To Fix The Exports Slowdown, Audit What India Imports, And Why

Productivity, infrastructure, research and development spending must be addressed to control flux in exports.

Image used for representational purpose. 

Yo-yo! It went up in September. It came down in October. Shorn of the seasonal appearance glowworms and fireflies on the data graph, India’s exports have languished for over five years.

The moot point is: Can a $2 trillion dollar economy sustain growth, leave alone achieve its potential if a fifth of the gross domestic product yo-yos like the proverbial ball on a string. The lament is about exogenous factors when the fault lies within. Yes, a fall in global trade matters. Equally, it should matter when global trade grows.

CRISIL research shows that between April and October, exports of Vietnam, South Korea, and Indonesia grew at twice the rate of India’s exports.

The conventional view serves to protect us from the painful job of thinking. There is a need to look beyond the usual suspects and conventional theories. What is critical is the domestic policy landscape. To comprehend and fix the underperformance in exports, it would be instructive to audit what India imports and why.

Noted economist and diplomat John Kenneth Galbraith said

A deep dive into data across two decades illustrates the depth and width of dependence and the state of competitiveness.

In 1996-97, India’s import bill was $39.1 billion with the United States topping the list and China at number 12. Ten years later, the import bill stood at $185 billion, with China topping the chart. In 2016-17, the import bill touched $384 billion — imports from China jumped from $756 million in 1996-97 to $17 billion in 2006-07 to $61 billion in 2016-17.

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Admittedly, a big chunk of imports falls into the category of the unavoidable — petroleum products and precious metals which in 2016 accounted for over $154 billion. It follows that the rest of the imports define export of domestic consumption.

Not Made In India

What are the big ticket entries in on the import basket?

Electrical And Electronic Equipment

(Photo: BloombergQuint)

Plastics

(Photo: BloombergQuint)

Optical Instruments

(Photo: BloombergQuint)

Furnishings And Fittings

(Photo: BloombergQuint)

Glassware

(Photo: BloombergQuint)

For a granular perspective, take a look at the calendar year data from the Massachusetts Institute of Technology’s Observatory of Economic Complexity, of what we are importing from where.

Take computers and phones.

• India’s telephone imports spiked from $156 million in 1996 to $1.5 billion in 2006 and spiraled to $10.6 billion in 2016.
• India’s import of computers shot up from $248 million in 1996 to $2.6 billion in 2006 and touched $ 5.4 billion in 2016.
• Over 67 percent of phone imports and 62 percent of computers imports were from China.
• For sure there are Indian outfits producing phones and computers — much of the ready-mix cooking happens with Chinese, Taiwanese and Korean ingredients.

For sure there are Indian outfits producing phones and computers — much of the ready-mix cooking happens with Chinese, Taiwanese and Korean ingredients.

What are the other big tag items on the list?

India imports broadcasting equipment and accessories worth $5.4 billion, semiconductors and integrated chips worth $ 5.1 billion, valves worth $ 2.2 billion, $1.6 billion worth blank audio media, $1.4 billion worth electric transformers, $1.3 billion worth air pumps, $1.18 billion of video displays, and $548 million worth light fixtures.

Talk About Scale

Availability and affordability — the primary drivers of exports — are enabled by economies of scale. Take a look at these. The Wolfsburg plant of the world’s largest automaker Volkswagen is spread over 6.5 square kilometres, roughly the size of Gibraltar, and rolls out 93 cars every hour.

Global electronics giant Foxconn’s plant at Longhua in China’s Shenzhen occupies three square kilometres, employs a quarter of a million workers and produces 90 million phones a year. Samsung, the global leader of screens, is setting up the world’s largest OLED plant in South Chungcheong province in Korea, to crank up over 2,00,000 units a month.

Countries craft policies to enable market dominance.

Computers worth $307 billion and telephones worth $ 255 billion were exported globally in 2016, roughly every second dollar went to China.

• In 2016, cars worth $673 billion were exported — 22 percent were from Germany.
• Of the $402 billion global exports of integrated circuits, $65 billion were printed in Singapore.
• The United Kingdom owns 20 percent of the $98 billion gas turbines export market.

