From UPSC perspective, the following things are important :
Prelims level : Not much
Mains level : Paper 3- Importance of export for growth
The article highlights the argument made by Arvind Panagaria about the primacy of export for the progress of the country in his new book India Unlimited: Reclaiming the Lost Glory.
What will it take to achieve 7 per cent growth rate
- A vibrant debate is currently underway in India and across several emerging markets about growth and the path economy should take.
- In India’s case, to say more reforms would be repeating the same thing.
- Instead, the choice and sequencing of reforms will depend critically on the growth philosophy India embraces.
- This is where Arvind Panagariya makes argument in his new book, India Unlimited: Reclaiming the Lost Glory, where he systematically reconstructs a path to higher growth.
Necessity of export-led growth
- The book by Arvind Pangariya underscores necessity of export-led growth to India’s prospects.
- No emerging market has been able to sustain 7-8 per cent growth for any length of time without relying on the exports and investment.
- 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 per cent (versus China’s 12.8 per cent).
- 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 per cent.
- The opportunity is huge.
Opportunity for India
- The opportunity for labour-intensive manufacturing has not passed us by.
- 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 multinational companies seeking a China hedge in the region.
Why size of the firm matters
- The book crucially links the endogenous pressure export-orientation will exert on India’s fragmented industrial structure.
- It’s estimated almost 60 per cent of India’s manufacturing workforce is employed in firms with five or less workers, and 75 per cent in firms with 50 or less workers.
- Productivity is much lower in smaller firms and it should be no surprise that wages remain low for a large swathe of India’s manufacturing workforce.
- The book illustrates that 92 per cent of workers in the apparel sector worked in firms with less than 50 workers.
- In contrast, 57 per cent of China’s apparel workforce were employed in firms with more than 200 employees.
- Going forward, a renewed focus on exports should endogenously put pressure on firm size to grow, with implications for productivity and wages.
Ways to generate export growth
- By avoiding the import-substitution trap.
- Recognising an import tariff is equivalent to an export tax (the famed Lerner Symmetry Theorem).
- Ensuring the rupee remains competitive.
- Boosting free trade agreements and trade facilitation.
- 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.
- The gulf in per-capita incomes between agriculture, industry and services will only widen.
- The medium-term strategy must be to create higher-wage jobs in industry and services for agricultural workers to migrate to.
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 lays out meticulously and comprehensively.