A vibrant debate is currently underway in India, and indeed across several emerging markets, about the pace of recovery from COVID-19, the extent of any permanent damage, and the nature of the policy response. But soon a more important debate will be upon us. What will drive growth in the post-COVID era? With public sectors confronting a mountain of debt, the fiscal will need to be reined in post-COVID across several emerging markets. Further, COVID is only likely to accentuate the prevailing export pessimism, as global potential growth is damaged and protectionist instincts are stoked.
In India’s case, what will it take to lift potential growth back to 7 per cent? To say more reforms are required is tautological. Instead, the choice and sequencing of reforms will depend critically on the growth philosophy India embraces. This is where Arvind Panagariya makes crucial contributions in his insightful new book, India Unlimited: Reclaiming the Lost Glory (hereafter Reclaiming), where he systematically reconstructs a path to higher growth.
It’s tempting to believe India’s size provides fertile ground for import substitution. But we’ve seen that movie before and know how it ends. Of the many contributions the book makes, perhaps the most significant is to underscore the necessity of export-led growth to India’s prospects. Indeed, no emerging market has been able to sustain 7-8 per cent growth for any length of time without relying on the Siamese twins of exports and investment.
To bolster this case, Reclaiming first clinically dismantles the underpinnings of export pessimism: Growing global protectionism and automation. Global merchandise exports stood at almost $18 trillion in 2017 (more than six times India’s GDP) with India commanding an export share of just 1.7 per cent (versus China’s 12.8 per cent). Therefore, even if the global market shrinks to $15 trillion — an unlikely prospect — India could double its exports by raising its global market share to just 4 per cent. The opportunity is huge. What about the challenge from automation? For many labour-intensive tasks, automation is still infeasible. Adidas, for example, produces only 1 million of its 360 million pairs of shoes in automated factories.
Reclaiming makes the often-forgotten case that the opportunity for labour-intensive manufacturing has not passed us by. In fact, the timing couldn’t be more fortuitous. Chinese real wages are rising, the workforce is shrinking and the embattled relationship with the US appears more structural than cyclical. This is India’s moment to integrate into the Asian supply chain by attracting multinational companies seeking a China hedge in the region.
What’s less appreciated — and what the book crucially links —is the endogenous pressure export-orientation will exert on India’s fragmented industrial structure. It’s estimated almost 60 per cent of India’s manufacturing workforce is employed in firms with five or less workers, and 75 per cent in firms with 50 or less workers. Productivity is much lower in smaller firms and it should be no surprise that wages remain low for a large swathe of India’s manufacturing workforce. A litany of small firms even in the labour-intensive sectors (apparel and footwear) has impeded India’s export potential in these areas. The book dramatically illustrates, based on Hasan and Jandoc’s 2005 work, that 92 per cent of workers in the apparel sector worked in firms with less than 50 workers. In contrast, 57 per cent of China’s apparel workforce were employed in firms with more than 200 employees. How can a 20-person firm from India compete with a 200-person firm from China in the global marketplace? Why are we surprised the apparel opportunity passed us by? Going forward, a renewed focus on exports should endogenously put pressure on firm size to grow, with implications for productivity and wages.
To be sure, generating export growth will not be easy. India’s 2002-2010 growth boom was underpinned by exports, which grew 18 per cent a year for eight years — twice the rate of headline GDP — but in an era of hyper-globalisation. Now, India will have to undertake the harder slog of increasing market share. Reclaiming lays out the package of measures needed: Avoiding the import-substitution trap, recognising an import tariff is equivalent to an export tax (the famed Lerner Symmetry Theorem); ensuring the rupee remains competitive (we have found the 15 per cent trade-weighted appreciation between 2015 and 2020 hurt export competitiveness); boosting free trade agreements and trade facilitation; creating autonomous employment zones (AEZs) where factors of production are less distorted. While factors market reform is crucial in the medium term, the AEZ approach appears most pragmatic in the near term given the narrow window of opportunity emanating from China.
Finally, as Reclaiming demonstrates, the linkages don’t end there. To the extent that exports can create manufacturing jobs, they will serve as a powerful magnet to attract labour away from agriculture. By 2030, agriculture will constitute less than 10 per cent of GDP while still employing 35-45 per cent of the workforce. The gulf in per-capita incomes between agriculture, industry and services will only widen. The medium-term strategy must be to create higher-wage jobs in industry and services for agricultural workers to migrate to.
A 1000-word essay is never enough to do justice to a book as rich as this. There are chapters on facilitating urbanisation, reforming the financial sector, transforming higher education and improving governance. My personal preference would be to front-load financial sector reforms, a sector that will have a crucial bearing on India’s prospects emerging from COVID.
What about concerns that economists are always fighting the last war? Given how COVID has accelerated technological disruption, a focus on low-end, labour-intensive manufacturing exports seem archaic? Almost dinosauric? It isn’t. While COVID will spawn creative destruction, it won’t alter the basic tenets that exploiting comparative advantage, boosting productivity through structural transformation and improving allocative efficiency are the keys to boosting potential growth and creating productive jobs. Here, there are no silver bullets or quick fixes. Only a well-thought-out and sequenced reform plan. One that Reclaiming lays out meticulously and comprehensively.
Chinoy is chief India economist at J.P. Morgan. Views are personal
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