The need for diversification and sophistication of Indian manufacturing exports

By Rahul Anand, Kalpana Kochhar and Saurabh Mishra

The expansion of India’s exports of services between 1990 and 2013 has been nothing short of spectacular, putting India on a par with the world’s high-income economies in terms of service-product sophistication and as a share of total exports. This has created unique opportunities for continued growth. By contrast, when it comes to exports of manufactured goods, India has lagged behind its emerging-markets peers, both in quality and as a percentage of the total export basket, leaving substantial room for improvement.

While trade leads to structural transformation and diversification of economies, the types of goods and services traded—and trading partners—make all the difference. India should capitalise further on its comparative advantage in exports of high-value services. At the same time, it should also increase the quality, sophistication, and diversification of manufacturing. That way, India can expand its total exports, while improving the sophistication of goods and services, and diversifying into higher value-added activities that generate better jobs for Indians.

Our new paper looks at the evolution and prospects of India’s exports documents and analyses the technological content, quality, sophistication, and complexity of India’s export basket. It also discusses their implications for future export performance, structural transformation, and growth.

India’s exports evolution

The evolution of Indian exports follows a unique growth model: a well-integrated, technologically advanced, and highly sophisticated service sector thrives alongside a lagging manufacturing sector. At 32 percent, the share of services in total exports is now more than double the average for emerging markets (EMs) and exceeds that of many advanced-income economies. At the same time, the share of goods exports in total exports declined from nearly 80 percent in 1990 to 67 percent in 2013.

India owes its rapid growth in service exports to the emergence of modern services, defined as products that can be stored and traded digitally. The fastest-growing sector of the global economy, exports of modern services account for nearly 70 percent of India’s total commercial-services exports, double the average for emerging markets.

Though no developing economy performed as spectacularly as China between 1980 and 2013, most have seen sharp increases in manufacturing’s share of total exports. India’s manufacturing exports as a share of total goods exports rose from 58 to 64 per cent, but in contrast to its highly evolved and sophisticated modern services sector, India’s product quality trails that of both China and other EMs.

In line with global trends, Indian exports shifted from the European Union and the United States toward emerging and developing economies. East Asia and the Middle East have emerged as the top two destination markets.

Implications for the future

Goods differ in productivity and therefore in their future growth consequences, and development involves not just making more of something but also introducing new, more sophisticated products. Because of revealed comparative advantage, countries tend to add to their export mix whatever is more, rather than less, closely related to the goods already being manufactured (a country has revealed comparative advantage when the share of a given product in a country’s total exports is larger than the share of that product in total global exports).

India is no exception in the pattern it follows while expanding its export basket. Existing revealed comparative advantage in various products, such as textiles, has led to comparative advantage and export growth in related product clusters, such as fabrics, garment technology, etc. Similarly, emerging comparative advantage in research and development can lead to expansion of other high-value exports of modern services.

Recommendations

The income and employment potential of Indian exports could further benefit from the following structural and policy changes:

• Increasing the value and quality of high- and medium-tech manufactured exports (low-skill or low-tech products would likely face an incumbency disadvantage relative to lower-cost producers).
• Diversifying services that underpin modern the manufacturing supply chain and capitalising on emerging comparative advantage in aerospace, pharmaceuticals, chemical and mechanical-engineering research and development.
• Expanding exports to new markets, especially South Asian neighbours.
• Optimising policies to promote export through reducing trade costs; liberalising foreign direct investment rules; improving urban infrastructure; developing labor’s technological skills and the future market’s flexibility; and fostering innovation and entrepreneurship to enable higher productivity activities.
• New technology and cultural inventions from India would shape the wave of economic growth. For example, California with a population barely 3 percent of India has the GDP which is very similar to India’s. It is driven by a pocket of few concentrated yet uniquely specialised hubs of exports within California. Similar clusters with unique new inventions could be a source of growth engine in India too, and would require an enabling environment for openness and creative inventions in India. This could help move faster towards convergence.

Rahul Anand is Assistant to the Director in the IMF’s Institute for Capacity Development, working on India. 

Kalpana Kochhar is currently a Deputy Director in the Asia and Pacific Department of the IMF. 

Saurabh Mishra served in the IMF’s Jobs and Growth Group from 2013-15. He holds a PhD in Reliability Engineering at the University of Maryland College Park.

This article was previously published on the LSE Business Review.

Featured Image Courtesy: The New Indian Express