • Also, there is a growing trend of weaponization of trade and technology.
    • China had imposed sanctions on its key exports of grain, beef, wine, coal, etc to Australia for demanding an inquiry into the origins of the coronavirus and advocating a robust Indo-Pacific vision.
    • It is against this backdrop that India, Japan, and Australia initiated the Supply Chain Resilience Initiative (SCRI).
    • It focuses on automobiles and parts, petroleum, steel, textiles, financial services, and IT sectors.
    • The SCRI may be strengthened by the future involvement of France.
    • Kingdom has also shown interest in the SCRI.

    “China plus one” strategy

    • For many Japanese companies, global performance and profits are linked to manufacturing facilities and supply chains in China.
    • Yet, they have shown an early capacity for risk mitigation through the “China Plus One” business strategy.
    • The “China plus one” strategy aims at diversification of investments to the Association of Southeast Asian Nations (ASEAN), India, and Bangladesh.
    • Japan announced a 2.2 billion Relocation Package.
    • Of the companies that availed this package, 57 relocated to Japan, 30 to Southeast Asia, and two to India.

    India’s vulnerability to supply chain disruptions

    • India can ill-afford the shocks of disruption in supply chains.
    • For instance, the pandemic caused a breakdown in global supply chains in the automotive sector.
    • For India, which imports 27% of its requirement of automotive parts from China, this quandary was a wake-up call.
    • It is t is noteworthy is that despite being the fourth largest market in Asia for medical devices, India has an import dependency of 80%. 
    • Given the renewed thrust in the health-care sector, this is the right time to fill gaps through local manufacturing.

    India increasing its presence in global supply chains

    1) Electronic industry

    • India’s electronics industry was worth $120 billion in 2018-2019 and is forecast to grow to $400 billion by 2025.
    • India is enhancing its presence in the global supply chains by attracting investments in the semiconductor components and packaging industry.
    • The Indian electronics sector is gradually shifting away from completely knocked down (CKD) assembly to high-value addition.

    2) Defence sector

    • Defence is among the key pillars of the ‘Atmanirbhar Bharat’ policy.
    • The government is providing a big boost to defence manufacturing under the ‘Make in India’ program.
    • It has identified a negative import list of 101 items.
    • There is a tremendous opportunity for foreign companies to enter into tie-ups with reputed Indian defence manufacturers to tap into the growing defence market in India.

    Consider the question “Pandemic has demonstrated the damage vulnerable supply chains can cause. It also underscored the importance of resilient supply chains. In light of this, examine the importance of diversification of supply chains.”

    Conclusion

    India has the capacity and the potential to become one of the world’s largest destinations for investments, and one of the world’s largest manufacturing hubs, in the aftermath of the pandemic.

  • Fixed-term employees

    The recent incident of violence at the iPhone manufacturing factory brought into focus the issue of contract labour. The article explains the reasons for its persistence despite the provision of fixed-term employment.

    Difference between a contract worker and fixed-term worker

    • Contract workers, who are hired via an intermediary (contractor) and are not on the payrolls of the company on whose shop floors they work.
    • Fixed-term employees can be directly hired by employers without mediation by a middleman.
    • They are ensured of the same work hours, wages, allowances, and statutory benefits that permanent workers in the establishment are entitled to.
    • Employers are not required to provide retrenchment benefits to fixed-term employees.
    • With an aim to discourage the use of contract workers the government introduced the option of fixed-term employment in the Code on Industrial Relations (2020).

    Issues with the provision of fixed-term employment

    • Fixed-term employment in India is indeed quite open-ended.
    • The Code does not specify a minimum or maximum tenure for hiring fixed-term employees.
    • Nor does it specify the number of times the contract can be renewed.
    • The absence of such safeguards can lead to an erosion of permanent jobs.
    • Workers may find themselves moving from one fixed-term contract to another, without any assurance of being absorbed as permanent workers by their employer.

    So, why firms still hire contract workers?

