The past few months have witnessed a spirited recovery in global trade, with some estimates suggesting that the recovery will gather momentum in 2018. Despite this buoyancy in global trade, India’s export performance has been quite modest, especially when compared to other major Asian economies.
Several Asian economies have reported faster export growth than India.
India’s exports grew at an average pace of 12% in the April-November 2017 period from a year earlier, slower than those of Vietnam and Indonesia, which grew at 24% and 16%, respectively.
While India’s double-digit growth in exports marks an improvement over fiscal 2017 when exports grew at slightly above 5%, there are several worrying signs in the export data.
The disaggregated exports data show that the rebound in India’s exports growth in the current fiscal year has been very uneven. Exports of two commodity-based sectors—petroleum products and iron and steel (and other metals)—have accounted for more than half of the export growth in the current fiscal year.
The most worrying part about India’s export performance is the growing divergence between labour-intensive sectors and other sectors. As the chart below shows, the aggregate export growth in labour-intensive sectors—textiles, electronic goods, gems and jewellery, leather, and agricultural products—has remained anaemic even as overall exports growth has picked up pace in recent months.
A key engine of job creation in the Indian economy has been malfunctioning.
The sluggish growth in labour-intensive exports comes at a time when global trade has picked up pace, and when currency levels have been relatively stable. This suggests that domestic developments such as the ham-handed implementation of the goods and services tax (GST) are to blame, wrote economists Dharmakirti Joshi, Adhish Verma, and Pankhuri Tandon of CRISIL in a recent note on exports. The economists argued that the implementation of GST and the associated glitches have hit the small and medium-scale enterprises the hardest, derailing growth in sectors such as textiles, gems and jewellery, and leather—where such enterprises dominate the supply chain.
But they also pointed out that while the clumsy implementation of the GST may have exacerbated the woes of these sectors in recent months, these sectors have been losing competitiveness over a much longer stretch of time.
What this suggests is that the real fix in reviving India’s export engine will lie in structural solutions involving ease of access to basic infrastructure such as roads, ports, and power as well as simplification of business regulations and labour laws. While a simpler GST structure would definitely help exporters, especially smaller enterprises, this needs to be followed up with more broad-ranging reforms.
The Narendra Modi government’s ability to deliver on its promise of job creation before it faces general elections in 2019 will hinge crucially on how far it is able to facilitate a recovery in key labour-intensive industries.
Source: Live Mint