4 min read.Updated: 09 May 2022, 10:34 PM ISTV. Anantha Nageswaran,Prerna Joshi,M. Rahul
India Inc must rely on R&D-driven competitiveness rather than tariff barriers or a weaker currency
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In fiscal year 2021-22, India’s exports did rather well. They were nearly $420 billion, raising hopes that India was putting behind it a decade of export under-performance. For India to be a $5 trillion economy by 2024-25, we need to export at least $1 trillion worth of goods and services, as exports contribute around 20% to overall gross domestic product (GDP). What would it take to sustain India’s export growth? We explore some avenues.
To export $1 trillion by 2024-25, it is imperative to boost export competitiveness. Though competitiveness is often observed through changes in global market shares, a country may mask its underlying competitive weakness by manipulating exchange rates—through devaluations, for example, or by maintaining a weak currency. In the case of India too, studies have pointed to the exchange rate as an important determinant of exports and our trade balance. However, it is not the key determinant. During 2002-2007, our merchandise exports grew at a healthy annual growth rate of around 25%, while the 36-currency export-weighted real effective exchange rate (REER) appreciated by 1.2% per annum (Veeramani, 2008). Similarly, between 2011 and 2021, while the Chinese yuan appreciated by around 57% relative to the Indian rupee, our merchandise trade deficit increased by around 78% with China. So there was no improvement in our trade balance with China despite rupee depreciation versus the yuan, implying there are other forces at work affecting export performance.
Other than the exchange rate, factors such as tariffs and quotas and non-tariff factors like infrastructure, research & development (R&D) expenditure, innovation, the ease of doing business and efficiency of logistics play a critical role in determining export competitiveness.
Lack of R&D investment remains a concern for India, as the share of gross domestic expenditure on R&D in GDP stood at a low 0.65% in 2018, as against 2% in China, and that too driven mainly by the government with a share of 56%. Indian businesses account for just about 37% of national R&D expenditure, compared to 68% in other large economies and 77% in China. This can explain why India—once nearly self-sufficient in pharma inputs in the 1990s—is critically dependent on imported inputs today.
Research suggests that weak protection of intellectual property (IP) rights leads to low returns on innovation, thereby disincentivizing companies to innovate. India ranked 43rd out of 55 nations in recent IP rankings. On the Global Innovation Index 2021, India stood at No. 46. While an improvement from our earlier rankings, we fell short of China, which was ranked 12th.
Given that frontier technologies represent a $350-billion market expected to reach over $3.2 trillion by 2025, as per UNCTAD estimates in 2021, Indian industry needs to urgently invest in technology, corporate R&D and product innovations to be competitive and make India a global technology and innovation leader. To reduce logistics cost and make supply chains efficient, the country must digitize supply chain operations, leverage disruptive technologies such as blockchain and Internet of Things, and move towards green supply chains, even as we enhance skill development.
It is also observed that none of the export commodities in which India has a high comparative advantage is among its top exports in terms of share and value. India holds a comparative advantage in mainly labour-intensive commodities such as cotton, carpets and other textiles, etc, while Indian exports more capital-intensive products such as transport equipment, machinery and mechanical appliances. This is reflected in our declining share of labour-intensive exports over time, raising concerns for a country that is labour abundant.
As for services, the export specialization index suggests that we hold relative export competitiveness with major economies in computer programming, consultancy and information services, which are our largest exported services. However, export competitiveness does not exist for sectors like health and education, despite India’s inherent potential in providing cost-effective, high quality services in these areas; this is reflected in the negligible share of these services in total service exports.
India’s private sector needs to acquire specialization in products in which it is competitive. India needs to climb the rankings of the Economic Complexity Index. The higher this score, the better the export performance. In the Harvard Growth Lab’s ‘Atlas of Economic Complexity’, India’s score in 2019 was 0.46. It was 0.32 in 2000. The country’s global ranking has remained unchanged.
The Indian private corporate sector has several advantages as it enters a new decade. Its balance sheets are healthier than before. Its profitability is high while Indian corporate tax rates and real borrowing costs are low. Space is opening up for India to exploit avenues created by myopic policies pursued by some other nations. It is time for Indian businesses to aim bigger and lengthen their horizon. The focus has to be on win-win: pay small suppliers on time, help the pie of prosperity grow bigger, and focus on competitiveness gains through investment in research and technology, rather than through a weaker currency and tariff protection.
These are the authors’ personal views.
V. Anantha Nageswaran, Prerna Joshi & M. Rahul are, respectively, chief economic adviser, and Indian Economic Service officers serving the Government of India