How foreign trade policy can upscale India’s manufacturing exports

Dr Sunitha Raju, Professor, Indian Institute of Foreign Trade and Member, Committee for Advanced Trade Research, TPCI, emphasizes on the need for new tools and objectives under India’s foreign trade policy, given the increasing significance of non-trade concerns, and new approaches of trade engagement like E-commerce, data localization etc. 

The core of trade theory is based on two important assumptions of “Free Trade” and “Balance Trade”. Under the current conditions of protectionism, this translates into “exports financing imports”. With the rise in development needs of India, the demand for imports has increased. And as such, the challenge is to increase exports to finance these imports.

With this premise, the question is “how do we increase our exports”. This involves strategy for identifying and diversifying products and markets. This is where a trade policy becomes critical – it projects a path for targets and implementation.  The next step would be to formulate an approach. All industries, sectors, sub-sectors, products don’t respond the same to trade policy interventions.

For some industries, exports increase under ”learning by exports”, i.e.  trade provides an opportunity for moving up the technology path (e.g. electronics). For others, exports increase under “export selection”, i.e., they have to be technologically competitive in order to export (e.g. textiles, leather). Under these diverse requirements across industries, industrial policy becomes important in providing technology upgradation, scaling up production, supporting compliance to quality standards, etc.   

But numbers have a somewhat different story to tell. Niti Aayog’s ‘Strategy For New India @75’ (2018) has envisaged increasing the share of manufacturing to 25% of GDP and exports from US$ 478 billion in 2017-18 to US$ 800 billion by 2022-23.  But, the share of manufacturing continues to be about 16%, well below the target of 25%. Similarly, our exports reached US$ 414 billion only last year, way below the US$ 800 billion as projected. 

The National Manufacturing Policy of 2011 aimed at pushing up manufacturing productivity and competitiveness by introducing policies for creating National Investment and Manufacturing Zones (NIMZs), development of SMEs, Skill Upgradation, Promotion of Green Manufacturing and Rationalizing and Simplifying business regulations. The policy also emphasized development of core infrastructure, creation of financial & institutional mechanisms for technology development. Again, the outcome is not encouraging.

As per UNIDO’s data, in 2020, India’s per capita MVA (Manufacturing Value added) is US$ 307 as against US$ 1,605 for Thailand, US$ 755 for Indonesia, US$ 633 for Philippines and US$ 2,437 for Malaysia and US$ 2,844 for China. What this data indicates is that India’s manufacturing value addition is less than 25% of Thailand, Malaysia and China. Even with respect to Indonesia and Philippines, India’s MVA is less than 50%. 

UNIDO’s Competitiveness of Industrial Production (CIP) index assesses and benchmarks industrial production across countries by taking various dimensions like capacity to produce and export, technological upgrading and deepening and world impact. India’s overall global rank in CIP is 40 in 2020 while for China it is 2. Between 2010 and 2020, India’s position improved by 2 points, i.e., from 42 t0 40 while China’s rank improved from 6 to 2.  

Therefore, building manufacturing competitiveness is a priority for India for enhancing growth and exports. As such, this should drive our trade and industrial policy. So, the question we should be asking is “Will engaging in FTAs or participating in GVCs result in improving our manufacturing competitiveness?” Country experiences of ASEAN and East Asian countries have clearly supported this trend.

Research shows that the surge in manufacturing imports has facilitated in the growth of domestic manufacturing value added and resulted in India’s much higher trade engagement with the world. Clearly, this should drive our trade policy initiatives and we should not evaluate the success or failure of FTA purely on the basis of rising trade deficit with the FTA partner countries.

Building strong pillars 

Given this background, I believe, the focus of trade and industrial policy should be:

 (i) Developing India as a Manufacturing Hub; 

(ii) Increasing Manufacturing Exports; 

(iii) Attracting FDI inflows. 

For this, along with FTA engagements, there are other necessary conditions. A recent World Economic Forum (WEF) white paper on “Shifting Global Value Chains: An India Opportunity” underlined India’s role in reshaping GVCs and the potential to contribute over US$ 500 billion annually. This is contingent on creating globally competitive manufacturing companies; building capabilities through workforce skilling, innovation, quality and sustainability; reducing trade barriers and enabling competitive global market access for Indian companies; and focusing on infrastructure development for speed and flexibility. 

“The current focus on labour cost arbitrage needs to shift towards technology-induced cost efficiencies and effectively integrate the MSMEs into the value chain.”

Similarly, the recent Baines & Company report has argued that India’s manufacturing sector has the potential to reach US$ 1 trillion by 2028 from the current US$ 418 billion in FY 2022. Scaling up Indian manufacturing exports will need to be driven by supply chain diversification, government initiatives, sectoral advantages, Capex led growth, Mergers & Acquisitions and VC led investments. 

In all this, the challenge for India is to integrate MSME sector into this development path, especially as they account over 90% of the manufacturing enterprises and 33% of manufacturing GVO (Gross Value of Output). Scaling up, internationalization and access to technology and finance have been important deterrents. The large domestic market has to be leveraged to develop and reap scale economies and product and process innovations. The current focus on labour cost arbitrage needs to shift towards technology-induced cost efficiencies and effectively integrate the MSMEs into the value chain.