Messed And Missed Opportunities

India could have been at the frontier of electronics and computer manufacturing. Remember the first computer came to India in 1955, whereas the first one in China came in 1958. And it is not that the thought of inducting technology and leveraging competencies did not occur to the policymakers.

In 1966 a committee led by Homi Bhabha, which was appointed in 1963 to look at technology induction with a strategic perspective, recommended the installation of a base for manufacturing electronics. In 1968, India set a ten-year goal for self-sufficiency in computer manufacturing.

Britain’s International Computers Limited and IBM from the US came into India in the 1960s — the push was countered by misplaced notions and an ideological putsch. India’s left-turn with Indira Gandhi, followed by George Fernandes’ about-turn, messed up the opportunity to get onboard the fab makers, chip companies, integrated circuit and printed circuit board units. The Asian Tigers captured the hi-tech hardware segment.

The next big opportunity came after the 1991 reforms — India was a rising software star and had opened up the telecom sector. India’s politicos were preoccupied with the clichéd debate about potato chips and microchips.

India migrated from no connectivity to 4G on imported network equipment and devices and failed to leverage market size.

Global Economics, Local Politics

Why India lags in exports is in many ways explained by what it imports and why. It is cheaper to import — both for producers and for users.

Imports are essentially an export of domestic consumption, jobs, and retrenchment of investment demand. This is driven by policies that affect productivity — yes, exchange rate management helps exports, but you can’t make a meal out of the pickle. Take the factors of productivity – land, labour, capital. Cost of capital is higher — interest costs are double, if not more, that of competitors. Availability of land is affected by location politics and affordability.

Take infrastructure. Cost of power or energy is higher, prone to outages as shown by an IDFC Institute survey, and unreliable, resulting in the growth of power back-ups and captive plants. India trails in supply chain logistics. In the UK, currently, Honda is able to run its Swindon plant with just an hour’s worth of parts on the production line. Can India offer such a seamless logistics chain?

Cost competitiveness demands scale. Rigidities in labour laws preclude a creation of scale. And this tells, on value creation.

Ride The Next Wave

The current flux in exports is a wake-up call. The barriers in the ecosystem — factors of productivity, infrastructure, research and development spending — must be addressed.

It is also essential to engineer success stories. Emerging trends in disruptive technology and the potential of higher consumption afford India a chance to ride the next wave of opportunities.

The installation of 5G affords a shot at leveraging market scale to create a base for manufacture and export of network equipment and devices. Expansion of metro rail can be a force multiplier for global construction and carriage building contracts.

The shift from fossil fuels to renewables has potential to create competitive competencies in components manufacture and off-grid systems. The ‘all-electric cars by 2030’ goal — which depends on the successful adaptation of ISRO’s lithium battery tech for automakers — could be a potential game changer. And there are more — systems for autonomous vehicles and whatever else rolls off the artificial intelligence red carpet.

Frequently the steps for the future stem from lessons of the past.

India has been successful, less by design and more by randomness, in leveraging the demand for automobiles to scale up exports.

Small cars and components fetched $10 billion in 2016. How did India get that right, or the creation of mega refineries to open up exports of refined fuel?

Success demands resetting policy from default to design mode — a strategic call on what to do and what not to do. Entry into capital-intensive sectors can be daunting for a resource-strained economy. Climate change commitments constrain entry into energy-intensive sectors. Opting for labour intensity may result in loss of competitiveness — so can technology help?

Public-private partnerships can be a way to bridge the gap in R&D, as validated by the US experience. There is also need to rethink the top-down architecture and allow states and local governments to promote special administration areas to lure investments.

The crux of competitiveness is efficiency. If India enables its economy to deliver global quality at Indian prices global competitiveness will follow.

(This article was first published in BloombergQuint.)

(Shankkar Aiyar, political-economy analyst and Visiting Fellow at IDFC Institute, is the author of Aadhaar: A Biometric History of India’s 12-Digit Revolution; and Accidental India.)

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