International competitiveness imperative for survival

Gross domestic product growth has hit a record low of 5 per cent with dismal manufacturing growth. Economists are advocating increase in investment and interest rate cuts. But these are not sufficient to revive industrial growth. In the globalised world to which we are intrinsically integrated since 1991, we cannot succeed in sustained industrial growth without being internationally competitive. This calls for anti-protection policies contrary to what we are currently pursuing with increase in tariffs in successive Budgets. India’s non-agricultural average tariff level is about 14 per cent compared to single-digit levels in successful ASEAN countries. It is high time that we let our industry stand on its own feet in this turbulent competitive global environment. This is required for its long-term survival. We need to give up our protectionist policies immediately. Indian industry should be competitive enough to penetrate global markets as well as efficiently substitute some domestic imports. For this we need to better link our industry to global value chains (GVCs).

So far, India is not well connected with the GVCs, which combine goods, services and technology to promote exports on account of transaction costs and poor business climate. The government’s focus should be to overcome these deficiencies. India is well placed to link to GVCs:

• We have a very dynamic services sector — professional services — and a very remarkable technology capacity which are essential for task-oriented GVCs.

• We are yet a small player in GVCs with much room to grow. Our MSMEs hardly participate in GVCs unlike those in Southeast Asia, China, Korea, Japan, Mexico and some East European countries.

• The same is true for the levels of FDI, especially efficiency-seeking FDI, linked to creating a hub in India which are at a dismally low level till now. Most of our FDI is market-seeking catering to a large domestic market.

• India is ideally placed to be a supply chain hub given its proximity to the high growth Southeast Asia and East Asia.

• Most importantly, we have a government that has embarked on an outstanding foreign policy that just needs to be complemented with matching next generation trade and investment reforms.

 

We need to focus on the following policies:
 

• Fully implement the recommendations of the 2018 Logistics Development Report of the Prime Minister’s Economic Advisory Council (PM EAC). Significant reforms have been taken in trade facilitation as reflected by tremendous improvement in the ranking of Trading Across Borders from 146 in 2017 to 80 in 2018. We now need to focus on implementing the recommendations on logistics reforms contained in the report under the logistics cell in the Ministry of Commerce and Industry which should report to the PM since logistics issues are handled by several ministries .

• Improve the business climate to allow a level playing field for MSMEs and help them attract FDI since they are short of both investment funds and technological know-how. Again, we just need to build on the vast jump in the Ease of Doing Business ranking from 100 in 2017 to 77 in 2018. We should target reaching the rank of 50 in the coming year.

• Diversify professional services beyond IT and ITES to accounting, engineering, architecture, design, product development, legal and medical services. This requires urgent regulatory reforms of the services sector in India and negotiation of trade barriers within trade agreements.

• Promote skill development in labor-intensive services. The changing landscape of IT and ITES requires far greater emphasis on a diverse range of expertise and domain knowledge than mere programming that call centres ask for. The government and the private sector together would have to convert India’s large output of natural science, arts, and commerce graduates into employable resources in the diversified professional services sector. 

• A simplified tariff structure to encourage easy importation of inputs/intermediates, and to reduce tariffs on them.

• Regulatory environment that is attractive to FDI in manufacturing with emphasis on national single windows and timely decision making.

• Finally, the Department of Industrial Policy and Promotion should focus entirely on investment promotion with a strong value-chain focus. It should be mandated to chase global majors and innovators in specific value chains and attract them to India. We need to think value chains.

We need sustained growth in GDP, manufacturing, services, exports and jobs to cement our place as a major global player. For this we need to be internationally competitive and closely link our manufacturing and services industry and technology to GVCs to promote exports and efficient import substitution only. Make in India is to make for the whole world, not just for India.

The writer is a former economic advisor in the Union commerce ministry