    • The cost of hiring contract workers continues to remain lower than the cost of hiring fixed-term employees. who are required to be paid pro-rata wages and social security including gratuity.
    • In addition, the monitoring, legal compliance, and litigation costs are shifted onto the contractor in case of contract workers, thereby reducing the transaction costs of recruitment to firms.
    • To encourage a shift away from contract workers to fixed-term employees, the government should have completely prohibited the use of contract labor in core activities
    • Instead of completely prohibiting contract workers in core activities the Labour Code on Occupational Safety and Health has allowed it under certain conditions.
    • Such a provision encourages the use of contract workers, undermining the initiative of introducing fixed-term employment.

    Using PLI and Atmanirbhar Bharat to boost formal job creation

    • The production linked incentive scheme (PLI) offers government subsidies for a limited period which is five years for mobile handsets.
    • The objective of the PLI scheme is to create “good jobs”.
    • It may have been more useful to link these incentives for which a financial outlay of Rs 1.45 lakh crore has been approved over five years for 10 sectors explicitly to job creation.
    • Significantly, under the Atmanirbhar Bharat Rozgar Yojana, the government is offering provident fund subsidies to employers for hiring new formal workers.
    • Both these programs could jointly be leveraged to give a big boost to formal job creation in the manufacturing sector.

    Consider the question “Examine the reasons for the persistence of contractual labour despite the option of fixed-term employment. Also suggest the ways to increase the employment opportunities that are secure.” 

    Conclusion

    The government should focus on the creation of employment opportunities that are secure through policies and laws.

  • Spectrum auction

    The article analyses the factors influencing the outcome of the spectrum auction and suggests the measures to ensure the success and avoid the repeat of 2016 auction.

    Details of the auction

    • Based on the recommendation of the Telecom Regulatory Authority of India (TRAI), the government is planning to auction spectrum in the sub GHz bands of 700, 800, and 900 MHz along with mid-band frequencies in bands of 1800, 2100, 2300, and 2500 MHz across the 22 Licensed Service Areas (LSAs) of the country.
    • The cumulative reserve price — and hence the potential revenue accrual to the government at reserve prices — is about $50 billion.
    • The total reserve price of spectrum put on auction in 2016 was about $90 billion while the realized value was just about one-tenth of that.
    • Hence, while the 2016 auction could be considered as a failure from the auctioneer’s point of view.

    Factors determining the success of  the spectrum auction

    1) Right reserve price

    • Research on a cross-country spectrum database shows that the reserve price significantly and positively correlated to the winning bid price.
    • However, a higher reserve price also inhibits bidders from bidding for more spectrum blocks.
    • If the quantity effect is more than the price effect, then it results in reduced revenues for the government exchequer, as happened in 2016.

    2) Role of Over The Top (OTT) provider

    • Over The Top (OTT) providers who are providing substitute goods such as Voice Over Internet Protocol (VoIP); and capturing a greater mind share of customers while remaining relatively invisible to government regulators.
    • The rise of VoIP subscribers could have a positive effect on winning bid prices.
    • However, the erosion of the position of telcos in the overall digital value network of devices, connectivity, and apps, could result in a lower willingness to pay.

    3) Allocation of unlicensed spectrum for WiFi

    • By off-loading mobile data, Wi-Fi supplements the carrier network and reduces the demand for mobile network capacity.
    • A number of countries including the United States have unlicensed the V-band spectrum in 60 GHz — pencil beam band.
    • Referred to as “wireless fiber”, the 60 GHz spectrum provides huge capacities in a limited area.
    • Wi-Fi 6 (a.k.a. IEEE 802.11 ax) that operates in the 2.4/5 GHz unlicensed band requires additional unlicensed spectrum allocation to provide Gigabit speeds.
    • The more the unlicensed spectrum allocation, the lower will be the demand for licensed spectrum.

    4) Clarity on the availability of spectrum for auction

    • While there is an indication by the government that the spectrum for the 5G auction, namely 3.4-3.6 GHz, will be held in late 2021, the amount of spectrum that will be made available is not clear.
    • There is still uncertainty about the release of 26 GHz by the Department of Space for mobile services.
    • With this limited visibility, the bidders will be in a quandary whether to acquire the spectrum now or wait for subsequent auctions.
    • Further, some part of the current spectrum holding of all the operators is coming up for renewal in mid-2021, and hence there is additional pressure on them to retain them in the forthcoming auction.

