Wrong turn inwards: Exports no longer a manufacturing priority for India

For consumer welfare, greater economic resilience, a stable trade deficit, and sustainable growth, the country needs to start looking outward for new markets

India is fortunate to have a large base of domestic consumers, which, to some extent, insulates the economy from the tides of global demand. But this does not mean that growth and economic security can be attained without the help of a healthy focus on exports. Unfortunately, the numbers suggest that this process is not currently underway in India. In fact, if anything, matters have moved in the opposite direction. Within the private corporate sector, in spite of some notable success stories in sectors such as mobile handset manufacturing, there has been a shift away from, and not towards, exports. As this newspaper reported on Wednesday, while more than 18 per cent of sales in manufacturing were exported in 2012-13, that proportion dropped below 7 per cent in 2022-23. And, on the basis of the data set managed by the Centre for Monitoring Indian Economy, this may fall further this financial year.

This reduced focus on exports in the manufacturing economy has had obvious implications in the aggregate. While services exports remain healthy for now, India retains a larger than comfortable trade deficit — which in August reached a 10-month high of almost $30 billion. Some of the reasons for this are obviously transitory rather than structural. Over the past years, China has slowed as it has finally entered the phase of its development that requires it to rebalance away from savings- and investment-driven growth to boosting consumption. This naturally will reduce its appetite for such things as commodities. It also means that there is significant excess capacity to satisfy broader global demand. The steel sector reveals the ripple effects of overcapacity in China. India has turned a net importer of steel instead of a net exporter this year — as Chinese steel capacity needs to find an outlet because of shrinking local demand.

The other issue is ongoing supply-chain disruptions. Instability in West Asia has raised insurance and other costs, as well as introduced additional risk to shipping deadlines. Some exporters report fewer ships are calling at Indian ports, and there is more competition for outbound space. While all these issues must be addressed, deeper questions about a lack of structural focus on exports must also be asked. India is not a significant force in global value chains and has seen only modest success from the China plus one strategy of global corporations. India’s size is an advantage, but can also become a curse. A focus on satisfying internal demand will keep an individual company in business. But it will not grow the economy as a whole. Sustained growth has never been achieved by any country through focusing entirely on internal demand.

In economic development, nobody pulls themselves up by their own bootstraps. Global demand and investment have always played a key role in creating the space for new projects and growth-enhancing capacity addition. This is particularly true of mass manufacturing. Making the changes to India’s regulatory and business environment necessary to compete with China on cost and reliability in the global marketplace has been too long deferred, thanks to the power of the Indian domestic market. The outcome is clear to see: A manufacturing sector that increasingly depends upon domestic rather than global demand, and which will inevitably argue for tariff barriers that increase domestic costs and hurt Indian consumers, as has been the case over the past several years. For consumer welfare, greater economic resilience, a stable trade account, and sustainable growth, India needs to start looking outward for new markets.