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1.Introduction as china i pulling u t e tous
r ports hos a n e t potehal ture

The Covid pandemic has ravaged the Indian economy. But even as the country remains mired in
crisis, discussion is turning to the medium-term and in particular to India's post-pandemic
we ask whether
development model. In this paper, we ask what that model should be. Specifically,
India's orientation should be outward or inward.
So far, the intellectual and policy consensus seems to favor an inward orientation. This consensus
self-
was emerging even before Covid had reflected in increasing calls to atmanirbharta or
struck,
reliance.
three
consensus, based evidence. We argue that this belief is based on
We challenge this on new
In fact, the domestic
main myths. The first is that India's domestic market is large and buoyant.
remain small the medium-term, since domestic
still quite small, and likely to over
demandis
market will be weighed down by heavy debts across the economic horizonin firms, households,
and the government.
and
The second myth is that has been driven by domestic demand, not by exports,
India's growth
the opposite, namely that for three
definitely not manufacturing exports. Our evidence illustrates
decades a stellar export performance has played a critical role in India's overall growth.

show to the contrary, that India has

The third myth is that India's exports prospects are dim. We
considerable room to increase exports by increasing its market share. India has been gaining
market share for several decades now, even during the difficult global conditions of the past
decade. Moreover, India's past under-performance on low-skill exports creates a significant

opportunity at a time when China is vacating export space in such products.

turn could doom India to a trajectory of

Given these conditions, we argue that an inward
to focus on the domestic market will give up a
mediocrity. A strategy of abandoning exports
valuable-perhaps the most valuable-opportunity for growth. And a strategy of offering
protected access to India's market as a way of convincing firms to relocate their global production
to India will not work. To the contrary, the big export opportunity for India-low-skill
manufacturing-can only be exploited through less protection and more outward orientation
because this industry is import-intensive, as China and the other successful low-skill exporters
have shown.

Thus, abandoning export orientation is akin not just to killing the goose that has laid golden eggs.
It is akin to killing the only goose that can lay eggs.

The paper is organized as follows. Section 2 describes the inward turn. Section 3 discusses and

dispels the three myths underlying the inward tun. Section 4 evaluates the inward strategy and
observations.
Section 5 provides brief concluding

2 Development is about a lot more than this question but we chose to focus on one dimension both because it is
macro-economically important and becauset nas oecome a domain of intellectual and policy contestation. OOn
another imnportant issue, namely fixing the 1inanclal system to revive investment, a more detailed diagnosis and

are in Subramanian and Felman (2019).

prescriptions
2. Has India been
turning Inward?
Inward and outward orientation can be assessed on a number of dimensions: macroeconomic,
trade, capital ilows, people, technology and data. We will restrict ourselves to the first two, where
the inward turn is more
pronounced. In contrast, since 2014 India has become more open to capital
flows, both in the form of foreign direct investment and
portfolio flows.
A.Macro-economic
Inward orientation has become central to India's
A consensus seems to be policy and intellectual discourse (Mehra, 2019).
emerging that India's growth slowdown preCovid owed to
domestic demand, especially consumption." Accordingly, there has been a search for weakening
policies to
revive demand, with
some proposing a redistribution of
income, others suggesting agricultural
reforms, and still others proposing public investment (Nagraj, 2020; Chinnoy, 2020; Ghatak
et. al., 2020; Kotwal and
more
Sen, 2020)
The focus on domestic demand is not limited to
short-term strategies. Many argue that this needs
to be the new medium-term
growth strategy. In that sense, there is a parallel with-perhaps even
mimicry of-discussions in advanced economies that claim there has been secular
which can only be overcome with forceful stagnation,
demand-side measures such as investment public
(Summers, 2016, Krugman, 2013).
The Indian debate seems also to be
inspired by a resurgence in academic-cum-policy circles of the
notion that in the face of demand constraints to
countries can leverage their size to boost demandlong-run development (emphasis ours), some
and create incentives for faster growth. Most
notably, there has been a rehabilitation of the Shliefer et. al. (1989) model which formalized the
Big Push intuition of Rosenstein-Rodan from the 1950s.

