Can India Become Next Workshop Of The World ?

Several questions in this regard have been raised : The answers are theoretically founded and
empirically substantiated .What are the industries which hold the greatest potential for growth
and employment generation? What should be the nature of trade policy ; should we pursue an ‘
ultra export promotion strategy or neutral policy which favours neither domestic nor the export
market? (2).Should the government pursue an activist industrial policy by selectively pursuing
some industries or just play the role of neutral facilitator ? What role do multinational
corporations play and what kind of synergies can they establish with domestic companies ?
What changes in service sector exports , in a changing environment ?

As per Foreign Trade Policy 2015-20, the government aims to increase India's export of
merchandise and services from $465.9 billion to about $900 billion by 2019-20 and to raise
India's share in world exports (goods and services) from two per cent to 3.5 per cent.

India’ Trade pattern shows resemblance to from David Ricardo’s static comparative
advantage(1817; ​ Bertil Heckscher and Eli Ohlin and dynamic​ comparative advantage Bela
Belassa ((1965) , India’s trade pattern shows resemblance to Gravity model also. (1) , (2) and (3)

India’s major export items include , ​Jewelry , Packaged Medicaments , Frozen Bovine Meat , 
Leather Footwear .​High​-​technology exports from india ​ are products with ​high​R&D intensity,
such as in aerospace, computers, pharmaceuticals, scientific instruments, and electrical
machinery.

Now ​India exports​ machines, engineering goods, chemicals, chemical products, ready made
garments, gems, processed foods and handicrafts. The share of traditional​ exports​ like tea, jute
and textiles in total ​exports​ was 55% in 1950-51 and decreased to 12% in year 2003-04.

According to Department for Promotion of Industry and Internal Trade (DPIIT), FDI equity
inflows in India in 2018-19 stood at US$ 44.37 billion, indicating that the government's effort to
improve ease of doing business and relaxation in FDI norms is yielding results. There have
been significant reforms with respect to FDI policy since 2017 -Under the “Make in India”
initiative , there is significant liberalization cutting across all sectors - Civil Aviation Services

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such as Maintenance & Repair Organizations, Petroleum & Natural gas, Pharmaceuticals,
Plantation sector, Ports & Shipping, Railway Infrastructure, Renewable Energy, Roads &
Highways, Single Brand Retail Trading, Textiles & Garments, Thermal Power, Tourism &
Hospitality (4).

Since 1980s trade in parts and components have grown faster than in final goods as
intermediate products cross the national boundaries several times (Athukorala, 201).(11) This
type of trade results from interconnected production process involving a sequential , vertical
trading chain stretching across several countries .This is described as by various terminologies
such as fragmentation trade , trade in Network Products , trade in middle products task trade
vertical specialization .Growth of GPN means that trade involves not only exchange of end
products but , increasingly , of P&C ie parts and components .

For India network product trade increased at the rate of 22 per cent from 2000-2014 which is
miniscule as compared to that of China (billion ), Singapore (162 billion) , South Korea (258
billion) .for India it stood at 24 billion in 2014( pg.196 , ,Garmia and Veermani Dhir)(6). While
India’s trade has been mainly driven by AEP ie assembly trade.

Being a large coury with varied resource endowments and skill sets , India has the potential to
export a diversified set of Network Product . India needs to lock into the East and Southeast
Asia .By improving its participation it can increase its share in (P&C) exports African region is
another area Currently Europe accounts for the largest share of India’s P&C exports (27 percent
) closely followed by Americas (24 percent ) .China is another region with current trade tariffs ,
where the scope of network product exists.

India has High Complexity Index (ECI) of( 0.36) It means India is 45th most complex country
India’s export potential is larger than what would be expected out of its size of export economy
and the size of its products in globa​based on a study being conducted at ISID.

l market.(14) .India has the advantage of demographic dividend , the youngest working age
population .There has been steady improvement in ease of doing business , ​India​ Improves
Rank by 23 Positions in ​Ease of Doing Business​. The World Bank released its latest​Doing
Business​ Report(DBR, 2019) today in New Delhi. ​India​ has recorded a jump of 23 positions
against its rank of 100 in 2017 to be placed now at 77​th​rank among 190 countries assessed by
the World Bank. There has been an improvement in the government policies towards exports ,
under ‘ Make in India.’

The ​Make in India​ program was launched by Prime Minister Modi in the year 2014 to
put ​India​ on the world map as a major hub for global design and manufacturing. ...
Through the ​Make in India​ (MII) initiative the Government of ​India​ aims to take the
GDP to 25% by 2022.​ ​. Under this programme, the government is focusing on 25 sectors
including defence, food processing and leather.