    Steps need to be taken

    • A re-visit of reserve prices and lower it further, especially that of 700 MHz which is the “golden band” for covering the hinterlands of the country.
    • Releasing more unlicensed spectrum in 2.4/5/60 GHz for proliferating Wi-Fi as a suitable complement to [the] carrier network.
    • This will also augment the deployments of the Public Wi-Fi project which the cabinet approved recently.
    • Provide visibility of future auctions, especially the quantum of the spectrum that can be put on the block in 3.3/3.6/26/28 GHz.
    • The government should release guidelines on how OTT platforms will be regulated and what will be regulated so that the telcos and OTTs can join hands to provide superior services for the benefit of the consumers.

    Conclusion

    The government should follow the steps mentioned here to make the auction of the spectrum a success.

  • U.S. puts India on ‘currency manipulators’ monitoring list

    The U.S. Treasury has labelled Switzerland and Vietnam as currency manipulators and added three new names, including India, to a watch list of countries. Earlier it had removed India from the list in March 2019.

    What is Currency Manipulation?

    • Currency manipulation refers to actions taken by governments to change the value of their currencies relative to other currencies in order to bring about some desirable objective.
    • The typical claim – often doubtful – is that countries manipulate their currencies in order to make their exports effectively cheaper on the world market and in turn make imports more expensive.

    Why do countries manipulate their currencies?

    • In general, countries prefer their currency to be weak because it makes them more competitive on the international trade front.
    • A lower currency makes a country’s exports more attractive because they are cheaper on the international market.
    • For example, a weak Rupee makes Indian exports less expensive for offshore buyers.
    • Secondly, by boosting exports, a country can use a lower currency to shrink its trade deficit.
    • Finally, a weaker currency alleviates pressure on a country’s sovereign debt obligations.
    • After issuing offshore debt, a country will make payments, and as these payments are denominated in the offshore currency, a weak local currency effectively decreases these debt payments.

    US treasury’s criteria

    To be labelled a manipulator by the U.S. Treasury:

    • Countries must at least have a $20 billion-plus bilateral trade surplus with the US
    • foreign currency intervention exceeding 2% of GDP and a global current account surplus exceeding 2% of GDP

    Implications for India

    • India has traditionally tried to balance between preventing excess currency appreciation on the one hand and protecting domestic financial stability on the other.
    • India being on the watch list could restrict the RBI in the foreign exchange operations it needs to pursue to protect financial stability.
    • This comes when global capital flows threaten to overwhelm domestic monetary policy.
    • The two most obvious consequences could be an appreciating rupee as well as excess liquidity that messes with the interest rate policy of the RBI.
    • Indian policymakers have to be sensitive for the unpredictable nature of policy-making in the US under Trump, especially concerning global trade.

  • Premature membership of RCEP would not serve Indian interests

    The article analyses government’s decision to stay out of RCEP and factors responsible for it.

    What India chose not to join RCEP

    • By joining RCEP, India would have further risked a flood of cheap Chinese imports in sectors like electronics.
    • India had tried and failed to win substantial concessions in areas like work visas for its information technology-enabled services.
    • Two of India’s proposals—an RCEP business travel card and an RCEP service supplier card—failed to find favour with a majority of the bloc’s members.

    Arguments in favour of India joining the RCEP

    •  First argument made is RCEP would have provided an excellent opportunity for Indian firms to get integrated with regional value chains.
    • However, merely joining a trade bloc does not automatically result in integration with global value chains.
    • The complex nature of global production networks requires a lot of economic and trade policy reforms on the domestic front.
    • Second important argument made is that India would lose an opportunity to access RCEP’s common market.
    • But this argument too doesn’t hold much water if Indian producers are not competitive.
    • Competitiveness is driven by factors both within and beyond the control of domestic industry.
    • So it would be an over-simplification to assume that Indian industry does not have the capability or appetite to be competitive.
    • Often, global competitiveness inside factory gates gets diluted by costs borne outside those gates.

