A services-led export strategy holds appeal but only up to a certain point

India’s economic story has always been led by robust consumption, with net exports acting as a drag.
India’s economic story has always been led by robust consumption, with net exports acting as a drag.

Summary

  • Indian policy can’t afford to focus on service exports at the cost of our current employment-oriented manufacturing thrust. Recent arguments for focusing on high-value services seem far-fetched in their expectation that such exports would act as a growth engine.

The recently announced interim budget resonated with the government’s aim of making India a developed economy by 2047. Instead of going for populist policies, the budget focus on infrastructure and R&D will go a long way in making India a manufacturing hub. The budget has been a confluence of measures aligning with the broad vision of the government to increase the contribution of manufacturing to 25% of GDP by 2025. Greater investment in physical and digital infrastructure will go a long way to make India an important player in global supply chains.

Notably, the last decade witnessed the share of manufacturing in India’s real GDP move up from 17.3% to 17.7%. Meanwhile, the share of the agriculture sector declined from 16.5% to 14.4% and that of the services sector rose from 51.1% to 54.6%, of which an 89% increase is attributable to the financial, defence and public administration sub-sectors. This is not surprising, given that the government has taken several initiatives for the financialization of savings and modernization of Indian defence, among other steps.

Against this background, we would like to introspect on the suggestion made in the recent book, Breaking the Mould: Reimagining India’s Future by Raghuram Rajan and Rohit Lamba, that India should focus primarily on high value-added services rather than low-value-added manufacturing exports to boost its exports.

Interestingly, notwithstanding the brouhaha over export-led growth, the share of average weighted contribution of private consumption to GDP growth has been at 55.6%, while that of net exports has been at a negative 9.8% (its positive contribution being outstripped by imports) for the past two decades ending 2023-24. Thus, India’s economic story has always been led by robust consumption, with net exports acting as a drag.

Coming back to the Rajan and Lamba argument, at the onset, we must congratulate them for taking the time to put forth suggestions on how India could shape its policies. However, the arguments made might be too far-fetched in terms of pushing service exports as an engine of growth.

Firstly, India’s labour market does have a large informal component and thus any attempt to push service exports will militate against the low-skill lower end of the mass-manufacturing value chain and thereby deepen the divide.

India’s manufacturing exports comprise 34% of total goods and services exports, and are catching up with the country’s service exports share at 42%. Indian exports of leather, gems and jewellery, plastic and rubber, and textiles are primarily labour- intensive and the share of low-skill manufacturing exports (leather, textiles, etc) in overall exports is declining. This raises a serious need to reflect on the composition of manufacturing-sector exports and provides an opportunity for India to become an export powerhouse in low-skill manufacturing sectors such as leather, clothing and footwear, which provide mass employment. There is no harm in doing what works in favour of our mass population.

Secondly, the share of manufacturing employment in India (International Labour Organization’s latest available data) is 11.7% of total employment. This is lower than in Asian developing counterparts like Vietnam (21.4%), Thailand (16.0%), Malaysia (16.7%), Indonesia (13.9%), Bangladesh (14.4%) and China (28.7%), thus making a clear case for pushing manufacturing-sector growth further to generate mass employment.

Thirdly, and most importantly, the aspect that is paradoxically missed by our fellow economists and is not revealed by traditional trade statistics is the domestic value addition generated by exports of a good or service in a country. When we look at the value added by manufacturing in service exports of India, it is merely around 3% (in 2018 as per the OECD’s TiVA origin of value added in gross exports database). However, value added by services in the manufacturing exports of India increased to around 22% in 2018 from 13% in 1995, indicating the ‘servicification of manufacturing.’ In terms of actual numbers, services embodied and embedded in Indian exports of manufacturing goods have increased more than eight times since 2000. This ‘servicification’ is a global phenomenon, as the same has changed over 3.5 times for the Organization of Economic Cooperation and Development (OECD) since 2000. More and more companies are now using labour services in their processes. Ignoring this trend would only be at our own peril.

Fourthly, digging deeper shows that the wholesale and retail trade contribute the most to value added in manufacturing exports, followed by transportation and storage. However, their contribution in terms of value addition in total exports is significantly low when compared to information and communication. Thus, these components of service exports (i.e., wholesale and retail, transportation and storage) should be focused upon, so that our manufacturing exports also benefit.

Moreover, this will clearly help India expand its share of global value chains (GVCs). The latest data for 2020 shows that India’s integration with GVCs through forward participation (i.e., domestic value added in foreign exports as a share of gross exports by a foreign exporting country) has become higher than the country’s backward participation (i.e., foreign value-added share of gross exports by the value-adding origin country).

There is no denying the fact that service exports have sometimes acted as a cushion amid the recent sluggish demand for our merchandise exports, but this does not mean we ignore manufacturing exports altogether. Data reveals that India has a comparative advantage in the case of textiles and clothing, consumer goods, chemicals, footwear, ores and metals.

Services and manufacturing should complement each other and not act as substitutes, as they are often assumed to be.

The government has been making substantial efforts to ensure sustainable manufacturing-sector growth and employment generation. The ‘Make in India’ initiative, Stand-up India, Startup India, National Logistics policy, Indian Footwear and Leather Development Programme, PM MITRA, FAME India and other programmes all are playing distinct roles in transforming the manufacturing sector. The Production Linked Incentive scheme has ensured that MSMEs are moving up the value chain, as recent RBI data also shows.

We thus ask a simple question: Why abandon such initiatives that are currently paying off?

These are the authors’ personal views.

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