Prudent economic management but lagging exports

Expectedly, New Delhi officialdom was quick to seize upon the news that India had overtaken the UK to become the fifth largest economy in the world. Such self-congratulation may be warranted provided the government does not take its eye off the huge roadblocks still obstructing the way to much faster growth for India to be able to wipe out poverty, inequality and disease. Of course, barring a few missteps the economic management during the difficult two-year-long pandemic has been creditable. Unlike most rich nations in the West, the government did well not to open the national purse wider than was absolutely necessary. It is this prudence exercised in the use of funds, at a time when the economy was under great stress due to the recurring lockdowns, which seems to have now paid off in quicker rebound in economic activity.

That said, the policy-makers in various blocs and bhavans in Lutyens’s Delhi ought to view the news — of India surpassing Britain to become the fifth largest economy — in the right perspective. The key factor ought to be the per capita income of an average Brit and an average Indian. Here we continue to be laggards by quite some distance, and catching up will require a lot of policy work and a willingness to shift emphasis on exports, especially when in a globalised world it is pointless to manufacture at home when better products at competitive prices can be sourced from abroad. Unfortunately, successive governments — even after the opening up of the economy in the early '90s — have been niggardly in offering sops for increasing our exports. Indeed, periodically both time and funds are wasted on indigenous manufacturing in the name of swadeshi and even atmanirbharta. It should be a matter of concern that even in labour-intensive readymade garment exports, India lags behind Bangladesh and a number of Southeast Asian countries . We have tremendous potential in the garments sector, but we have failed to create the right business environment for this key sector which can create millions of new jobs. Overall, the latest figures underline the widening gap between exports and imports, pressuring the rupee further. With the Western economies staring at recession, the resulting slowdown in the export of IT-enabled services, now a major source of foreign exchange, could further widen trade deficit. Notably, exports in the first five months of this financial year totalled $192.59 billion while imports in the same period were $317.81 billion, a deficit of $125.22 billion in less than half a year of 2022-23. This is an unacceptable situation. A number of economists, even those widely known to be friendly towards the current regime, have emphasised ad nauseam that the only sensible prescription for the country to record a higher growth is to incentivise exports.

Unfortunately, politicians of all hues seem to be obsessed with local manufacturing, to the detriment of higher exports. For instance, though the Production Linked Incentives scheme to an extent seeks to address the issue, the fact is that a large number of companies availing the benefits available are in capital-intensive sectors. And what we need is investment in labour-intensive industries, in order to not only absorb the vast army of jobless who join the ranks of the unemployed every year but also wean away millions from the agriculture sector. It is significant that even the latest economic data point to slow growth in the farm sector, which is unable to support the ever-rising numbers dependent on the ever-shrinking land holdings. The point is that no economy in recent times has eradicated poverty, or raised the living standards of its people without encouraging exports. China, of course, is a prime example, but Bangladesh, Vietnam, South Korea, even Thailand and Indonesia have provided all help to grow their exports. It is worth noting that in the recent years when labour and other costs began to rise in China, the smaller economies mentioned above benefited the most, while India hardly gained from the steady shift away from China. As we said, PLI is well-intentioned, and attracting quite a few marquee brands for making India a manufacturing hub for exports, but given the rising trade deficit, exports need a bigger push. Even in a slowing global economy a concerted effort to boost exports can further energise growth.