    What past data suggests

    • India’s merchandise exports grew at an annual rate of more than 18% between 2000-01 and 2010-11, which was largely a pre-FTA period.
    • In this period, India activated only two FTAs—with Sri Lanka and Singapore.
    • India joined the FTAs in a big way from 2010 onwards.
    • It operationalized big trade agreements with the 10-nation Association of South East Asian Nations (ASEAN), Japan, Korea, and separately with Malaysia.
    • However, despite these deals, India could realize annual merchandise export growth of only 2.5% between 2010-11 and 2019-20.
    • This disappointing performance shows that FTAs are not conducive for exports.

    Conclusion

    While RCEP may theoretically offer India new opportunities for exports and integration with pan-Asian production networks, we have a lot of work to do internally before we are in a position to make the most of free-trade deals.

  • Steps needed to achieve Comparative advantage in Manufacturing

    The article suggests the policy approach to achieve industrial growth while avoiding the isolationist approach in pursuit of AtmaNirbharBharat.

    Issue of policy binary

    • The goals of the Make in India initiative and now the AatmaNirbharBharat Abhiyan are driving a major shift in policy.
    • Import duties are being raised.
    • Production-linked incentives are being offered to firms across a wide canvas of 10 priority sectors.
    • At the same time, there is considerable unease at the rolling back of trade liberalisation.
    • This binary is not very useful.

    Steps needed to gain competitive advantage

    1) Infrastructure

    • It would still take India many years to develop its physical infrastructure to the levels required for international competitiveness.
    • Until then, large industrial parks for textiles, electronics, toys or shipbuilding need to be developed by state agencies with soft financing.
    • Competitive logistics are essential.
    • This was critical for the success of the information technology (IT) industry where world-class infrastructure was created within the software parks.
    • High-speed broadband real-time connectivity to the US market was provided through public investment.
    • This was done well before general telecom modernisation began.

    2) Closing the financing gap

    • Long-term financing for world-class infrastructure is still a gap.
    • The central government can either use one of its existing financial institutions or create a new development financial institution to provide long-term low-interest rate debt.
    • The sovereign needs to provide risk-mitigation through an implicit guarantee. It can afford to do so.

    3)  Prevent real exchange rate appreciation

    • Before considering specific increases in import duties, real exchange appreciation should be undone.
    • This would have the effect of raising tariffs across the board.
    • It is high time the government and the Reserve Bank of India (RBI) agreed on this objective.

    4) Change the regime for SEZ

    • Allow SEZ to sell into the domestic area with import duties at the lowest applicable rate with any trading partner and the same value-addition norms.
    • Tax exemption on profits could be dispensed with while continuing to provide a duty-free import regime.
    • This would create a level-playing field for production vis-à-vis competitive locations overseas.
    • Large zones would have to be developed by the state.
    • The private sector can be partners in the process, but achievement of scale is only possible by the state.
    • Production for the domestic as well as the global market would become easier.

    5) Encourage domestic value addition

    • Domestic value-addition can be incentivised by-
    • 1) Reducing duties to zero for all primary raw materials and inputs.
    • 2) then progressively higher rates for intermediates with the highest rate for the finished product.
    • In short, have just the opposite of the inverted duty structure we have had for computers.
    • This would change investment and production decisions if other costs of production in India have been made competitive.

    6) Commitment of procurement of full production

    • In some industries, commitment of procurement of full production for a few years would suffice to get investment.
    • Bids could be invited for solar panels, or for battery storage for the grid, for annual supply for, say, five years with the condition that full value-addition has to be done in India.
    • Such commitment would provide for amortisation of the capital investment and make it a risk-free investment.
    • If the bid size is large enough, the best global firms would come and invest.
    • If the bids are repeated, prices would come down and a competitive industry structure would be created.

    7) Encourage public investment

    • Public investment in firms should not be ruled out altogether.
    • In some cases, it may be the best way to create competitive capacity.
    • Maruti Suzuki is a good example in India.
    • Volkswagen was set up by a state government in Germany, which is still a substantial shareholder.
    • This is a policy instrument that can be used to create competitive advantage.

    8) Creation of fund

    • There should also be willingness to create a fund that looks at modest returns, but aims at creating national and global champions through start-ups.

    Conclusion

    The foundation of China’s incredible success was laid by Deng Xiaoping with the maxim on economic policy that one should not bother about the colour of the cat as long as it caught mice. India’s policies have tended to be doctrinaire. We need a heavy dose of pragmatism to achieve our full potential.