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The report also showed that FDI under the automatic route fell by nearly 30 per cent during
April-August period of 2016-17 fiscal."FDI equity inflows through the automatic route, which
allows foreign investors to take their own decisions without waiting for specific government
approval, fell by almost 30 per cent during the first five months of the current year," the report
said.This fall would not have occurred had the foreign investors responded consistently to the
more liberal policy environment of the government, it added.According to the government data,
FDI during October 2014 to May 2016 grew by 46 per cent to USD 61.58 billion after the launch
of Make in India programme."These claims, however, ignore the simple fact that decisions on
long-term investments will not be taken instantly and will be based on careful analysis of
investors' future requirements and the relative advantages offered by alternative locations
globally," it added.Further, it said the overall FDI increase during January - September 2016
was achieved in large measure because of a huge jump in the acquisition of existing shares by
foreign investors by displacing the existing investors.The authors have pointed out major
deficiencies in the official data, which, according to them, have remained "unnoticed" till now.(
FDI EPW ; 15 ).

Critical uncertainties exist with respect to slodown of World trade (16), movement away from the
multilateral trade towards bilateral trade (17) . China and the United States trade war .and
consequent uncertainties Fluctuations in exchange rates The infrastructure hurdles , will take
time to be overcome (19) ...There is an emerging consensus that by 2030, the world will not
have a hegemonic power that dictates global rules (NIC 2012). Donald Trump’s announcement
that the United States (US) will stop policing the world can be seen as a result of their waning
influence to set the global agenda. This retreat by the US has resulted in a shift in economic
and political power to Asia, creating space for China—and more recently India—to achieve their
potential as some of the world’s largest economies.India must develop more skill intensive
activities along the value chain.

Greater focus of India should be on ;(a)increasing value and quality of manufacturing exp[orts
.(b) overall diversification and uniqueness of service activities(c) diversifying into higher
(PRODY) /(EXPY) a higher income represents higher income enhancing potential. In the long
term the domestic policy improvement is the key for electronics and other industries .FDI should
create new production potential.

Policy Implications :
1.​The industries which include the greatest potential are under potential for growth and
employment are :(a) traditional labor intensive products :(b) Network Products particularly labour
intensive assembly. India’s strength lies in assembly related activities given its vast manpower.

2.Based on imported parts and components , India has a huge potential to emerge as a major
hub for final assembly in several industries, particularly in electronics and electrical machinery.

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Since scale of operations is very large , the total domestic value addition is from these activities
could be considerably high contributing to large scale employment generation.

3. Logistics costs are critical - transportation costs , communication , supply disruption shipping
delays , power failure , political disturbances , labour disturbances .(8)

4. Global Production Network in several industries are are primarily controlled by the MNEs ie
multinational enterprises.The Fdi reforms introduced in India, since 2015 are a reflection of
this.​Currently, India is among the most open economies globally for foreign investment. It allows
FDI of up to 100 percent of the equity shareholding in most sectors under the automatic
route.​Since ​2017​, ​India​ has launched a series of ​reforms​ to liberalize its ​foreign investment
norms in sectors such as infrastructure, construction, development, and single brand retail
trading.

5​.​Compared with G-20 economies the restrictiveness of tariffs is high .Reducing trade
restrictiveness will further help export performance. For example, the STRI index seems to
show the Indian services sector as one of the most restrictive, particularly in policy areas like
foreign entry. This seems surprising since 1991, the one area that has seen maximum
liberalisation in India is FDI.(5)

6.High exports sophistication , particularly of services is likely to support growth (6) India’s
comparative advantage in R&D services with an ecosystem of risk -based capital to
entrepreneurs will play an important role

7. Using ​‘Gravity Model’ ​, Parbir De (7) has shown that potential for expansion of India’ exports
is highest with countries such as China and ASEAN-6 India’s exports have remained largely
unrealized with other parts of the world (Central Asia ,Eastern Europe , Latin America , and
Africa ).

8.Regional trade development will reduce the would help in reducing real trade costs and
behind -border-barriers in region .over period ​India has​ previously signed framework
agreements with​ the ASEAN (Association of Southeast Asian Nations) and MERCOSUR
(Southern Common Market ).
Spanish)​trade​ blocs, and ​countries​ like Japan and Korea. Aside from FTAs, ​India has
negotiated​ other types of ​agreements​ to promote ​trade​ liberalization .These should be further
negotiated with Africa .(9).

