Rising Exports with Declining Domestic Value Added
INDIA’S trade deficit has increased in the recent months with double digit growths in both exports and imports. The trade deficit was a result of imports growing at a faster pace than that of exports. The year on year growth of exports and imports in March 2022 was roughly 20 per cent and 24 per cent respectively leading to a widening trade deficit. This is primarily because of rise in the import bills due to increase in international prices of petroleum, oil and lubricants (POL) and also of non-oil and non-gold and silver imports such as commodities and metals. On the other hand, cumulative exports in 2021-22 crossed the 400 billion US dollars target in March 2022.
In the first eleven months of the financial year 2021-22 there was a sharp growth in exports of POL, engineering goods, electronic goods and gems and jewellery. The rise in exports value can also be attributed to increases in oil prices, because in February 2022 exports of POL increased by 88.2 per cent in US dollar and non-POL exports increased only by 18.9 per cent which was also the lowest year on year growth of non-POL commodities exports in 2021-22. Within merchandise, decline of exports was recorded in pharmaceuticals, iron ore, spices, oil seeds and handicrafts. In fact, the rise in exports was largely driven by rise in oil prices rather than of increase in volumes of exports. For imports also the recent rise in import bills can be attributed to sustained increase in crude oil prices. There has been significant growth in services trade in the post-pandemic period with records of high services growth since December 2021.
DECLINING DOMESTIC VALUE ADDED
Long term trends of foreign trade in India however raise some important concerns. Considering a longer period, merchandise exports as a share of GDP increased till 2012 and then it shows a declining trend. In spite of the fact that the composition of exports has undergone some change, meaning the share of textiles and raw materials within the export basket has declined and medium and high-tech exports as a share of merchandise exports have increased in recent times. But it is also important to note that overall share of manufacturing in merchandise exports has declined over the years. Also merchandise exports to high income countries as a share of total merchandise exports declined in recent years.
But apart from these broad trends in foreign trade what seems to be significant in the globalised world is that gross export figures overestimates the real contribution of a country in the global production process. In fact, a final product which is being exported by a country may not actually be fully produced in that country. Instead a small part of total value may be added in that country while the rest mat be imported from other countries. More countries in today’s world are engaged in producing components or performing particular tasks for the overall process of production rather than producing the whole of the product. This is the architecture of current global value chains and due to increased interdependence in a globalised world, intermediates and components cross several borders before being assembled in the final product. This simply implies that what we have exported is not what we have produced rather the import content of exports is gradually on the rise.
There are ways to measure domestic value added in gross exports and such exercise particularly shows that in case of India domestic value added share in exports fell sharply in the recent decades. It means that even if exports are increasing it would not create enough jobs if the import content of the exports is rising. In other words, we might be selling more goods to the world but if the share of our value addition in those goods suffers a decline then such rise in exports would not be employment augmenting. In fact, in machinery, chemicals, basic metals, furniture and other manufacturing, rubber and plastics our exports grew but accompanied by a sharp fall in value added growth in these sectors signifying a hollowing out of manufacturing in these sectors. It is therefore important to increase domestic value addition in gross exports otherwise the leakage in value added in the form of rising import content actually reduces the employment potential of the economy.
In the aftermath of financial crisis and also during the pandemic major exporting countries of the world faced supply constraints and rebalancing of growth particularly focusing on domestic market emerged as the new trend. This was also reflected in the contraction of global value chains for the time being and economies tried to gear up their domestic demand through several doses of stimulus packages. In the wake of recovery for the sake of grabbing a larger share of the global market many developing countries strategise in offering incentives to global investors and manufacturers to relocate production in respective countries.
India’s ‘China plus one’ policy and follow up schemes such as Production Linked Incentives (PLI) for about 13 sectors is one such strategy to incentivise research and application of new technologies, increase scale of operation to reduce unit costs and also to generate domestic production and cut down imports. But these incentives are minimalist in nature and stricter norms need to be put in place ensuring output targets to discipline the industrial class, else it is very much likely that this may also lead to another form of cronyism funded by public money. In spite of such schemes in place the share of China in our merchandise exports is as high as 16.5 per cent. Our import dependence on China is about 48 per cent in goods such as personal computers, parts of telephonic and telegraphic equipment, electronic integrated circuits, solar cells, urea and other chemicals. In 2020-21 the total imports from China was to the tune of 65 billion dollars, out of which 39.5 billion dollar accounts for imports in goods and commodities that come under PLI scheme. This implies that simply sector specific incentives are not enough and India has to go a long way to emerge as another manufacturing destination for global producers.
Remember that India’s share in global manufacturing value added increased from 1.1 per cent to 2.8 per cent during the decade 1995 to 2015 and during the same period China’s share of global manufacturing increased from less than 5 per cent to 25 per cent. During this period, China not only emerged as the ‘factory of the world’ ranking second biggest exporter of low-skilled labour intensive manufacturing but also emerged as the fourth largest exporter of medium-skill manufacturing and top exporter of high-skill innovation products. The success of exports primarily depended on building productive capabilities that grew on the basis of declining inequality and expanding domestic market and also through engaging with foreign capital and technology strictly in terms of national interests. Similar set of policies of calibrated engagement with global market and sequencing of productive capacities can also be seen in different political settings in late industrialisers of Asia.
In a globalised world, production facilities of developing countries tend to converge with international division of labour set by the global MNCs. The specialisation is generally articulated through global production networks where producers of different countries specialise in manufacturing components of a final good. This implicitly fixes tasks for countries according to their available resources and creates disincentives in moving out from assigned structures. This eventually reduces industrial capabilities of developing countries and makes them perennially dependent suppliers to MNCs of the world. Expanding domestic market, incentivising domestic value addition, creation of employment and pushing frontiers of technology in selected sectors, increase high value added exports – all these demand comprehensive strategies for industrialisation. It cannot be left to the spontaneity of markets rather State should intervene with defined goals of not only incentivising exports and output but also for generating decent employment and punish those who fail to meet the defined targets while availing subsidies from State exchequer.