    Source:-

    https://www.financialexpress.com/opinion/industrial-growth-the-right-policy-mix-for-success/2136735/

  • PLI Scheme extended to 10 key Sectors

    Manufacturing holds key to the economic prosperity of the country. The article examines the significance of Production Linked Incentive Scheme to boost manufacturing in India.

    Need for increasing manufacturing capabilities

    • The world of manufacturing is now more interconnected than ever before with all major industries—automobile, electronics, pharmaceuticals, textiles, etc—operating as a global value-chain.
    • In order to integrate India as a pivotal part of this modern economy, there is a strong need to step up our manufacturing capabilities in sectors of high growth, including the cutting edge technology sectors.
    • A strong and dynamic manufacturing sector will fuel India’s economic growth by allowing companies producing in India to penetrate effectively into the global supply chains across various sectors.
    • Apart from enhancing exports, it will also reduce our import dependencies and spur domestic consumption.
    • ‘Atmanirbhar Bharat’ has brought manufacturing to the centre stage and emphasised its significance in driving India’s growth.

    Factors favouring India

    • India offers an attractive domestic market, with a large population in the educated and earning segment.
    • It also has a strong institutional framework which allows for a smooth functioning of the industry.
    • A concerted effort towards attracting substantial investments for the creation of large manufacturing facilities, combined efficiency and economies of scale, can help Indian companies globally competitive and integrate with the global markets.

    How Production Linked Scheme (PLI) will help achieve these objectives

    • The Production Linked Incentive (PLI) Scheme is designed to incentivise incremental production for a limited number of eligible anchor entities in each of the selected sectors.
    • These selected entities will invest in technology, plant & machinery, as well as in R&D.
    • The scheme will also have beneficial spillover effects by the creation of a widespread supplier base for the anchor units established under the scheme.
    • Along with the anchor unit, these supplier units will also help to generate massive primary and secondary employment opportunities.
    • The sectors for PLI have been shortlisted on the basis of their potential for economic growth, extent of benefit to the rural economy, revenue and employment generation.
    • A key benefit of the PLI Scheme is that it can be implemented in a very targeted manner to attract investments in areas of strength and to strategically enter certain segments of global value chains (GVCs).
    • This will help bring scale and size in key sectors and create and nurture global champions.
    • The scheme incentivises upcoming technologies that represent the biggest economic opportunities of the 21st century.
    • The scheme intends to generate large-scale employment by incentivising the development of traditional, labour intensive sectors like Food Processing and Textiles.
    • The current basket of Indian manufacturing constitutes of large volume of low-value products.
    • The scheme aims to correct this by encouraging large manufacturers to bring technology and to build capabilities for high-value output thereby providing higher returns to the upstream producers.
    • It will also enable an increase in exports.
    • The scheme envisages globally-integrated manufacturing in sectors such as automobile and auto components, pharmaceuticals, telecommunications, white goods and steel.
    • These are crucial sectors in terms of their strategic importance, contribution to the GDP and employment-generation potential.

    Conclusion

    Given the scale of incentives, which is around Rs 1,96,000 crore, the manufacturing sector of the country is set to transform in the next few years. Its contribution to the GDP will significantly improve, leading to unprecedented investment and job creation.

    Source:-

    https://www.financialexpress.com/opinion/pli-scheme-will-help-india-nurture-manufacturing-giants/2128992/

  • [pib] PLI Scheme extended to 10 key Sectors

    The Union Cabinet has unveiled the Production-Linked Incentive (PLI) Scheme to encourage domestic manufacturing investments in ten key sectors.

    PLI Scheme

    • The PLI scheme aims to boost domestic manufacturing and cut down on imports by providing cash incentives on incremental sales from products manufactured in the country.
    • Besides inviting foreign companies to set shop in India, the scheme aims to encourage local companies to set up or expand, existing manufacturing units.

    UPSC can directly as the sectors included in the PLI scheme. Earlier it was only meant for Electronics manufacturing (particulary mobile phones).

    What was the earlier PLI Scheme?