9.​ The strategic plan being considered by the Ministry of Commerce and Industry aims to attract
companies leaving China owing to trade war concerns. However, ministry officials did not elicit
comments on the plan.Besides providing sops such as tax breaks, the plan envisages to set-up
manufacturing hubs in the coastal areas of the country. ​Items such as electronics, automobile
parts, pharmaceuticals and telecom equipment have been identified by the strategy paper.

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10.Long term foreign trade policy 2015-20 included ,- (a) Duty exemption and remission
schemes ,(b)Export promotion capital goods scheme (c) export oriented units (d) Electronics
hardware technology Parks (e) Software technology parks and biotechnology parks .New
foreign trade policy 2020-25 which is to be announced consider - (a) the existing export
subsidies, including the popular Merchandise Export from India scheme (MEIS), will be
withdrawn as they are no longer compatible with the World Trade Organization (WTO) rules. (b)
Export incentives will have to be replaced with incentives that are allowed under the multilateral
regime such as a rebate of all input taxes paid by exporters at the Central and State levels and
subsidies for research & development and modernisation of production process. (c) Under
existing WTO rules, a country can no longer offer export subsidies if its per capita GNI (gross
national income) has crossed $1,000 for three years in a row. In 2017, the WTO notified that
India’s GNI had crossed $1,000 in 2013, 2014 and 2015.

11.The research paper, “Indian Exports: The Next Trajectory – Mapping Products and
Destinations”, also suggests a double-pronged approach of expanding domestic production and
undertaking targeted promotion in top importing nations to build exports in these
items.Consequently, the top-37 products from a range of sectors, including apparel, organic
chemicals, machinery and mechanical appliances, pharmaceuticals and others have been
identified.

12.India’s exports fell by 1.7 per cent in the first quarter of 2019-20 to $81 billion due to an
uncertain global trade climate. In 2018-19, exports had expanded by 8.8 per cent to cross $330
billionIndia is facing headwinds from the ongoing global trade conflicts at a time when some
other countries are capitalising on changing supply chains and the country must step up its
export strategy to compete, the industry body has said.In June, export growth hit a 41-month
low as poor performance plagued all major foreign exchange earners including petroleum oil,
gems and jewellery, and engineering goods.

13.For enhancing the market promotion of the select products, the body has pointed out that
non-tariff barriers must be taken up with the respective governments of destination countries.
Other suggestions include facilitating effective marketing strategies by setting up centres in top
international markets, product promotion and integration of brand building initiatives with India’s
commercial missions.

To encourage domestic manufacturing, CII has called for strengthening industrial clusters with
related infrastructure and port connectivity. Adopting an integrated value-chain approach for
establishing global linkages is another important recommendation which would require
interventions such as logistics and infrastructure support and skill development initiatives,
among others.

14. FDI should create new production potential rather than just mergers and acquisitions .

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.

1.“A Model of ​Trade​ with ​Ricardian Comparative Advantage​ and ... between ​pattern​ of
comparative advantage​ across sectors and ...... ported Intermediate Inputs and Domestic
Product Growth: Evidence from ​India​,”Haichao FANy Edwin L.-C. LAIz Han (Ste¤an)
;https://www.aeaweb.org/conference/2014/retrieve.php?pdfid=114

2.A TEST OF THE HECKSCHER-OHLIN THEOREM ON INDIA EXPORTS A Thesis Presented

to the Faculty of California State Polytechnic University, Pomona -Amith Jay Shetty 2014
;https://broncoscholar.library.cpp.edu/...3/.../ShettyAmith_Thesis2014.

3.REVEALED COMPARATIVE ADVANTAGE: AN ANALYSIS FOR INDIA AND CHINA Amita

Batra Zeba Khan : AUGUST 2005 ;www.icrier.org/pdf/wp168.pdf .

4 In regard to FDI .​https://www.investindia.gov.in/foreign-direct-investment​.

5.Make in India: Which Exports Can Drive the Next Wave of Growth? -Prepared by Rahul
Anand, Kalpana Kochhar, and Saurabh Mishra May 2015.© 2015 International Monetary Fund
WP/15/119 -​www.iariw.org/India/veeramani.pdf

6. “Reaping Gains from Global Production Sharing Domestic Value Addition and Job
Creation by Indian Exports “C. Veeramani Indira Gandhi Institute of Development Research,
India . Garima Dhir Indira Gandhi Institute of Development Research. Paper prepared for the
IARIW-ICIER Conference New Delhi, India, November 23-25, 2017 .

