"With China increasingly looking to serve its domestic market and facing high labour costs, India is at certain advantage in gaining global lead in textile exports. With a huge demographic dividend and lower wage rates compared to exporters in Southeast Asia and China, India has many positives. The Government’s ‘Make in India’ programme also aims to propel India’s growth as the leading exporter of the world."

With China increasingly looking to serve its domestic market and facing high labour costs, India is at certain advantage in gaining global lead in textile exports. With a huge demographic dividend and lower wage rates compared to exporters in Southeast Asia and China, India has many positives. The Government’s ‘Make in India’ programme also aims to propel India’s growth as the leading exporter of the world.

A recently released World Bank report, ‘South Asia’s Turn: Policies to Boost Competitiveness has and Create the New Export Power House’, highlighted the potential of South Asia to become the next factory of the world. The report cites increasing labour costs in China as the key factor which could lead to this transition. Increasing labour costs have been the major determinant of location of exporting industries historically. It was Japan which first challenged manufacturing in the West through low labour costs, only to lose to Asian tigers later, which subsequently lost out to China. However, it needs to be kept in mind that just low labour costs do not guarantee export success. Despite having higher wages, China has a much bigger share in the global apparel industry than south Asian countries.

Among other recommendations, the report also underlines the importance of integration into Global Value Chains (GVCs) for expanding manufacturing in south Asia. While the emphasis on GVCs is not new, the renewed thrust seems to be in the backdrop of trade facilitation agreement (TFA), which was arrived upon in the World Trade Organisation’s ministerial conference in Bali in 2013. TFA is aimed at harmonising trade regulations such as custom clearance procedures, by drastically improving trade infrastructure in third world countries. The report identifies timely access to key imported inputs as an important factor for sectors such as apparel and electronics, something which can greatly improve due to TFA.

Boosting competitiveness

The role of GVCs in boosting a country’s export competitiveness is a widely debated topic in economics. Organisations such as the WTO, OECD (Organisation for Economic Co-operation and Development) and the World Bank have been arguing that GVCs can help a country boost its manufacturing exports, provided right kinds of reforms accompany them. Such policy prescriptions have focussed more on labour market reforms and improvement in ease of business rankings, and remained critical of attempts to force domestic content requirements on players involved in GVCs. On the other hand, many developing countries have lamented the fact that thanks to GVCs, they have become stuck at low value addition activities without much income generation.

Impact of GVC integration

After the opening up of the economy in 1991, Indian manufacturing has become more integrated with the rest of the world. This has been accompanied by an increasing share of manufacturing exports in India’s total export basket as well. However, it is also a fact that manufacturing’s share in India’s GDP has been more or less stagnant in the Indian economy. India has been witnessing a decline in its value added manufacturing in the post-reform period, resulting from a large increase in imports of processed industrial supplies, which suggests increasing outsourcing of content requirements.

Although increasing integration to the global economy has benefitted a section of Indian manufacturing, India has ended up importing more from the rest of the world rather than exporting to it. India is not the only economy, which is facing such problems. In 2014, Indonesia banned imports of raw materials, to increase domestic sourcing of its manufacturing activity. Such policies carry the twin risk of alienating investors as well as promoting inefficiencies within the economy in the name of domestic sourcing.

Working towards the goal

There is a need to improve investment climate in the South Asian regions vis-à-vis other manufacturing centres in the world. Although India fares much better than its South Asian peers, it is much behind countries such as China. A tepid global economy, trade growth environment and rising protectionist politics in the advanced capitalist world is likely to make export led growth more difficult in the days to come. Unless India undertakes holistic reforms, which equip its manufacturing sector to fully exploit the advantages of integration to the global economy, it is unlikely to realise the dreams of the becoming the next global factory.