India’s drivers: exports and digital

High-skill exports and new-age technology firms can boost GDP if infrastructure keeps pace

20 September 2021 Pranjul Bhandari, Chief Economist, India

As countries build back from the pandemic, many could find new economic drivers. India is seeing exports rise briskly and has a growing ecosystem of new-age tech firms.

But India is not fully utilising its biggest endowment - workers. While tech exports soar, labour-intensive agriculture and textile exports remain weak. To realise its full export potential, India needs to diversify gains across the export basket. Small manufacturers are held back by infrastructure deficiencies, access to finance, the regulatory burden and lack of skilled labour.

In 2017/19, before the pandemic, as the world attempted to diversify supply chains, India’s export growth picked up in both value and volume terms. But the improvement was not uniform. High-skill manufacturing and services exports grew much faster than low-skill manufacturing exports.

High-skill exports, 56 per cent of total overseas sales in 2013, are now about 70 per cent, led by mobile phones, machinery, pharmaceutical products and cars. By contrast, low-skill and labour-intensive manufacturing exports fell from 44 per cent to 30 per cent, with white-goods and jewellery also weak. And while the mix changed, the net gain in goods export was small.

Diversification aided export growth, as did a revamped government export-incentive programme, but the sharp recovery in global growth after 2020’s big fall explains the lion’s-share of this year’s export performance.

Export growth was an annualised 36 per cent in the first two quarters of 2021, seasonally-adjusted, and is now 17 per cent above pre-pandemic levels.

India nevertheless has a good opportunity to make the most of the strong demand in developed economies. This is a good time to carry out reforms to ensure that exports don’t fall back when global growth normalises.

A world awash with liquidity is eager to invest in India’s start-ups and the country could benefit from other nations’ curbs on some internet companies.

The rapid growth in Indian digital firms is aided by a young population, rapid smart-phone adoption, and a digital-payments revolution. These firms account for about half of foreign direct investment, compared with 20 per cent ten years ago, led by fin-tech, e-commerce, ed-tech, enterprise-tech, media and entertainment, consumer services, healthcare and logistics.

More digital start-ups should nurture India’s entrepreneurial culture, boost consumption and create jobs. It will increase capital spending on warehousing, data centres and associated software.

If India can halve the e-commerce penetration gap between it and mainland China, and if banks continue funding consumption growth, expanding e-commerce could add 0.25 percentage points a year to India’s GDP growth.

There are clear parallels between the growth drivers of rising exports and expanding new-age firms. Both can benefit from India’s large and young labour force. And both the drivers are interconnected.

But to realise full potential, requires the physical and digital economies to rise in tandem: new-age firms also use India’s roads, ports and power, and both depend heavily on goods produced by manufacturers. Yet public infrastructure spending has been stagnant.

The ecosystem that keeps small manufacturing firms from growing needs to be changed. This requires effort across the board – access to high quality infrastructure, access to finance, and less regulation.

First published 8th September 2021.

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