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7​.IGIDR Working Paper: “Domestic Value Added Content of India’s Exports: Estimates for
112 Sectors, 1999-2000 to 2012-13”
-​www.igidr.ac.in/igidr-working-paper-domestic-value-added-content-india​.

8.The Role of Extensive and Intensive Margins and Export Growth Tibor Besedeˇs∗
Georgia Institute of Technology Thomas J. Prusa† Rutgers University and NBER
February 2008
-​https://www.sciencedirect.com/science/article/pii/S0304387810000970

9.Export Diversification and Economic Growth Heiko Hesse - 2008 The

International Bank for Reconstruction and Development / The World Bank -
siteresources.worldbank.org/.../Growth_Commission_Working_Paper_21_.

10.Export Diversification and Economic Growth: Evidence from Cross-Country

Analysis Anwesha Aditya♦, Saikat Sinha
Roy-https://www.isid.ac.in/~pu/conference/dec_10_conf/.../AnweshaAditya.pdf.

11.​Asian trade flows: Trends, patterns and prospects -​Prema-chandra

Athukorala
(prema-chandra.athukorala@anu.edu.au)-​https://econpapers.repec.org/RePE
c:eee:japwor:v:24:y:2012:i:2:p:150-162.

12.​Calibrating the model to the ​World Input​-​Output Database​ (​WIOD​), the ... "A comparative
analysis​ of export growth in Turkey and China through ... R.E. ​Baldwin​ and J. ​Lopez
Gonzalez​(2015) .... "Global Value Chains: A Case for Europe to Cheer Up" Compnet Policy
Brief 03/2013, European Central ​Bank​, August 2013. ​-​WIOD-based publications - World
Input-Output Database ​www.wiod.org/published

13.​The Structure of the Product Space and the Evolution of Comparative Advantage -​ Ricardo
Hausmann​ and Bailey ​Klinger​. CID Working Paper .... 2015
https://www.researchgate.net/.../242563879_The_Structure_of_the_Product_..

14.​India (IND) Exports, Imports, and Trade Partners - (product space)

-OEC....​https://atlas.media.mit.edu/en/profile/country/ind/​-

15.FDI | Economic and Political Weekly-​21 Jul, ​2018​ ;​https://www.epw.in/tags/fdi​.

16 ​FRB: Causes of the Global Trade Slowdown

https://www.federalreserve.gov/.../causes-of-the-global-trade-slowdown-20…

17. Globalisation is dead and we need to invent a new world order

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https://www.economist.com/.../globalisation-is-dead-and-we-need-to-invent.

18.​Does China's Belt and Road Seek Global Dominance …(​Mar 5, 2019 - ​EPW​ Home
https://www.epw.in/engage/article/does-chinas-belt-and-road-seek-global

19.​Does China's Belt and Road Seek Global Dominance ​Mar 5, 2019
...https://www.epw.in/engage/article/does-chinas-belt-and-road-seek-global

20. C Rangarajan | Economic and Political Weekly-​, 26 May, ​2018​ .

APPENDIX :
A1.’Ultra export promotion strategy ‘ involves subsidizing exports with chap inputs as well as
undervalued exchange rate (Bhagwati,1978).It is generally argued some of successful East
Asian economies , including China have followed this strategy.

A2.Athukorala , 2012 Global​ Production Sharing, Trade Patterns, and Determinants ...
https://www.adb.org/.../global-production-sharing-trade-patterns-and-deter​mination.-​.”... Global
production sharing has become a defining characteristic of world trade. ... World trade in parts
and components increased from about 18.9% to 22.3% of total exports between 1992/93 and
2005/06.”
A.​3. ​ Ishii and Kri Mu , 2001 .​The nature and growth of vertical specialization in world trade
https://ideas.repec.org/a/eee/inecon/v54y2001i1p75-96.html -...”....Production processes
increasingly involve a sequential, vertical trading chain stretching across many countries, with
each country specializing in particular stages of a good’s production sequence. We document a
key aspect of these vertical linkages – the use of imported inputs in producing goods that are
exported – which we call vertical specialization…”

A4.The concept of global commodity chain (GVC) have also been used to describe the interconnected
production process in a given industry across.Compared to GPN , the conceptualization of GCC/GVC is
more restricted , focusing on the governance of inter-firm transactions and on linear structures with
sequential stages in the value chain

A5.The OECD STRI project includes:Composite for each country and sector in the STRI that quantify
restrictions on foreign entry and the movement of people, barriers to competition, regulatory transparency
and other discriminatory measures that impact the ease of doing business (see country and sector notes
below).Indices of regulatory heterogeneity that measures regulatory differences by country pair, sector
and year.Empirical analysis assessing the impact of services trade policies on economic performance and

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trade costs.A suite of interactive web tools that can be used to compare regulatory regimes across
countries and to simulate the impact of policy reforms.

