Author: Yash Prakash Yadav, Bachelor of Law (LL. B) from Campus Law Centre, Delhi University
The process of structural change, in terms of transferring large surplus of labor from agriculture to non-agriculture has been very slow in India. India has been skipping the intermediate stage of industrialization and directly moving to the final stage of service sector led growth. But one must be concerned after looking at the examples of history which make it very clear that industrialization plays a significant role in the process economic development of a country, which includes sustained economic employment generation and poverty reduction.
Given the India’s comparative advantage in labor intensive activities there are two groups of industries that hold the greatest growth potential.
- First, India’s significant unexpected export potential in India’s traditional unskilled labor-intensive manufactured products such as textiles, clothing, footwear, toys and so on.
- Second, India has huge potential to emerge as a major hub for final assembly in a range of products, where production process is internationally fragmented and is mainly controlled by Multinational Enterprises (MNEs) within their global production network, that is GPNs.
Research by eminent economist has led to identification of 7 product groups where GPNs and fragmentation-based international trade is most relevant, and these product groups are referred as network products (NPs). They are:
- Offices machines and automatic data processing machines.
- Telecommunication and sound recording equipment.
- Electronical machinery
- Road vehicles
- Professional and scientific equipment
- Photographic apparatus.
Rapid growth of fragmentation (internationally), notably since 1980s, has resulted in higher growth of trade in parts and components compared to trade in final goods.
Distinction: Between intermediate goods and inputs from fragmentation-based parts and components.
The latter appears longer along the production chain and forms a layer between primary inputs and final consumer goods. Unlike in the case of primary inputs and conventional intermediate inputs, international exchange of fragmentation-based parts and components does not occur in organized markets. Trade in fragmentation-based parts and components generally takes place through a network of inter and intra-firm relations rather than in an arm’s length manner. Trade in primary and conventional intermediate inputs is usually explained by the natural resource endowments of exporting countries whereas the activities of the MNEs are an important determinant of trade in fragmentation-based parts and components.
Being a labor abundant country, India enjoys significant comparative advantage in the assembly of NPs. If we accept Athukorala’s (2011) observations than the only practical way is to focus on the specific product categories in which fragmentation trade is heavily concentrated. He argued that GPN and fragmentation-based trade are most prevalent in a group of products referred as network products (NPs).
Trade and pattern: Network Product exports for India.
India’s NP exports increased from about 2 billion dollar in 2000 to 24 billion dollar in 2014. Though India’s export of NP grew at a rate of about 22% per annum during the period 2000-2014, it’s still minor in dollar value when compared to other countries, examples are Vietnam with 47 billion dollars and China with 932 billion dollars. Of the total export of 24 billion dollars by India in 2014, AEP (that is, value of assembly trade, it is the difference between the total value of trade in NP and the value of trade in parts and component within this category) accounted for a higher proportion (14 billion dollars) compared to parts and components (10 billion dollars). Relatively richer countries such as Singapore and Malaysia show significantly higher share of parts and components than end products. For Korea, however, the two groups accounted for broadly similar shares. Similarly, for India parts and components accounted for slightly higher share than AEP until the mid-2000s, but latter started occupying higher position since then. Clearly, India has been a minor player in NP, it is also evident from the fact that in 2014 its export accounted for a meager 0.5% in world exports of NP, up from 0.1% in 2000.
Looking at the pattern across countries and over the years, it seems clear that there exist significant opportunities for India to expand its exports of NP, particularly AEP. The main product groups in India’s export basket include road vehicles (accounts for 4.3% of exports in 2014) and electrical machinery (with a share of 2%) India’s export growth of NP between 2000 and 2014 has been mainly brought about by road vehicles, mainly AEP within this group. India’s export share in electronical machinery, the most important category for several comparator countries, is extremely small.
The India is locked out of the regional production network in Asia, it is evident from data. For all countries (in the region) except India, east and southeast Asian region accounts for an overwhelmingly large share of parts and component exports. The share of east and south-east Asia in India’s exports of parts and components declined from 21% in 2000 to 17% in 2014. For the category of AEP too, the geographical direction of India’s exports is strikingly different from that of comparator countries. Central, west and south Asia accounts for largest share of India’s export of AEP (26%) closely followed by Africa (23%). Between 2000 and 2014, the share of Africa increased remarkably from 8% to 23% while the share of Europe and east and southeast Asia declined significantly. This pattern clearly indicates that much of the recent growth observed in India’s AEP exports, mainly road vehicles, is driven by the demand originating from African region. Traditionally rich country markets like America and Europe accounts for a relatively smaller share in India’s export of AEP (37% in 2014). There are
Two important observations
First, the data shows that India’s export of AEP is biased in favor of Africa and Central, South, and West Asia and biased against Oceania, America, and Europe. Therefore, the assembly related exports from India are primarily targeted in low and middle-income countries in Africa and Asia while significant potential exists to expand exports to traditionally rich country markets. The high export intensity in Africa and Central, South, and West Asia is primarily driven by AEP corresponding to road and vehicles. When it comes it comes to part and components India shows a greater export bias in favor of Europe and Oceania and against America and other Asian countries.
Second, it is clear that, with some exception within electronical machinery and professional and scientific equipment, India holds unexploited export potential for almost all products and across all destination markets.
Suggested policies and conclusion
The US-China trade tensions have been causing significant adjustments in global value chains and firms are searching for alternative locations for operations. But, even before the trade war began, China’s image as a low-cost location for final assembly of industrial products was rapidly falling due to high labor shortages and increases in wages. And same is accepted by the Economic Survey in 2019. India should step in to exploit this opportunities in export manufacturing and create jobs. Adopting such a move will also help India in its aspiration to become a $5-trillion economy which seems like a distant dream today. India’s job market is a demand-supply mismatch, employment generation is already falling way behind jobs on offer. At least 12 million new labor enter the market every year in India. But on an average, India created only 4.36 million formal jobs per year between 2011-12 and 2017-18, the Economic Survey said.
Industries which hold the greatest potential for growth and employment generation in India include traditional labor-intensive products and NPs, particularly labor-intensive assembly. So, what needs to be done at policy level to exploit India’s potential in NP? Policy makers should focus on reducing India’s high service link cost with other countries within production network, skill development policies should actively be followed by both the central and state government, it also needs to create and environment that allows entrepreneurs to freely search and identify opportunities in vertically integrated global supply chains of various industries, and policy makers should avoid tariffs to protect domestic final goods producers blindly.
An outward-looking, but not an ultra-export promoting, strategy should be an integral part of policies promoting industrialization, Like Make in India initiative.
- Make What in India? By C. Veermani and Garima Dhir.
- Authukorala, Prem-chandra.2011 ‘Production networks and trade patterns in East Asia: Regionalization or Globalization? Asian Economic papers: 65-95