Labour-intensive exports need a policy push
The government of India has taken several measures to boost exports in its midterm review of foreign trade policy 2015-20. Apart from incentives for specific sectors such as ready-made garments and footwear, it also allowed duty-free procurement of the inputs needed for exports on a self-assessment basis. Further, a new logistics division has been established in the department of commerce to coordinate development in the logistics space. These measures, along with recent changes in the goods and services tax, are likely to help the export sector.
However, at a broader level, India needs structural changes to be able to attain higher and sustainable exports growth in the medium to long run, particularly in labour-intensive sectors. At a time when the global economy is witnessing a synchronized recovery, the latest gross domestic product data showed that India’s exports went up by just 1.2% in the second quarter of the current fiscal. According to the World Trade Organization (WTO), merchandise trade volume in 2017 is expected to grow by 3.6%, compared to 1.3% in 2016.
Exports are an important driver of economic growth and will also help create much needed jobs for India’s growing workforce. They played an important role in transforming countries such as South Korea and China in recent decades. Therefore, India will need to work on increasing competitiveness to expand its exports share in the world market.
It is often argued that India stands to gain as labour-intensive manufacturing is moving out of China due to rising wages and an ageing population. But this is not happening in a big way, and India is losing out to other Asian countries such as Bangladesh and Vietnam. In an article published in these pages earlier this week, economists at CRISIL showed that India’s “revealed comparative advantage”, an indicator of competitiveness, in some of the labour-intensive sectors has actually declined over the past decade. Vietnam and Bangladesh are becoming more competitive and are capturing the low-end manufacturing space being vacated by China. India will need to swiftly take necessary measures in order to improve its position. The latest Economic Survey (2016-17) also highlighted how India is losing out in labour-intensive sectors like apparel and footwear, and why it is important to focus on these sectors. For instance, apparel is 80 times more labour-intensive than the auto sector. India will have to work on multiple levels to increase its competitiveness.
First, it will need to improve logistics to increase efficiency, both in terms of the time and costs involved. The trade policy review shows that the government is addressing this issue.
Second, the government will need to move forward with reforms in the factor market. India has a large number of small enterprises, which are not in a position to attain economies of scale and compete in international markets. As the Economic Survey highlighted, Indian firms in the apparel and leather sectors are smaller than those in China, Vietnam and Bangladesh. The reason for this is regressive labour laws. Firms in labour-intensive sectors will need more freedom to operate. Similarly, more flexibility in land acquisition will also help the manufacturing sector.
Third, while there is a threat of rising protectionism, India needs to be prepared to protect its interests without compromising on its open trade policy. India has always supported rule-based multilateral trade negotiations under the WTO. But as progress has been limited in recent years, it should also look for opportunities to reduce trade barriers at the regional and bilateral levels.
Fourth, it will be important to keep the currency competitive. This is not to suggest that India needs an undervalued currency, but the Reserve Bank of India (RBI) should not allow the rupee to appreciate sharply. The RBI has done well in recent months to absorb a significant amount of the foreign exchange flow by building reserves to keep the rupee in check. However, the 36-currency exports-based real effective exchange rate is still showing significant overvaluation. As we have argued in these pages before, now that India has adequate reserves, policymakers should reassess the kind of funds it needs. This will not only assist in keeping the rupee competitive and stable but will also help in conducting the monetary policy.
To be sure, the government is working on increasing the ease of doing business, which should also help India’s exports. Policymakers would do well to increase the pace of reforms as challenges on the export front may increase owing to the growing threat of protectionism and rising automation.
What can the government do to promote labour-intensive exports? Tell us at email@example.com
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