A6. R&D and exports sophistication is interlinked in several trade models , Gruber et al (1967) and
Mansfield et al (1979) examine firm and industry-level R&D behavior with respect to foreign markets. In
general, they find that firms and 4 industries have significant ongoing R&D activity because of the foreign
markets they have to serve. A study by Franko (1989) concludes that R&D intensity is a good predictor of
corporate growth and the primary engine for increasing market share in global competition. His study
shows that the decline in U.S. world market share of five industries during the 1970s could be attributed to
a larger R&D intensity commitment on the part of European and Japanese counterparts. Cameron, et al
(2005) maintain that R&D plays a very significant role in raising productivity growth in UK manufacturing
industries for the past three decades (1971-1992). However, Engelbrecht (1998) argues that technology
alone will not be able to overcome Australia’s trade balance problems at least in the short and medium
term. R&D intensive imports still dominate exports in Australia, which implies a revealed comparative
disadvantage in R&D intensive products.

A7. Gravity Model of international trade -In order to understand India's import trade with its partners, this
paper applies the generalized gravity model to analyse the import structure by employing the panel data
estimation technique. The results portray that India’s imports are determined by the inflation rates, per
capita income differentials and the overall openness of the countries involved in trade. It has been also
found out that imports are influenced to a great degree by the common border, as the case is between
India, China and Bangladesh. Furthermore, the country precise effects describe that the sway of
neighbouring countries is more than that of distant countries on India’s imports (ASEAN-India
Connectivity: An Indian Perspective Prabir De Research and Information System for Developing
Countries (RIS), India.) .

​ hirty-one years after ​The Wealth of Nations ​was published, ​David Ricardo introduced an
A8.​ T
extremely important modification to the theory in his ​On the Principles of Political Economy and
Taxation​, published in 1817. Rica​rdo observed that trade will occur between nations even where one
country has an absolute advantage in producing all the products traded.
Ricardo showed that what was important was the ​comparative advantage ​of each nation in production.
The theory of comparative advantage holds that even if one nation can produce all goods more cheaply
than can another nation, both nations can still trade under conditions where each benefits. Under this
theory, what matters is relative efficiency.

Smith and Ricardo considered only labor as a “factor of production.” In the early 1900s, this theory was
further developed by two Swedish economists,​ Bertil Heckscher and Eli Ohlin, who considered
several factors of production. The so-called Heckscher-Ohlin theory basically holds that a
country will export ​those commodities that are produced by the factor that it has in relative abundance
and that it will import products whose production requires factors of production where it has relatively less
abundance.In fact, economists consider this law of comparative advantage to be fundamental.​ As
Dominick Salvatore says in his basic economics textbook International Economics, the law of
comparative advantage remains “one of the most important and still unchallenged laws of
economics. . . . The law of comparative advantage is the cornerstone of the pure theory of
international trade.”​In static terms, the law of comparative advantage holds that all nations can benefit
from free trade because of the increased output available for consumers as a result of more efficient
production. James Jackson of the Congressional Research Service describes the benefits as follows:
Trade liberalization, “by reducing foreign barriers to U.S. exports and by removing U.S. barriers to foreign
goods and services, helps to strengthen those industries that are the most competitive and productive

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and to reinforce the shifting of labor and capital from less productive endeavors to more productive
economic activities.”

Many economists, however, believe that the dynamic benefits of free trade may be greater than
the static benefits. Dynamic benefits, for example, ​include the pressure on companies to be more
efficient to meet foreign competition, the transfer of skills and knowledge, the introduction of new
products, and the potential positive impact of the greater adoption of commercial law. Thus trade can
affect both what is produced (static effects) and how it is produced (dynamic .

A9.GPN or network products -​"the nexus of interconnected functions, operations and transactions
through which a specific product or service is produced, distributed and consumed."

A10. The authors build a disaggregated approach using the United Nations dataset on network products
(UN) comtrade database ie BEC Broad Economic Categories to separate out P&C from assembled end
products(AEP) They categorised the codes into six digit level Harmonised System (HS) of trade
classification that corresponds to a group of network products .

the product space is a network connecting products that are likely to be co-exported and can be
used to predict the evolution of a country’s export structure.

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