The World Bank said India’s economy is driven by domestic demand rather than exports. Although India and Sri Lanka have both been growing more than economies of other regions of the world, their rate of growth is slowing down.
World Bank Chief Economist for the South Asia region, Hans Timmer explained that South Asian countries suffer from low exports and, hence, experience lopsided growth because most of their revenue comes from domestic economic activity.
He also told PTI that 30% of the country’s GDP should have come from exports, but the figure is currently at 10%.
However, he stresses the importance of building up the export sector, because it will also help negate issues domestically, such as low wages and unemployment.
What did Timmer say about Indian exports?
Timmer said that, for the past few years, South Asian economic growth has been largely driven by “non-tradable sectors”, meaning goods and services that are not exports.
He explained that while a barber in the non-tradable sector in South Asia and the US need equal time to cut hair, a factory in South Asia will need more labour to produce the same output as a factory in Europe.
This happens because poorer countries also have low productivity levels.
The World Bank’s Exports Wanted report adds that India’s growth has slowed since last year. The country grew at above 8% in the first half of 2018 but only at 7% in the third quarter, and 6.6% in the fourth.
Timmer added that exports in India are sitting at a mere one-third of their potential and have not managed to mirror the successes of similar economies.
“And without further integration into global markets, South Asia will not sustain its growth,” he said.
What caused this situation?
Several trade policies have resulted in this outcome, such as trade tensions between India and the US.
Prior to 2019, India enjoyed beneficiary status under the US’ Generalized System of Preferences (GSP) programme.
The GSP allows certain exports from developing countries to enter the US market duty-free. It not only keeps American companies competitive but also gives emerging economies a step up in trade.
However, Trump announced that he was ending India’s membership because the US found that the country “implemented a wide array of trade barriers that create serious negative effects on U.S. commerce”.
Even the recent escalation of Indo-Pak tensions, following the Pulwama terrorist attack, has stalled India’s progress.
India has withdrawn Pakistan’s most favoured nation status and raised customs duties on all Pakistani goods to 200%. Pakistan also has the option of imposing retaliatory tariffs on India, says the report. This friction will prevent both countries from reaching their peak potential in export trade.
On a positive note, Timmer praised the liberalisation of markets within the country through the new GST policy. He said Indian states are now finding it easier to trade with each other, which is a model for the country to apply internationally as well.
Solutions for India
Timmer said, “A country can develop and grow its economy if it improves the productivity in its tradable goods—let’s call it productivity catch-up. This leads to higher wages and higher prices in non-tradable sectors.”
Simply put, Timmer believes that if India can boost its export market, domestic issues, like low wages, will also be solved. South Asian countries that are more exposed to exports experience a higher growth rate in the short run, he added.
Hence, if emerging economies like India expand on its tradable sector, ie exports, it will also enjoy greater prosperity.
This phenomenon occurs because an increase in exports forces countries to be more efficient in their production processes as they now have to compete with the global market.
“Competitive pressures in these markets lead to greater efficiency. Interactions with foreign competitors and foreign consumers facilitate knowledge transfers,” he said.
Timmer recommended removing barriers to trade, whether in economic regulations or labour market rigidity.
He suggested that India should solve any unemployment crises and create policies to include marginalised groups, such as women and transgenders, into the workforce.
He added that Indians in the workforce must also be educated and trained adequately to compete with their global counterparts. The widening gap between the formal and informal sectors must also be closed, Timmer warned.
The chief economist said that following China’s model of export-led growth is a good place to start because it also triggered a sharp increase in productivity. However, the increased productivity resulted in greater wealth for the Chinese, making labour more expensive.
So, India is now in an extremely advantageous position to compete with China, as it has cheap and abundant labour and is diverse enough to trade attractive exports.
Rhea Arora is a Staff Writer at Qrius.