India's exports are currently 20 per cent of GDP. For the same share in GDP, exports should then cross a trillion-dollar mark for a $5 trillion economy. This means an almost doubling of the current $537 billion export figure (goods and services) in the next five years. What actions will take us there?
A look at the products we export and their relative importance in the world trade basket offers insights into what to do. Our current share in world merchandise exports of $18 trillion is 1.8 per cent. But this share varies for major product categories. To understand, we divide all products into two categories: A and B.
Category A products account for 70 per cent of world trade while Category B products count for 30 per cent. So any country focussing on Category A products has greater chances of raising exports. The problem is we are weak in Category A products and strong in Category B ones. And this is the core issue we need to address. A look now at the two categories.
Category A products include electronics, computers, telecom, factory machinery, and high-end engineering products. India's global share in such products is 0.4 per cent. Frankly, we have less capability in this category.
India has a high global share in Category B products such as small diamonds (19.8 per cent), jewellery (12.9t), rice (39.3 ), buffalo meat (19.1), shrimps (17.7), and textiles (4.5 per cent). Medicines, auto components and marine products also form part of this group.
The small size of the Category B basket limits the potential for growth. Most of the category B products, being labour-intensive and low-technology, are prone to competition from low-cost countries.
Both categories need different approaches to increase exports. Let us use two metaphors 'Ant's way' and 'Bird's way' to describe the distinct development path.
These come from the Varah Upanishad, which refers to the two main pathways to reach the top of a karma tree. Ant's way (pipilika marg in Sanskrit) is a slow but sure way. Bird's way (vihangam marg) is used in exceptional circumstances. Here an external force pulls a person to the top in one flight like that of a bird.
If a significant share in trade is our goal, we need to follow both the ways. Bird's way for Category A products and ant’s way for category B products. Let us understand how to implement these.
Bird's way: Since we do not have enough expertise in Category A products like electronics, computers, telecom, factory machinery, etc, we need external help to ramp up production and exports. For this we need to invite large global firms to relocate, manufacture and export from India.
Many global firms already want to relocate production because of new tariffs, increased protection across borders, and hassles of the trade war.
Few significant investments have gone to Vietnam. But most firms look for large domestic markets as the most critical condition for relocating. India with large markets, high skill base, and presence of R&D networks can be an ideal location. We need to offer a robust incentive package to persuade global manufacturing firms in strategic sectors to relocate.
Such firms will act as anchor manufacturers and will bring along component suppliers, so essential for end-to-end manufacturing. Soon, Indian ancillary firms will become part of this ecosystem leading to growth in jobs and exports. China followed the bird’s way in the early 1990s to become the factory of the world.
Ant's way: Here, the focus is on increasing competitiveness of the existing Indian exporters so they can export more. A five-pronged strategy captures the essence of ant’s way:
Create product design and development studios: The MSME Ministry facilitates many centres that assist small firms in developing new prototypes. We need to scale these to include the latest tools and also increase their number. This will help innovation-driven small firms and reduce dependence on import of daily-use goods.
Set up product quality testing labs: Many small firms are not aware of quality standards/certifications. They get a shock when products are rejected. India needs to set up more globally accredited testing laboratories. And, enhance capacities of the existing laboratories.
Open large product exhibition centres cum markets: China has many sizeable wholesale markets where local firms display their products to a large number of foreign buyers.
Such exchanges will help small firms to showcase their products and get orders without travelling abroad.
Provide actionable trade intelligence: Simple information like which country is buying what product at what price helps. Data suggests that a firm exporting two similar category products (for example, boy's shirts and men's shirts) has three times the turnover than the firm shipping only one product (boy's shirts).
Data also reveal that a firm exporting one product to three countries has five times the turnover than a firm exporting to one country. With bits of such information, most firms can readily scale turnover and earn more money.
Reduce cost of doing business: This can be achieved by improved access to capital, quick refund of GST, online regulatory approvals, low duty on inputs, promoting e-commerce exports from Tier 2/3 cities, and so on.
While the bird's way would help in the quick ramping up of production and export of both goods and services in which we lack expertise, the ant's way would create a robust economic base, empower entrepreneurs and create a large number of jobs. We need to act on both to reach a $5 trillion economy.