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Can boost exports even as global economy slows

Date: 20-08-2019
Subject: Can boost exports even as global economy slows
The world may or may not slide into recession, as many believe, but with US 10-year yields lower than those on 3-month paper and with China’s industrial production at a 27-year low, global economic prospects don’t look good. Not surprisingly, gold is up to a six-year high; and with the trade war between the US and China showing no signs of abating, indeed it has spread into more dangerous areas like theft of intellectual property, the global picture could get markedly worse. With such uncertainty, cross-border investments could also slow, further accentuating the slowing in GDP; though, with the US economy still growing at 2.1%, and unemployment at historic lows, there may possibly still be enough juice left to stave off the crisis.

At a time when the world is slowing, it is easy to conclude that there is little India can do in such a situation, especially when it comes to boosting its exports. That, however, is completely not true, indeed the US-China trade tensions gives India a historic opportunity to boost trade by, in the same way that China boosted its exports, by getting US firms to set up base here to meet global demand. As this newspaper has pointed out before, to cite the example of mobile phones where global trade is galloping, China-based production centres of firms like Apple account for half the global trade in mobile phones; and while Vietnam is snapping up several producers looking to diversify out of China, there could be a big opportunity here for India. Indeed, even when global trade was doing much better than it is today, India managed to miss the boat; in the last four years, India’s overall exports of all good grew just 0.2% a year in value terms.

Between 1990 and 2018, while India’s exports grew just 18 times, Vietnam’s rose 102 times, as a result of which its exports are 75% those of India today; these were a mere 6% in 1960. In other words, it is not how fast global trade is growing that is critical, it is seizing the opportunities this throws up.

Doing so, though, requires India completely reverse its current policy that is focussed on production for the local market since global biggies like Apple and Samsung are unlikely to move their entire production base to India for just the local market; India’s local market for smart phones is just $25bn as compared to the global export market of $280-300bn. But getting global firms to relocate to India is not going to be possible when Indian corporate taxes for foreign firms are 43.68% while Vietnam’s rates vary between 10 and 20%.

Similarly, India has poorer infrastructure, higher electricity costs etc; ideally, any export policy needs to find ways to address this. India’s labour laws, similarly, are a big source of frustration and low productivity; it is difficult to see how India can boost its productivity unless this is fixed. How important it is to get large MNCs to use India as a production base is best seen from the fact that the bulk of global trade takes place between companies; where the MNCs decide to locate their operations decide how much of a share each country gets. Anyone who doubts this needs to see just how India’s exports of automobiles grew once Suzuki took control of Maruti and decided to use the India operations as part of its global value chain. Unless India is able to sharply increase the share of global FDI it gets, especially in the manufacturing sector, it is difficult to see how its exports can do well on a sustained basis.

Source: financialexpress.com

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