Top politicians of India’s ruling coalition boast that China's economic crisis should be viewed as an opportunity for India to capture a bigger global export share in manufacturing and grow faster. With India being the only BRIC nation growing by 7% plus, it's not long before India will overtake China economically, they argue.
In 2014, China's GDP at current prices was US$ 10.38 trillion - roughly five times of India's GDP at US$ 2.04 trillion. Even if India grows at CAGR of 10% (its best case scenario) while China 3% (its worst case scenario), it won't be able to overtake China before 2038 counter the critics.
Besides, India's record of missing global opportunities is far more impressive than not missing them. Yet, these politicians have a chance to make the claim right. India can take on China, but not by blindly following the now obsolete export-led growth model that made China the world’s factory.
Because India is not China, and today's world is quite different from what it was, when China embarked on its export-led growth path. India is a multi-party democratic country with all kinds of pulls and pressures that make effective implementation of Chinese growth model difficult, if not impossible.
Export led growth strategy - aided by artificially undervalued currency – won’t work when world trade grows at slower rates than world GDP. And each country is relying on currency devaluation to capture a bigger slice of sluggish global demand. Mega trade pacts like TPP and TTIP will further deprive India from accessing overseas markets.
Moreover, India can't compete with LDCs in low-cost-labour-intensive manufacturing for long. Its labour cost is lower than China but far higher than say countries like Bangladesh, Ethiopia or Myanmar. If not anything else, India’s badly conceived trade pacts will kill low-tech manufacturing that depends upon labour cost advantage.
Well, it doesn't make much difference to India’s growth ambition as there's not much money left in low-tech manufacturing such as leather foot wear or apparel making. Instead, it's the pre and post manufacturing services that capture maximum value in global value chain compared to actual manufacturing that accounts for as low as 3%. Pre-manufacturing services comprise activities like research and development, design and testing. Post-manufacturing services capture value through branding, marketing and retailing.
India has a handful of strong brands and record of its service providers barring some exceptions is not very impressive. Moreover, creating and building brands is a long drawn process that India can't afford either in terms of time or money if it really wants to overtake China any time soon.
Many of India's key exports e.g. apparels are nothing but low-margin contract manufacturing that does not make much money for manufacturers because manufacturers don't own the brands. A suit being retailed for US$ 2500 in Tokyo or London gives just US$ 250 to its makers in Tirupur. That’s also the key reason why top Indian manufacturers of consumer goods want to sell in domestic markets rather than export despite all kinds of incentives by government.
Ports and logistics related inefficiencies further squeeze exporters’ margins. Moreover, India also has to deal with manufacturing through robotics and 3D printing that are going to take away its comparative advantage that comes from possessing abundant supply of cheap labor. Low skilled - low productive labor will take India only so far.
India should rather focus on high value jobs in pre-manufacturing services like research, engineering and design by capitalizing on its comparative advantage - actual or potential - given the availability of low cost technically qualified manpower. Internet of Things is another big opportunity for India to tap. Only then we can even think of overtaking China.
That in turn calls for overhauling (and not incremental improvement) of education system which is focused on rote learning and scoring high marks in exams, and not on promotion of questioning and critical thinking – prerequisites for innovation. Further, government should focus its energy on five or six strategic sectors that have strong backward and forward linkages with other sectors. These sectors in my opinion are: Automobile, Defence, Housing & Infrastructure, Pharmaceuticals, Electronics, and Agro-processing & Retail.
India’s automobile sector depends on duty protection. Defence production is so shackled that private sector participation is nil. Infrastructure sector is marred by under-bidding and difficulties in getting land and environmental clearances. Housing sector is a good example of how lack of effective regulation can limit the growth potential of a sector. Unscrupulous builders are taking their customers for a ride without any accountability. That reduces its multiplier effect for India’s overall economic growth.
Pharmaceutical sector depends upon on generics. With the US pushing for tighter IPR regime through data exclusivity and patent linkages under its mega-regional trade pacts, it would be difficult for Indian pharma companies with poor R&D base. Electronics manufacturing is hampered by inverted duties - lower duty on finished products compared to higher duties on components.
Agriculture and food-processing sector remains largely untapped because of poor regulation and poorer compliance that impedes growth of manufacturing (e.g. demand of equipment and chemical fertilizers) and services (e.g. retailing and transportation).
With right policy environment, these sectors can grow at a CAGR of 20% plus, and pull up a number of upstream and downstream industries without any government support.
Double digit growth will require an ever growing number of entrepreneurs. Government can help unleash India’s animal spirit by making it easier for first-time-entrepreneurs to start and run businesses. This will require actions beyond getting higher rank on ease of doing business even if improvement in thecountry's ranking is genuine. And one thing that is needed from Modi Govt. the most is improvement on contract enforcement.
Going forward, India will not much benefit from access to global markets primarily because of slower expansion of world trade, and also because of its being blocked out in mega-regional trade pacts like TPP. It makes sense for India to tap its large but somewhat fragmented domestic market.
Given the size and complementarities of its provincial economies, an early implementation of GST will create a pan-India common market of $2 trillion GDP and 1.2 billion people — a big attraction of any investors — and add as much as 2 per cent to GDP by reducing transaction cost and freeing up interstate trade and commerce.
Women labor force participation in India is a little over 30% which compares badly with China at 70%. IMF estimates, increasing women work force participation to the level of men, will add as high as 27% to India's GDP.
Increasing participation of women in the economy supports it from both supply and demand side. From the supply side, it does so by adding to the size of the workforce, promoting division of labor and greater specialization. From the demand side, it supports the economy by generating additional demand for a range of products and services, for instance, bags, beauty care and cosmetics, food & beverage, clothing and other life style products and services.
It would help if government can make it safer for women to go out and work.Indian corporate too need to make their workplaces more conducive to women employees. That will give a real boost to India's growth momentum.
World trade in services has been growing faster than merchandise trade. Yet,India remains hesitant in joining the pluri-lateral agreement on trade in services (TISA) that can open up immense possibilities for pushing export of non-IT services and reduce over-dependence on remittances and IT exports for managing current account balances.
Given the linkage of FDI and exports through regional and global production networks, India needs a bolder FDI policy. An overcautious approach of raising FDI caps - from 0% to 26% to 49% to 51% - won’t work. Tax terrorismincluding the practice of retrospective taxation has to end once and for all to really turn India into an attractive investment destination.
Even by taking the above steps, there is a long way to go before India overtakes China, but let us at least give China a serious fight. Right policy mix can help India do far better than it's doing currently despite the limitations imposed by its democratic polity.
A shorter version of this post has been published by The Hindu Business Line: We can’t export our way to growth. Please share your thoughts even if you completely differ from me.
Look forward to your comments and suggestions on how to help India achieve its true economic potential. If we're not connected, it's time to get to know each other. The chart is from The World Bank. You can follow me on twitter @RiteshEconomist You may like to also check Swaminathan S. A. Aiyar on why China will fail while India will rise?