Topic: General Studies 3:
- Indian Economy and issues relating to planning, mobilization, of resources, growth, development and employment.
In Discussion: The economic ramifications of COVID-19 have a significant bearing on reshaping the world economic order as countries weigh their external linkages and recalibrate development strategies. For India to claim its rightful position in the new world order, it is imperative that the vision of ‘Aatmanirbhar Bharat’ is globally integrated to harness the opportunities created by the emerging shifts.
In the post-pandemic era, the world economic order is set for a recast with huge gaps emerging between the performance of countries. According to forecasts by the OECD, by end-2021, the US economy is likely to be the same size as it was in 2019, but China is expected to be 10% larger. Europe and Japan would languish below their pre-pandemic level of output and could do so for several years. From India’s perspective, recovery in GDP growth is firmly on track and sets the foundation to regain our position as the fastest-growing major economy next year.
At this critical juncture, it is important to set the vision of positioning Aatmanirbhar Bharat in the new world order with priorities closely linked with our global aspirations.
A. Increasing India’s share in world exports and FDI
The path taken by India is not about being self-contained but strengthening our position in global supply chains. Bolstering international trade and investments is key for India to lift its GDP growth and per-capita income. Pertinent to note is that while India is currently the world’s fifth-largest economy, its GDP per capita is a fifth of the world average.
Globally, trade and FDI have been crucial vehicles for enhancing economic growth and reducing poverty. Arvind Panagariya, former vice chairman, NITI Aayog, in his book “Free Trade and Prosperity (2019)” analyses performance of more than 200 countries between 1960 and 2013, demonstrating a causal relationship between trade and per capita income. The findings show that the countries that experienced intensive growth for a period always maintained a high and/or expanding trade to GDP ratio. Similarly, in the case of FDI too, many studies have established a strong positive long-term correlation with GDP per capita.
However, the share of India’s exports of goods and services in GDP has declined steadily from 24.5% in 2011 to 18.7% in 2019. At 13th position globally, India has a share of 2.2% in world exports of goods and services—nearly a fifth of China (10.6%). It is noteworthy to mention that India’s trade to GDP ratio has surpassed that of China since 2008, but our imports outweigh exports significantly. A renewed focus is required to rejuvenate exports with a special emphasis on high potential manufacturing sectors—electronics, apparels, pharma, among others. Strong comparative advantage in services sector suggests focus can be on high-value services exports in ICT, healthcare, and business and professional services.
With regard to FDI, an analysis of G20 countries reveals that India achieved the highest growth of 20.3% (CAGR) in FDI inflows between 1990 and 2019. However, in value terms, India ranked 9th globally in 2019, which shows further potential to move up the global order.
B. Achieving a higher share in exports and FDI
Achieving a higher share in exports and FDI needs to be oriented with a push for greater global competitiveness. This requires investment in infrastructure, particularly in power and logistics, and reducing the regulatory compliance burden on companies. There is no doubt that the emerging shifts in global supply chains provide India a significant opportunity to attract multinational companies. At the same time, sustained efforts are needed to build technical capacities and scale of Indian enterprises for enhancing participation in GVCs. It will also be crucial to embrace Industry 4 with greater adoption of frontier technologies by the Indian industry.
Aatmanirbhar in agriculture
India has been a net exporter of agri-produce. In fact, it has been so ever since the economic reforms began in 1991. The golden year of agri-trade, however, was 2013-14. That year agri-exports peaked at $43.6 billion while imports were $18.9 billion, giving a net trade surplus of $24.7 billion.
The current agri-export basket of 2019-20 gives a sense of “revealed comparative advantage”. Marine products with $6.7 billion exports top the list, followed by rice at $6.4 billion (basmati at $4.6 billion and common rice at $2.0 billion), spices at $3.6 billion, buffalo meat at $3.2 billion, sugar at $2.0 billion, tea and coffee at $1.5 billion, fresh fruits and vegetables at $1.4 billion, and cotton at $1 billion.
On the agri-imports front, the biggest item is edible oils — worth about $10 billion (more than 15 mt). This is where there is a need to create “aatma nirbharta”, not by levying high import duties, but by creating a competitive advantage through augmenting productivity and increasing the recovery ratio of oil from oilseeds and in case of palm oil, from fresh fruit bunches. While mustard, sunflower, groundnuts, and cottonseed have a potential to increase oil output to some extent, the maximum potential lies in oil palm. This is the only plant that can give about four tonnes of oil on a per hectare basis. India has about 2 million hectares that are suitable for oil palm cultivation — this can yield 8 mt of palm oil.
Connecting the Dots:
- The deeper into the supply chain, the greater the impact of the outbreak is likely to be. Discuss.
- How has the Coronavirus impacted the global supply chain? Suggest some structural reforms that will help the sector be better prepared for a crisis of this scale.