Today, India’s share in global merchandise exports remains low at 1.7%. In 2000, when China’s GDP was no more than India’s today, it already accounted for 4% of global merchandise exports. Sustaining high growth and creating good jobs will require a strategy centred on building an exportfriendly ecosystem in the country.
The starting point for this strategy is shedding three of our current obsessions: import substitution, micro and small enterprises, and a strong rupee. Import substitution has never produced sustained rapid growth anywhere. On their own, micro and small enterprises can provide low productivity, subsistence wage employment to the multitude but they cannot be the source of high productivity, wellpaid jobs without successful medium and large enterprises around them.
A strong rupee keeps imports artificially cheap for our citizens and our exports artificially expensive for foreigners. The resulting trade deficit then tempts policy makers to slap tariffs on imports.
The first step in building a tradefriendly ecosystem has to be a realistic exchange rate. We reaped the benefits of this approach in the 2000s. By letting the rupee depreciate steadily from Rs 17.1 per dollar in 1990-91 to Rs 47.7 per dollar by 2001-02, we created a highly competitive environment for producers of our exportable goods as well as those competing against imports, which were being liberalised alongside.
Our exports boomed during the following decade, with exports of goods and services as a proportion of GDP rising from 12.9% in 2001-02 to 24.1% in 2011-12. With rapidly expanding exports, we could also expand imports, which rose from 14.7% to 30.8% of the GDP over the same period. Recall that this was the period during which the cellphone revolution took place in India. Without the export growth, we could not have imported cellphones and this revolution would have stopped dead in its tracks.
Unfortunately, however, higher inflation in India than in trading partners without a commensurate nominal depreciation of the rupee has left Indian products up to 15% more expensive than their foreign counterparts since 2014. An econometric study by Sajjid Chinoy and Toshi Jain finds that this loss of competitiveness has had a negative effect on India’s exports. In the coming years, if the US tariffs on China lead to a depreciation of its currency and India continues to hold on to the strategy of a strong rupee, it would compound the problem of loss of competitiveness of our products vis-a-vis China.
Getting the exchange rate right is only the beginning. We also need to maintain a liberal trade regime in which exports and imports can flow freely without the uncertainty of interventions that disrupt market processes. Arbitrarily raising tariffs and bringing antidumping suits may benefit producers of some products, but they hurt the economy as a whole. They replace less costly imports by more costly domestic products while also, more subtly, undermining exports. When imports decline because of higher tariffs and antidumping duties, the Reserve Bank of India allows the rupee to appreciate, making our exports abroad more costly.
Free flow of exports and imports also requires trade facilitation. Unnecessary clearances, delays at ports and high transport costs add to costs of exports. In ease of doing business rankings, India still continues to have a low ranking on crossborder trade, which measures the time and cost associated with the logistical process of exporting and importing goods.
Finally, and above all, sustained export growth requires an ecosystem in which medium and large firms can flourish. This requires flexible labour and land markets. Contrary to the impression conveyed in media, progress was made in labour market reforms during the last five years. Of particular importance is the provision of fixed ter m contracts, which allows fir ms to let workers go on the expiry of the contract.
But more needs to be done. For example, the temptation to fix the minimum wage at excessively high levels needs to be resisted, as it would lead even small firms to become micro to escape ultrahigh minimum wages. India is also unique in the entire world in having rising minimum wages without rising levels of skills. This practice must be ended.
Buying land remains a challenge for large firms due to the existence of land parcels that remain in dispute within any large contiguous land area. Only an amendment of the current draconian Land Acquisition Act can solve this problem.
Absent these reforms, we must experiment with Autonomous Employment Zones that cover large areas of 500 square kilometres or more and have considerable autonomy to implement flexible land and labour laws. Like Shenzhen in China, some of these zones could be close to the coast to become export hubs.
The writer is Professor of Economics at Columbia University