Day 43 – Q.3 What are the key factors deciding the export competitiveness of India’s manufacturing sector? Where does India lack on this front? Do a critical assessment.

What are the key factors deciding the export competitiveness of India’s manufacturing sector? Where does India lack on this front? Do a critical assessment.

भारत के विनिर्माण क्षेत्र की निर्यात प्रतिस्पर्धात्मकता को तय करने वाले प्रमुख कारक कौन से हैं? इस मोर्चे पर भारत के पास कहां कमी है? समालोचनात्मक मूल्यांकन करें।

Approach – 

In this question candidates need to write about key factors which decides India’s export competitiveness in manufacturing sector, in second part write about where India lack on this front .

Introduction-

India has reached USD 418 billion dollars of manufacturing exports in the fiscal year 2022 (FY22) with rapid growth over the last 2 years. Despite having the fifth-largest economy in the world, contributing to 3.1% of the GDP, India’s export contribution to global trade is still only 1.6%.

Body –

The factors are Value of exports is taken as a dependent variable while inflation rate, Exchange rate, FDI inflows and USAGDP and Indian GDP were taken as Explanatory variables.

• First, the decision to lower the corporate tax rate to 22% for all firms and 15% for new manufacturing firms, will encourage the domestic manufacturing sector.

Production linked incentive scheme-

• The introduction of the Production-Linked Incentive (PLI) schemes in several key sectors, for the first time, incentivise production, rather than inputs.
• These schemes will help domestic manufacturing achieve size and scale. As many as 29 Central labour laws were rationalized into four codes.

MSME’s –

• The definitions of MSMEs have been raised upwards, allowing them to grow in size, whilst maintaining the benefits of MSMEs. All these steps should help in domestic industry achieve size and scale.

Domestic GDP-

• It is important to know whether exports will accelerate the domestic growth and employment. The empirical studies indicated that there existence positive relationship between Export and economic Growth of Country reveals the contribution of exports in the acceleration of GDP growth  found that the liberalization of trade policies is helpful in sustaining economic growth and exports cause growth in India.

Real Effective Exchange Rate-

• Real exchange rate is commonly known as a measure of international competitiveness. It is also known as index of competitiveness of currency of any country and an inverse relationship between this index and competitiveness exists. Lower the value of this index in any country, higher the competitiveness of currency of that country will be.The studies indicated that the exchange rate has significant negative impact on real exports implying that higher exchange rate fluctuation tends to reduce real exports in India.

Inflation rate-

• Increases in domestic inflation lead to higher prices for exported goods and a decrease in exports as foreign consumers substitute in favour of lower priced alternatives produced within their own country or imported from elsewhere. It reveals from empirical estimates that high inflation rate and an abundance of natural resources tended to be associated with a low exports and slow growth

Foreign direct investment-

• FDI a potential non-debt creating source of finance and a bundle of assets, viz., capital, technology,market access (foreign), employment, skills,management techniques, and environment, which could solve the problems of low income growth, shortfall in savings, investments and exports and unemployment.
• The evidence from the FDI promotes the manufactured exports of recipient countries showed the spill over effect of FDI on export in Bangladesh the entry of single Korean Multinational in apparel industry exports led to the establishment of a number of domestic export firms, creating the country’s largest export industry.

USA GDP-

• The performance of export sector is highly depends on other countries economic activity. It evident from that the financial crisis of 2008 had a dampening effect on global demand and slowed down capital inflows which affected India’s export sector.

What are the Challenges Related to Indian Export Growth?

• Rising Protectionism and deglobalization: Countries around the globe are moving towards protectionist trade policies due to disrupted global political order (Russia-Ukraine War) and westernization of supply chain, that is in way shrinking India’s export capacities.
• Lack of Basic Infrastructure: India’s mafacturing sector lacks sufficient manufacturing hubs, internet facilities and transportation are costly when compared to developed nations which is a huge deterrence to Industries.
• Uninterrupted power supply is another challenge.
• Lack of Innovation Due to Low Spending On R&D: Currently, India spends about 0.7% of GDP on research and development. This prevents the manufacturing sector from evolving, innovating and growing.
• Specialization versus Diversification: Indian exports are characterized by high diversification combined with low specialization, implying that India’s exports are spread thin over many products and partners, resulting in lack of competitiveness compared to other countries.

Way Forward-

• Exploring Joint Development Programme: Amidst a wave of deglobalization and slowing growth, exports cannot be the sole engine of growth. India can also explore joint development programme with other countries in sectors like space, semiconductor, solar energy to improve India’s medium-term growth prospects.
• Dedicated Export Corridors: The economic policy should also strive to promote export dynamism and product specialization alongside product diversification through Dedicated Export Corridors to offer the best of the best service across the globe and propel the Indian economy to the path of long term sustained economic growth.
• It is important for India to link Special Economic Zones with the MSME sector and incentive small businesses.
• Filling Up Infrastructural Gaps: A robust infrastructure network – warehouses, ports, testing labs, certification centers, etc. will help Indian exporters compete in the global market.
• It also needs to adopt modern trade practices that can be implemented through the digitization of export processes. This will save both time and cost.

Conclusion-

India’s manufacturing sector needs up-gradation and reforms for becoming globally competitive. Absence of effective, flexible and targeted policy support along with supportive measures like the development of infrastructure and education would mean the stagnation of the sector. The government needs to address the core problems of manufacturing sector to grow.