    • As a part of the National Policy on Electronics, the IT ministry had notified the PLI scheme on April 1 this year.
    • The scheme will, on one hand, attract big foreign investment in the sector, while also encouraging domestic mobile phone makers to expand their units and presence in India.
    • It would give incentives of 4-6 per cent to electronics companies which manufacture mobile phones and other electronic components.
    • A/c to the scheme, companies that make mobile phones which sell for Rs 15,000 or more will get an incentive of up to 6 per cent on incremental sales of all such mobile phones made in India.
    • In the same category, companies which are owned by Indian nationals and make such mobile phones, the incentive has been kept at Rs 200 crore for the next four years.

    10 new sectors added

    The ten sectors have been identified on the basis of their potential to create jobs and make India self-reliant, include:

    1. Food processing
    2. Telecom
    3. Electronics
    4. Textiles
    5. Speciality steel
    6. Automobiles and auto components
    7. Solar photo-voltaic modules and
    8. White goods such as air conditioners and LEDs

  • Economic lessons from Vietnam and Bangladesh

    The article examines the emergence of Bangladesh and Vietnam as the major export hubs in the world and explains the lessons India could draw from it.

    Context

    • Bangladesh has become the second-largest apparel exporter after China.
    • Vietnam’s exports have grown by about 240% in the past eight years.

    Analysing Vietnam’s success

    • An open trade policy, a less inexpensive workforce, and generous incentives to foreign firms contributed to Vietnam’s success.
    • Vietnam’s open trade policy through Free Trade Agreements (FTAs) means trading partners do not charge import duties on products made in Vietnam.
    • Vietnam’s domestic market is open to the partners’ products.
    • Vietnam has agreed to change its domestic laws to make the country attractive to investors.
    • Over a decade or so, large brands such as Samsung, Canon, Foxconn, H&M, Nike, Adidas, and IKEA have flocked to Vietnam to manufacture their products.

    What explains Bangladesh’s success?

    • In Bangladesh, large export of apparels to the EU and the U.S. make the most of the country’s export story.
    • The EU allows the import of apparel and other products from least developed countries (LDCs) like Bangladesh duty-free.
    • India, as a good neighbour, accepts all Bangladesh products duty-free (except alcohol and tobacco).
    • Bangladesh may not have this facility in four to seven years as its per capita income rises and it loses the LDC status.
    • Bangladesh is working smartly to diversify its export basket.

    Lessons for India

    • The key learning from Bangladesh is the need to support large firms for a quick turnover.
    • Yet, most of Vietnam’s exports happen in five sectors, in contrast, India’s exports are more diversified.
    • The Economic Complexity Index (ECI), which ranks a country based on how diversified and complex its manufacturing export basket is, illustrates this point.
    • The ECI rank for China is 32, India 43, Vietnam 79, and Bangladesh 127.
    • India, unlike Vietnam, has a developed domestic and capital market.
    • To further promote manufacturing and investment, India could set up sectoral industrial zones with pre-approved factory spaces.
    • There should be no need to search for land or obtain many approvals.

    India should pursue organic growth

    • Most of Vietnam’s electronics exports are just the final assembly of goods produced elsewhere.
    • In such cases, national exports look large, but the net dollar gain is small. China also faces this issue.
    • Country’s Export to GDP ratio (EGR) indicates its export capacity.
    • Vietnam’s EGR is 107%, such high dependence on exports brings dollars but also makes a country vulnerable to global economic uncertainty. 
    • The U.S.’s EGR is 11.7%, Japan’s is 18.5%, India’s is 18.7%. Even for China, with all its trade problems, the EGR is 18.4%.
    • Most such countries, including India, follow an open trade policy, sign balanced FTAs, restrict unfair imports, and have a healthy mix of domestic champions and MNCs.
    • While export remains a priority, it is not pursued at the expense of other sectors of the economy.
    • The focus is on organic economic growth through innovation and competitiveness.

    Consider the question “While export is essential for the growth of the country, over-dependence on it and its promotion at the expense of the other sectors could do more harm to the economy than good. Comment.” 

    Conclusion

    With reforms promoting innovation and lowering the cost of doing business, India is poised to attract the best investments and integrate further with the global economy without increasing its dependence on export.