With elections few months away, the economy should be of great concern to the ruling NDA government . Recently, the rupee almost touched Rs 73 per dollar. Oil prices have been on the rise and people are feeling the pinch in their budgets due to the steep rise in petrol and diesel prices.
The way out of this mess is to boost exports and curb imports. That is also the plan of the Government. To make the markets feel good and not unduly worried about the Rupee’s recent fall to historic lows, the Commerce Minister has announced that exports have picked up well showing a growth of 19.3 percent in August 2018. It is indeed good news that exports have probably benefited from the Rupee’s slide, but throughout the last four years, exports have not been making great strides. Good performance over just one or two months, though a positive sign, is not enough to assure that high export growth is sustainable.
Exports growth depends on manufacturing growth which has also been showing lacklustre performance (7.9 per cent in 2016-17) though there has been a recent rise in manufacturing growth (13.5 percent in April-June 2018 but 7 percent in July). Many attribute the problem of slow manufacturing growth due to the impact of demonetisation and the shaky handling of the GST which confused and befuddled many. The small and medium enterprises continue to face the challenge of getting reimbursements for the input tax credits. But the main reason why exports have not really done well lies with the problem of infrastructure and the quality of labour. The Chinese spent huge amounts in building infrastructure and in training and educating its labour force.
For manufacturing industries, the ‘Make in India’ campaign, which Modi started in 2014, has had some amount of success. It was a good idea to invite FDI in manufacturing rather than only in IT industries. Around 60 per cent of the FDI goes into the service sector. Around 25 sectors have been earmarked for the ‘Make in India’ invite to FDI. Although the quantum flow of FDI has been high during Modi government it has not gone into manufacturing as much as desired.
Import restrictions on the other hand via high tariffs on electronics have yielded some results. Recently, LG and Lenovo have started manufacturing TV screens and Xiaomi is making smart phones in India due to the duty hike on such items by the Modi government in the last Budget. This has been the pattern in the US also where high tariffs on tyres by Obama and Bush administrations in the past led to the establishment of tyre manufacturing companies from China and Japan in the US.
But on the whole, as compared to China where foreign investors came in droves and started manufacturing units and exporting manufactured goods back to the US and the world, not much has happened in India except in a few cases. Koreans have set up factories in the South and others like Kodak and Boing are in Delhi, Gujarat and Maharashtra but on the whole there has not been a deluge of FDI coming to India compared to China. The reasons are many from China’s better score in ‘ease of doing Business’ to superior infrastructure but the main reason is its supply of disciplined and trained labour force. Because of highly skilled labour in FDI industries, China learnt quickly (according to Trump by stealing American Intellectual property) and started manufacturing on its own the stuff foreigners were making on their land and established their own export industries. It led to high GDP growth and made China the manufacturer of the world. The Chinese have rightly said that it will take India 10 years to catch up in manufacturing.
Though the Modi government has focused on skilling Indian labour force, it has not been very successful nor industrial demand oriented because trained youth are not finding employment easily -- only 45 percent find jobs today in manufacturing. The unemployment rate has doubled according to CMIE at 7.13 percent. Had there been a big pool of skilled and employable labour, the manufacturing units would have absorbed them. Only 2 per cent have any kind of certification of training in India compared to 70 percent in the EU and 80 to 90 percent in Korea and Japan. Skill training should have been given the top priority if Modi really wanted his promise of providing 20 million jobs a year fulfilled. Around 12 million youth enter the labour force every year.
Unable to find jobs in the formal sector they work in the informal sector. The productivity of labour and wages in the informal sector are low as they work with a small capital base. They need social security and the Modi government has made a good beginning by promising the informal sector workers insurance policies.
In informal sector exports today, it is a cutthroat game. The MNCs zero in on countries that can provide the cheapest but quality products. India is losing out in garments exports to Bangladesh because of low wage cost combined with its duty free access to western markets due to its Least Developed Country status.
The world trade is also not growing fast because of the trade war between US and China and the tension around US sanctions. The rise in the price of oil is also a constraining factor. The world demand which is stagnant can mute our high export growth expectations and expected inflationary pressure in India from hike in petrol and diesel prices can be a deterrent in attracting FDI.
This commentary originally appeared in The Tribune.
The views expressed above belong to the author(s). ORF research and analyses now available on Telegram! Click here to access our curated content — blogs, longforms and interviews.
David Rusnok Researcher Strengthening National Climate Policy Implementation (SNAPFI) project DIW Germany
Read More +
PREV