The clearest exposition is by Goldberg and Reed (2020). As

they say, "The main implication of
this framework is that a minimum efficient scale-a
threshold market size is required to achieve-

development (if there is not enough demand, a firm adopting the increasing returns technology
will not break even)." Given some positive shock to
productivity/income/wealth, countries that arc

All discretionary scrutiny of FDI was abolished, reflccted in the dismantling of the lForcign Investment Promotion
Board. In terms of scctoral scope, India is closer to a negative list of impermissible FDI than to a positive list of
permissible FDI. Similarly, therc has been a consistent opening to foreign cquity and bond inflows as wcll as relaxation
of limits on external commercial borrowings (P'atel, 2020). The impact of thesc measures on actual gross capital inflows
has been substantial. In the period before 2014, FDI averagcd $27.5 billion and total
capital inflows avcraged
thercafter DI jumpcd to 42.5 billion (55%% tncreases) and total inflows to $133 billion (66% increase).
$80 billion;
Two exceptions
t the FDI liberalization werc in relation to China and to retad, the latter to favour a domestic incumbent
from Walmart and Amazon.
against foreign
compctiton
4One tension about this view is that it 1s at complete odds with the official figures which now show steadily risine and
robust growth in privatc consumption until 2018.
5Recent idcas from scholars at Azim Premji University to create urban employment guarantee schemes and from
Dreze for low-wage subsidies are Cxtremely important and worthy of consideration. But they should be seen morcJean
as
sttengthening the socalsafety net andc sas poucics to sustarnably boost growth (Abraham, et. al. 2020, 1>r ze, 20201.
We thercfore do not discuss them in this paper.
 demand,
able to ensure that that the results are widely shared will ensure greater consumption
efficient scale.
increasing the likelihood that oligopolistic firms can attain minimum

B.Trade
Tariffs have been raised, trade free
The inward orientation on trade is discernible in actual policies.
Asian treaty rejected), and production subsidies
agreements have been put on hold (and a major circumscribed. But
these steps have been carefully
have been rolled out.° In magnitude and scope, three-decade trend of steady
in spirit and intent, the inward turn
marks a major break with the
could only be the beginning.
opening since 1991. And of course, this
and
been the reversal in tariff policy (Figure
1). Between 1991
The most important change has 2017). Since 2014,
from 125 percent to 13 percent (Singhmost-favored-nation
2014, average MFN tariffs declined level (on
increases at the HS-6 digit
there have been about 3,200 tariff increased from 13 percent
large increase.' As a result, the average tariff has tariff
imports), a strikingly when there were nearly 2,500
increases occurred in 2018
to nearly 18 percent. The largest tariff increases affected
increases amounting to nearly 4 percentage
points. We estimate that the
billion or about 70 percent of total imports.
amount to about $300
import categories that
2014-2020
Figure 1. Tariff Changes, Aggregate,
177

13.0

400

2019 2020
2018
2015
2016 2017
Year

Lo
0 1 6 a e 6204 and 5305 eher.
o 6g goneU
N u b e r on b e n r &do e g o n o orrgd

Source: HWTO and Ministry of Commerce,

Government of India
Chinese foreign direct investment (FD),
actions have also been taken-restricting
6A number of China-related production and reducing military
from bidding tor government contracts, indigenizing military
Chinese technology apps and
excluding Chinese firms trom
hina, and banning
clearing of goods
and
services coming in intent.
imports, delaying actions, as they are largely geo-political
platforms. This paper
will these trade
not focus o n
2017 categories with 2016 categories. Thus,
in 2011. ience,we cannot tuly compare
i The HS Classification was revised 1s The 3200 increases in tariffs for HS6 digit lines includes
201/ omited.
between 2016 and
the bar for the tariff changes 2017.
between 2016 and
the 24 increases
al. (2020) cite the Global Trade Aert database
to
show that India had the highest count of protectionist
sKelkar ct. o,
nps:L¥N.IVenmint.com/news/india/india-must-remain-vo

actions amongst developing countries (hart

categories where tariffs were increased between 2017-2020. Note

global-11594822682912.html).

HS-6
imports in 2017 across all w e t e arrectea DeCause some came under free trade agreements but we
of actual imports
chat we cannot say how much
below.
liscuss this issue
 India's tariffs were highest
Figure 2 shows a sectoral breakdown of the tariff increases. 2014,
In
(10 percent) and then high-
magriculture (about 35 percent) followed by low-skill manufacturing been increased. Agricultural
SKil manutacturing (less than 10 percent).® Since then, tariffs have The increaseS on low-skull
aiiis have gone up modestly, by about 3.3 percentage points.
manufacturing products have been much larger, especially in apparel and footwear where tariffs
have gone up by 15 percentage points. Tariffs on assembly of cell phones were increased by 20
percentage points and on electronic products by 3.6 percentage points between 2014 and 2020.

