When domestic demand is slack, competitive economies look to export markets. Indeed, every country that has grown rapidly has been a successful exporter. One of the fundamental reasons for the slowdown in India in recent years has been the failure to generate export momentum, especially merchandise exports. So, exports have fallen significantly in relation to GDP. The economy cannot work its way out of the current slump without reversing these trends and achieving an export boost. Yet, almost all the talk is about import substitution (which is fine if done efficiently) and raising tariffs (which suggests it is not).
Sceptics say an export thrust is difficult when global trade is not doing well. The garment trade, too, is stagnant. Yet, Vietnam, Indonesia and Cambodia have recorded rapid export growth, and Bangladesh has continued to pull ahead of India. The reason is that they have stepped into China’s shoes. Beijing used to export $20 billion worth of garments every month; that is down to $12 billion (a figure that India takes nearly nine months to achieve). The slack has been taken up mostly by East Asia and Bangladesh, and to a relatively minor degree by India. Bangladesh used to export only 60 per cent of what India did; now it exports twice as much. Vietnam too has overtaken India and is now comfortably ahead. The irony is that Bangladesh sources cotton, yarn, and fabrics from India!
Garment exports offer a solution to complex problems, beyond helping to narrow the trade deficit. It is more employment-intensive than any other large industry, by a long shot — 10-fold or more when compared to the automobile/engineering sector, and perhaps 100-fold when it comes to chemicals and petrochemicals. Much of the industry’s sales turnover therefore goes towards wages, which boosts domestic consumption demand (an important consideration just now). Further, most employees in the industry are women, whose reduced participation in the labour force has become a matter of concern. Since the textiles/garments sector already accounts for about a third of total manufacturing employment, promoting garment exports could provide the single-greatest boost to jobs in manufacturing.
Also read: Nirmala Sitharaman’s corporate tax cut is tangential, because lack of demand ails economy
The opportunity is still there, because Chinese exporters face the threat of US tariff hikes (not yet applied to garments), rising costs, and wafer-thin margins. India’s handicap is an unlevel playing field; Bangladesh, as a “least-developed country”, enjoys duty-free access to markets in Europe, Canada and Japan. Vietnam and Sri Lanka do the same with Europe because of free-trade agreements (FTA). Bangladesh’s tariff-free access to Europe expires in 2024, but it too might sign an FTA. In a thin-margin business, a 10 per cent tariff handicap is a killer. India has balanced trade flows with the European Union, but continues to hold back from an FTA — partly because of lobbying by Japanese car companies in India.
In recent years, the government has helped by introducing flexible labour rules and contributing to provident fund accounts (thus partially closing the wage gap with Bangladesh). Its latest offer, of a 17 per cent tax rate to new manufacturing outfits, closes another gap. But exporters have to run other gauntlets, like poor infrastructure and time-consuming port processes. Equally important is correction of the rupee’s over-valuation.
Piyush Goyal, the minister for commerce, said in an interview the other day that he could not understand how a cheaper rupee would help when the country had a large trade deficit. For an answer, he should look at how trade numbers evolved after the 1966 rupee devaluation. Exports grew with a time lag, while imports contracted. A massive trade gap was reduced by over 80 per cent in four years. Similarly, the five-year average trade deficit before the 1991 devaluation was 40 per cent of exports, but fell off after the devaluation and then stayed relatively low for more than a decade. Sharp devaluations are not possible today, since the US monitors countries that it considers to be currency manipulators, but there is more than one way to skin the cat. A correction of the rupee’s bloated value is not only feasible, it is urgently required if rapid export growth is to return.
By Special Arrangement with Business Standard
Also read: India’s services exports will soon beat merchandise exports. That’s nothing to celebrate
The suggestion that garment exports may be the solution to kickstarting the economy is rather short-term and ad-hoc. (1) Global fashion retail and supermarket chains would want a certain advantage. The volume lies in fast fashion, and the way this industry operates, Indian producers will have to offer a distinct sourcing advantage, which is the COST advantage. How much more competitive can Indian producers be against other countries that are already way ahead on the learning curve? (2) Fast fashion industry itself is under intense scrutiny in the Western economies. It is being accused of being environmentally unfriendly for all the waste it produces, and ethically unscrupulous, for creating sweat labour (low wages, unhealthy conditions). As millennials become more sensitised, the price will need to go up because retail chains will have stricter ethical and sustainable sourcing policies. As a result, volumes will shrink. It is only a matter of time with more ‘Climate Heroes’ such as Greta Thunberg raise the pitch.
The solution perhaps lies in taking a broad-based approach by looking at a basket of products that can be made in India, and this must include, high technology products. Taxes will need to be looked at. The government may have to put more money into the pockets. There is no short term solution. However, the time to start is now. It is already too late.
For once we agree on something …
🤔😊👍🙏
Baat se baat chale …
No amount of devaluation will help if you don’t make goods that the world wants to buy. And it makes little sense to give an example from 1966. The world has changed.
10 years ago the Thai Baht was 50 to the dollar. Now it is 33 (https://www.xe.com/currencycharts/?from=EUR&to=THB&view=10Y). Exports have doubled (in $) in this period (https://tradingeconomics.com/thailand/exports).
India has perhaps the best traditional textiles of any country on earth. Some of the silk sarees are pieces of art that can be hung on the wall as pieces of art.
But if there’s no system that helps these artisans to adapt to and enter the modern world, then not much can be done.
If you devalue the rupee, then badly needed import of machines for making clothes, say from Italy, will become more expensive and will delay the process of modernization.
Textiles will be another area where India’s traditional advantage will wither away. It doesn’t help that some of the best artisans are Muslims.
India is busy solving non-problems like Kashmir and Assam, and attacking its business houses, while the world moves on.
Very well said Rajiv. Every word is true.
Should it fall to one cent to the rupee ? What has happened to the legion of the faithful who mocked its earlier decline, linking it to Dr Singh’s age, promised it would soon be forty to a dollar ? What happens to domestic inflation, the increased burden for corporates that have borrowed abroad, the recent proposal to issue sovereign bonds in foreign currency ? See the plunge in the Pakistani rupee; are their exports surging ? Compare it to the yuan, rock steady for a decade, before its recent softening. The entire economy needs fixing, to become more globally competent. An INR that has exhausted its Viagra will not do the trick.
… globally competitive.