State-level export competitiveness merits policy action
PremiumIndia’s trade strategy should include plans for export enablers in sub-national ecosystems
Global value chain interlinkages have increased with globalization, making the economic system more connected than ever. The interconnectivity of nations also means a more volatile system, and volatility increases in uncertain times, be it the covid pandemic or other global events of significance, such as the Suez canal blockage that led to higher freight and shipping costs, semiconductor shortage, and the latest geopolitical tension between Russia and Ukraine. However, crises have also provided us with an opportunity to rethink our existing systems in challenging times. India’s exports have shown resilience in times of crisis. They have grown remarkably, and the country has surpassed its ambitious target of $400 billion worth of merchandise exports in 2021-22.
An export-led growth strategy is vital to improving India’s overall competitiveness in the global market. An increase in exports increases the size of addressable markets, allowing domestic firms to exploit economies of scale, and improves the innovative capacity of firms as they compete with foreign rivals, fostering knowledge spillovers and raising productivity in various sectors of the economy. In light of this, the Second Edition of Export Preparedness Index (EPI) 2021 offers a comprehensive analysis of India’s export milieu, with new indicators added that help offer a robust picture. It goes beyond identifying inter and intrastate disparities within the country’s export ecosystem. It helps identify drivers and bottlenecks faced by individual states’ export preparedness to assess their level of preparation for expanding export capabilities. It promotes the spirit of cooperative federalism and a fair contest among states and Union Territories as it encourages them to take insights from their peers in strengthening their own export ecosystems.
Gujarat, Maharashtra, Tamil Nadu, Karnataka and Uttar Pradesh account for over 60% of India’s exports. These states have scored high on the export preparedness index as well. Regional disparities in trade support, research & development and export infrastructure need to be addressed sustainably to achieve the country’s target of $1 trillion in merchandise goods and services exports. Given the importance of exports in regional development, many relatively less developed states should emphasize the need to expand the export efforts of local firms. States need to undertake proactive policies for promoting exports through micro, small and medium enterprises. Moreover, key findings of the EPI suggest that states must do more to provide essential trade support and upgrade existing export infrastructure to support a conducive business environment for exports. It has also been noted that apart from coastal states, most states struggle to enable the export ecosystem as transport connectivity continues to be a significant bottleneck in the state’s export capacity. Most Indian states lag on the creation of export promotion industrial parks, special economic zones (SEZs) and agri export zones.
Most importantly, states need to adopt a slightly multifaceted export growth strategy, i.e., focus on a combination of manufacturing, agriculture, services and limited natural resources, as not every state can make manufacturing a priority area, given the limited prospects for merchandise export growth in some of them. States need to formulate a roadmap to expand their export footprint globally and develop a dynamic comparative advantage based on their geographical characteristics, complemented by existing absolute advantages in their current export basket. They need to move from the traditional approach of merely formulating export promotion strategies based on the thrust sectors in which they have a static comparative and absolute advantage. The Union government and state governments need to work closely with firms, export organizations and exporters to help identify dynamic comparative advantages in exports of products and services.
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India’s Union ministry of commerce is deepening its engagement with states and districts to promote exports as growth drivers. It is working on a portal that will provide country- and commodity-wise export data for states and districts. The ministry is also making efforts to fill gaps in service export data.
In his work on ‘diamond conditions’ of competitive advantage, Michael Porter, a leading thinker in competitive strategy, emphasized that competitive advantages often reside in the location of a business. Therefore, to assess dynamic comparative advantages, state governments need to look at embedded firms in the region to assess why firms in, say, another sub-national area are more successful in their export endeavours.
The export capability of a region is an outcome of an interactive decision-making process between industry, firms and exporters. It is characterized by regional factors such as factor conditions, demand conditions, human capital, physical and technological infrastructure, the availability of suppliers, and efficient administration, apart from open and vigorous local competition. All of these have a bearing on a conducive environment for exporters, and can be worked upon.
It is reasonable to forecast that almost all economies will continue to be affected by external shocks over the years ahead, which in turn could hold back a global recovery. In this context, it is very important to understand the Indian economy’s growth trajectory, which would be incomplete without considering the export ecosystem at the sub-national level to promote a resilient export ecosystem. This is all the more important in crisis-ridden times.
Amit Kapoor and Kundan Kumar are, respectively, chair, Institute for Competitiveness, visiting scholar & lecturer, Stanford University; and adviser, industry, NITI Aayog