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Rahul Jacob: India cannot be an export powerhouse

We must accept we cannot become another China or even an Asean. Only in fables do tortoises beat hares - and in this case the tortoise is in poor health, dropped out of primary school and its minders have been napping for decades

Rahul Jacob  |  New Delhi 

Rahul Jacob

China's drop in exports in March by 15 per cent, announced on Monday, is a cold shower of reality the world didn't need. China is already reeling from the effects of a property slowdown and the sharp decline in commodity prices that has hit profits at large Chinese state owned enterprises. The slump in steel production is hammering iron ore exporters from Australia to India - and raising concerns about China dumping steel in India, where steel imports jumped 71 per cent in 2014-15.

Economists, expecting exports in March to match the double-digit growth in combined exports in January and February, were confounded. Most resorted to pointing at the strength of the renminbi relative to the country's major trading partners, excluding the US. Others made the valid point that exports actually grew 4.7 per cent in the first quarter of 2015.

Worryingly for the rest of the world, though, the slowdown in China's exports, while hardly apocalyptic, may well suggest that outside the smartphone ecosystem, all is not well with global demand for consumer and capital goods. On Tuesday, the World Trade Organisation (WTO) said trade this year would grow by just 3.3 per cent, up from 2.8 per cent last year. The Financial Times's trade editor, Shawn Donnan, observed, "For at least three decades before the 2008 financial crisis, global trade regularly grew at twice the rate of the global economy, leading some economists to hail an era of 'hyperglobalisation'." According to the WTO, the annual average trade growth recorded since 1990 has been 5.1 per cent.

If this were not sobering enough, 2014 was the third year in succession that global trade has expanded at a rate slower than global GDP. Just the day before, the Brookings Institution released a report saying the global economy is "at risk of stalling again".

Undaunted by this backdrop, India's commerce ministry earlier this month announced that India should aim to double its merchandise and services exports to $900 billion by 2019-20 from the $466 billion total it achieved in 2013-14. This headline appeared on websites on April 1 so at first I thought it was a prankster's joke. I will let more numerate brains than mine calculate what that works out to as a compound growth rate, but no prizes for guessing that what the commerce ministry thinks is a plausible growth target is both considerably higher than the WTO's projections for global trade and the 0.88 per cent growth clocked by merchandise exports from India in 11 months through February, let alone the double-digit decline in India's merchandise exports in February.

Many of us admire this government's can-do attitude. One can only cheer when it promises to give us a spankingly clean country - given the garbage on our streets, another country really - in time for Mahatma Gandhi's 150th birth anniversary in 2019. But, goals need to be grounded in reality and followed up by exhausting, detail-oriented execution. To be asked to take our export targets seriously is like being asked to believe in Cinderella.

Yes, China's wages have been increasing by double-digit levels annually since 2010. Certainly, this means that there are labour-intensive opportunities in factory jobs migrating to Bangladesh, Indonesia and India -judging from our recent increase in garment exports. By all means, work obsessively on the ease… erm, reducing the difficulty of doing business in India for exporters and importers alike.

But, let us begin by acknowledging that there appears to be a secular stagnation in global growth and a structural shift in trade that stack the odds against us building an export-driven economy. The slowdown in global growth is the result of factors as disparate as a decline in the rate of productivity growth in the west and in population growth. As Barry Eichengreen points out, electricity had a bigger impact on gross domestic product and productivity growth than computers because it affected a wide swathe of manufacturing industries and households. "The 'computer revolution's' productive application was largely limited to finance, to wholesale and retail trade, and to the production of computers themselves," he writes

The structural shift in global trade can largely be summed up in two jargoney words that ought to figure prominently in Indian Administrative Service exams: supply chains. Manufacturers of everything from automobiles to smartphone like to cluster production and parts facilities close together. China, for instance, today manufactures 65 per cent of the components in the products it sells to the rest of us, up from 40 per cent in the mid 1990s, according to The Economist. Asia's share of manufacturing output is now almost half of global output, from about a quarter in 1990. The rigours of just in time inventory management means that managers will put production close to China even if they happen to be in industries where wage costs are a significant percentage of the cost of production. The chief beneficiary is likely not going to be India, but the Association of South East Asian Nations or Asean, both the Economist and the McKinsey Global Institute predict. The region already boasts workers with higher productivity than India's and a larger GDP of $2.4 trillion.

The government made a splash this week at the Hannover industrial fair, with gold-embossed coffee mugs with the 'Make in India' emblem and yoga classes for executives, but it needs to pay as much obsessive attention to building rural infrastructure to revive Indian agriculture and boosting services industries like retail so we have more than just software to boast about. Opening up a swathe of industries once reserved for small-scale units is a step in the right direction, but it should have been done two decades ago. We must accept we cannot become another China or even an Asean. Only in fables do tortoises beat hares - and in this case the tortoise is in poor health, dropped out of primary school and its minders have been napping for decades. In that time, the world has changed and we have not changed nearly enough.



Twitter: @RahulJJacob

First Published: Wed, April 15 2015. 21:46 IST
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