By Raghunath Nageswaran
Not too long ago, India was considered a bright spot in a global economy that was experiencing anaemic recovery from the Great Recession, set in motion by the global financial crisis of 2008. Today, analysts are drawing attention to the fact that India has not been able to take advantage of a synchronised global recovery in trade. It is in this context that the Economic Survey 2017-18 has expressed a major concern about Indias prospects of catching-up with the developed world through export-led growth due to four headwinds.
These headwinds include the backlash against globalisation, which reduces exporting opportunities, the difficulties of transferring resources from low productivity to higher productivity sectors (structural transformation), the challenge of upgrading human capital to the demands of a technology-intensive workplace and coping with climate change-induced agricultural stress.
Anti-globalisation sentiment made the scapegoat
It is quite true that there were widespread fears of a backlash against globalisation from the second half of 2016, with the rise of protectionist tendencies in the trade policy of the developed countries. Those fears have begun to recede as global trade outlook has improved. Therefore the backlash against globalisation cannot be a valid excuse for Indias less than impressive performance in exports in the recent months, even as other developing countries are surging ahead.
The Survey presents credible evidence to argue its case that the anti-globalisation sentiments had set in much before, affecting global trade volumes. It must be remembered that the first half of the present decade was a period of secular stagnation in the developed world, which was indicative of a slump in consumer and investment demand. The sluggishness in demand was due to the unravelling of the economic effects of the financial crisis and may not have been a reflection of the increasing resentment towards globalisation. Nonetheless, it is important to engage with the argument put forward by the Survey.
It posits that globalisation has led to a backlash in advanced countries, reflected in the decline in world trade-GDP ratios since 2011. Meaning that the trading opportunities available to the early converters, specifically the ability to export at double-digit rates of growth for three to four decades consistently, may no longer be available. This concern emerges from a strong penchant for an export-led growth strategy. This view of economic development refuses to see the enormous potential of the domestic market. It is quite ironic that foreign investment is invited to India to tap its market potential but sulk hopelessly about shrinking export opportunities.
Sure, exports have an important place in the development strategy of our economy but we run into problems when we make it the linchpin, especially when we are a demand-constrained economy. Whenever our exports begin to decline, the standard policy nostrum is to devalue the rupee and make our exports competitive. A world market is a place where many players compete for a greater share. In many cases, it turns out to be a zero-sum game, as some countries aggressively devalue their currency to edge out their competitors.
Indias need to change course
The biggest economic cost that countries like India pay to garner a greater share in global trade, which is currently a trivial 1.7 percent, is the erosion of purchasing power of its working class. As the distinguished macroeconomic theorist Amit Bhaduri has cogently argued in his popular writings, the blinkered focus on the external market over the internal market forces the producers to cut unit cost of production dramatically by raising productivity per worker through mechanisation and reducing wage bills. Slashing wages is seen as serving the twin objectives of making the product cheaper, leading to increased competitiveness, and increasing the share of profits in the value added. Prabhat Singh made the following observations in a Mint article, analysing the Annual Survey of Industries data, Real worker wages have been stagnant in the three decades to 2013 while real productivity has increased at an annual average rate of 7percent, and that the share of profits in the net value added has sharply increased.
Because of the fallacy of composition that blinds the policymakers in India, there has not been recognition of wage at the principal source of domestic consumption demand. The ill-advised excessive outward orientation usually delivers a double-whammy. There is a shrinkage of exports due to lack of competitiveness. When the currency appreciates, it allows for foreign capital to flow freely into the country, causing internal demand fails to compensate for the loss on the export front. In fact, as Indias trade to GDP ratio has been falling steadily in the recent years, it has to stave off the temptation to increase its share through competitive cost-cutting and currency devaluation.
Leading Indias policy to international markets
The policy thrust has to be on domestic demand led-growth, which could be achieved by keeping wages commensurate with productivity. In the meantime, India should look to improve its competitiveness in the world market but not by exploiting cheap labour, considered to be Indias comparative advantage in export-intensive sectors. Such an endeavour must be undertaken by building a modern technological base for industrial activity, and by creating a healthy and educated workforce. There must be organisationally evolving enterprises and the promotion of the idea of decent work.
The admiration for the East Asian economic success leads one to believe that those economies achieved rapid economic progress. They began catching up with the industrialised countries by exploiting their comparative advantage; the Economic Survey echoes this belief. However, Akshat Khandelwal refutes this line of argument in a review essay in The Caravan, arguing that the early converters made it a point to develop capital-intensive heavy industries even in their early stages of development, thereby going beyond what was widely reckoned as their comparative advantage. It would be most appropriate to conclude this essay by quoting the heterodox economist Ha Joon Chang, who has closely studied the development experiences of various countries from a historical perspective, Given the nature of the process of factor accumulation and technological capability-building, it is simply not possible for a backward economy to accumulate capabilities in new industries without defying comparative advantage and actually entering the industry before it has the right factor endowments.
Featured Image Source: Pexels