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The volume of exports plays a pivotal role in the GDP of any economy. India, as one of the fastest-growing major economies globally, anticipates surpassing Japan to become the third-largest economy in the coming years. Historically, vibrant export sectors have been fundamental to the prosperity of successful economies worldwide, whether in Europe, America, or Asia. Despite advancements over the past two decades, India’s export performance has not matched its economic potential, except for certain agricultural items like pharmaceuticals, iron and steel, machinery, textiles, electronics, dairy, automobiles, jewelry, and fuels.

According to reports from the Press Information Bureau (posted on April 13, 2023), merchandise exports reached $447.46 billion with a 6.03% growth during the FY 2022-23 compared to 2021-22. Conversely, service exports, although lower than merchandise exports, have been experiencing substantial growth. In FY 2022-23, they reached $322.72 billion, marking a 26.79% increase over FY 2021-22.

India’s Need for a Vibrant Export Sector

Given the significant role of the export sector in GDP growth, India must prioritize the development of a robust export sector. Several theoretical explanations exist for India’s historical export performance, but rather than delve into those, a historical perspective sheds light on the matter. Many European countries and Asian economies such as Japan, Taiwan, South Korea, Vietnam, and Bangladesh have achieved economic growth through successful export performances. Former Chief Economic Advisor (CEA) of the Government of India, Arvind Subramanian, emphasized the importance of manufacturing exports, stating that no country has achieved 7-8% growth without at least 15% growth in manufacturing exports. He noted that relying solely on the domestic market for growth has been a mistake made by Indian policymakers.

Challenges in India’s Manufacturing Sector

Typically, agricultural sectors lead economic growth, followed by industrial development, and finally, a dominant service sector. However, India has followed a different trajectory, bypassing industrial development and witnessing the dominance of the service sector in GDP contribution and employment. Manufacturing, which typically creates a vast job base, has lagged behind in India compared to other developed and developing countries. TCA Rangunathan, a former chairman of Export Import Bank of India, highlighted India’s manufacturing challenges, pointing out the significant disparity in job creation between India and China. To bolster manufacturing and employment opportunities, Rangunathan advocated for reforms in labor laws, land laws, taxation, and subsidies.

The Difficulty in Climbing the Manufacturing Ladder

The present global landscape poses challenges for India to establish a manufacturing base akin to China’s. Economists Raghuram Rajan and Rohit Lamba, in their book ‘Breaking the Mould - Reimagining India’s Economic Future’, explain why India struggles to create an industrial base similar to China’s. They highlight three key points:

Global supply chains dominate modern manufacturing, often leveraging labor arbitrage and significant automation. Indian workers, adjusted for quality, may not offer significantly cheaper labor compared to their competitors, making labor arbitrage less viable. Trade agreements with other countries are essential to address India’s deficien- cies in areas such as border tariffs and non-tariff obstacles.

India has lagged behind in participating in global supply chains, unlike countries like China and Vietnam, which have seen significant growth in their share of global value chain-related manufacturing output.

India’s Comparative Advan-tage in Service Exports

Despite challenges in manu-facturing, India holds a comparative advantage in ser-vice exports. These exports include direct services like software, consultancy, legal analysis, and accounting, as well as services embedded in manufacturing. India excels in service-intensive manufac-turing activities, such as R&D, chip designing, product design, packaging design, financing, advertising, and marketing. This advantage positions India favorably in the global market, with thousands of Global Capability Centers (GCCs) providing services to foreign clients and employing numerous individuals. In the future, India is poised to play a more significant role as a service exporter on the global stage.