Trade Competitiveness of India

Context

On most trade indicators, Vietnam and Bangladesh surpass India.

Background

Vietnam’s total merchandise exports grew at an annualised average rate of 18 per cent in the last 10 years till 2019, as compared with India’s 5 per cent.

During the same period, Vietnam attained a trade surplus of $47 billion, which again was a significant improvement over the trade deficit of $13 billion in 2010. While Vietnam started delivering trade surplus, India’s trade deficit increased to $156 billion in 2019 from $130 billion in 2010.

In Detail

Vietnam’s top exports, in 2019, comprised electrical machinery and equipment (with 41 per cent share), apparel (11 per cent), footwear (8), and machinery and mechanical appliances (5). The highest increase in exports during 2010-19 was in electrical machinery and equipment, the share of which in Vietnam’s total exports rose from 10 per cent in 2010 to 42 per cent in 2019.

In comparison to Vietnam’s manufacturing and technology-oriented exports, India’s top exports comprised largely low-tech manufacturing products like mineral fuels (14 per cent share), pearls (11 per cent), machinery (6), organic chemicals (5) and vehicles (5).

South Korea-based Samsung has one of its largest facilities outside its home country in Vietnam. In 2012, Samsung established a dedicated LFD business, Samsung Display Solutions, catering to the company’s SMART range of LED products.

In 2018, the total sales by Samsung Electronics in Vietnam amounted to $66 billion which accounted for as much as 28 per cent of the country’s GDP.

In Bangladesh, large export of apparels to the EU and the U.S. make the most of the country’s export story. The EU allows the import of apparel and other products from least developed countries (LDCs) like Bangladesh duty-free. Sadly, Bangladesh may not have this facility in four to seven years as its per capita income rises and it loses the LDC status.

Bangladesh is constantly working to diversify its export basket. India, as a good neighbour, accepts all Bangladesh products duty-free (except alcohol and tobacco).

Vietnam and Bangladesh have gained enormously from trade. Trade has created wealth and employment and lifted millions above the poverty level in less than two decades.
Vietnam has evolved as an attractive destination for FDI, as it is increasingly providing cheap labour whilst offering a friendly environment and reduction in taxes to foreign enterprises.

Loopholes in India's Trade Line

India could have been an ideal destination for hi-tech manufacturing, but Vietnam has been the frontrunner. Hi-tech exports as a percentage of manufacturing in Vietnam stands at 40 per cent, whereas in the case of India it stands abysmally low, at 9 per cent in 2018.

Out of 56 companies that have moved out of China since its trade war with US, only eight have invested in India, while 26 shifted bases to Vietnam.

Vietnam pursues an open trade policy mainly through Free Trade Agreements (FTAs) which ensure that its important trading partners like the U.S., the EU, China, Japan, South Korea and India do not charge import duties on products made in Vietnam. Vietnam’s domestic market is open to the partners’ products. For example, 99% of EU products will soon enter Vietnam duty-free.

Room for India

India needs to realize where it is going wrong. Since liberalization, the country has had multiple policies from the erstwhile National Manufacturing Policy to present day Make in India but the share of manufacturing in India’s exports has remained muted.

Although, Samsung is to diversify its production lines for making smart phones in India under the PLI (Production Linked Incentive) scheme, certainly this will be a boost.

It is necessary to be quick to react to the evolving global scenario. Recently, in the light of the trade war, Vietnam has been swift in offering attractive corporate tax rates for large firms wanting to relocate. For instance, the two common preferential corporate tax rates of 10 per cent and 20 per cent are applicable for eligible large manufacturing projects for 15 years and 10 years.

In deviation, the standard rate is 40 per cent for foreign companies and branches of foreign companies in India. Considering the surcharge and cess, the highest effective rate is 43.68 per cent for foreign companies in the country.

During the first six months of 2020, amidst the devastating Covid-19, exports from Vietnam were almost on a par with India’s, speaking volumes about the country’s aspirations. In fact, the average annual growth rate of exports from Vietnam has shown a growth of 3 per cent, while India showed a negative growth of 24 per cent during the same period.

The key learning from Bangladesh is the need to support large firms for a quick turnover. Large firms are better positioned to invest in brand building, meeting quality requirements, and marketing. Small firms begin as suppliers to large firms and eventually grow.

Vietnam has changed domestic rules to meet the needs of investors. Yet, most of Vietnam’s exports happen in five sectors. In contrast, India’s exports are more diversified.

The Economic Complexity Index (ECI), which ranks a country based on how diversified and complex its manufacturing export basket is, illustrates this point. The ECI rank for China is 32, India 43, Vietnam 79, and Bangladesh 127. India, unlike Vietnam, has a developed domestic and capital market.

To further promote manufacturing and investment, India could set up sectoral industrial zones with pre-approved factory spaces. A firm should walk in to start operations in a few weeks. There should be no need to search for land or obtain many approvals.

Conclusion

Integration and enhancement of logistics value chain, coupled with the adoption of new technologies such as Blockchain and Artificial Intelligence across the logistics network, and concerted efforts towards the improvement of infrastructure at ports and roadways will ensure last-mile connectivity for farmers, MSMEs, and small businesses, driving economic growth and trade competitiveness of India.

With reforms promoting innovation and lowering the cost of doing business, India is poised to attract the best investments and integrate further with the global economy.

Connecting the Article

Question for Prelims : Economic Complexity Index released by

(a) World Economic Forum
(b) IMF
(c) World Bank
(d) None of the above

Question for Mains : What are the key issues in India's export sector? Suggest necessary measures to rectify them.