16 worth noting that tarifs have come down on some products. But even these reductions are a
tom of protection, since they have mostly been on inputs, which encourages fims to set up plants
to assemble products domestically. Not coincidentally, input duties have been reduced on inputs
for cell phones and electronic
products.
Figure 2. Tariff Changes, Sectoral, 2014-2020

2014 2016 2018 2020

Year
Agriculbure Minerals
High-Skil Mg LowSi Mi
Apperel, Teatie, Leather, Foobreer

Source: WTO and Ministry of Commerce,

Government of India
Of course, these tariff increases will not
Even so, they will have significant
apply to imports under Free Trade Agreements
as imports from countries with
effects. For one thing, (FTAs).
imports under FTAs are not the
FTAs. The reason is that same
many sensitive goods are
excluded fromn

10
High and low skill sectors are defined in
Chatterjee andSubramanian (2020a).
ire the large and prominent low-skill sectors.
11
Apparel, textiles, leather and footwear
Simple average of MFN duty for HS-2
digt category
intensive products although their final assembly
85. Cell
might be. phones and electronic products are
not low-skill
12tene://www.business-standard.com/articde/cconomy-policy/duty-free-hits-a-fifth-of-manufacturing-imports-says-
wto-report-120071201035 1.html.
 MF Most l a e d n
naion
i e nel of rareet
rke by
by oc ewaly te t oter herein tu hort
C
ad ters ompannd
ts te ining naflen

these arTangements (Krishna, 2019). For these items, an increase in MFN duties is an increase
in the duties all
on
imports of the particular item.
Even it the goods in
question do enter duty-free under FTA, tariff increases still have deleterois
ettects. An MEN tarift inerease in the presence of FTAs is like a preferential tarifincreaseon the saq lo
restofthe world (that is. non-FTA partners). It will lead toincreased importsiom FIApartners
mports which by definition must be low quality or high cost, since otherwise they would have 201
entered the country before the tariff increase. This trade diversion in favour of FTA partners will
raise costs and reduce welfare. e r us
MN
and So much for tariffs. What about other trade policies? Progress in regional integration has come to
FTAS a halt. Between 2004 and 2014, India signed 11 preferential/free trade agreements. But none have
been signed thereafter. The major development has been India's decisionnot to join the Regional
Comprehensive Economic Partnership, a pact that covers nearly all Asian countries, including
China, Korea, Japan and ASEAN, as well as Australia and New Zealand. Free trade negotiations
with the European Union have made little progress.

Most recently, the government has announced a major initiative: production-linked incentives,
PLIs. This initiative aims to give production subsidies to companies acros a range of sectors:
electronics and pharmaceuticals have already been announced; clothing and automotive are
subsidies
reuekon expected. To some extent, these subsidies are a replacement for the explicit export
awarded under the MEIS (Merchandise Exports from India Scheme), which had to be eliminated
i n teodl with WTO rules. Production subsidies occupy a grey zone of
because of their inconsistency economic impact they serve to reduce imports and/or
c permissibility under WTO nules but in
increase exports.
PLIs have been complemented by a phased ban on military imports with a view to encouraging
in the wake of Chinese aggression in the
domestic self-sufficiency in military production
Himalayas. The ban would cover 101
items of equipment, which roughly involve expenditures of
S10 billion per year (Shukla, 2020).14

3.Dispelling the myths

Poae shht

Three myths inward

underlie India's there is growing belief that India is now so big
turn. First,lOSs
a
k a
of opportunities overseas. Second, and partly
that domestic opportunities can
make up tor the h
from the first myth, many believe that exports in general and exports of manufactures
overall economic performance. Third, there is the
following India's
in particular have not been critical to the era of globalization is over nitical w
belief that export opportunities
are in
any case shrinking because
evidence to contest each of these myths.
world. We present
in the post-Covid
3tpot|
other fon
vehcles, texalcs. etroiun pzroxaucs, sugar,
wheat, vcgetable oil dairy products and
13 For example, m o t o r detayed liberalization in India's ASEAN FTA, If certa
ertain
excludod o r placod
m
the sc ck tot
products
goods
were
are excluded, then
the question
ot trade divesion docs n o t arise and tantt increases will lead to a reduction in

of-101-
sLbi
imports ng-poucyanvoking-sclf-relant-indiagavt-bans-impott
14hts//aw.busincss-standand.com/aruc
dcfcncc-itcms-120080200743 .htm)
 f scof po
f* cnbehbutien
brhbation
L
Laye dake arket innet
aAittanu (
2 -
ipe t tmit)
LAg Labu lere. hanial
we i n o China .
T lana n-aaRst , 7n*a tna nke rigui-frat p o a a fa
te andAttk diven ieedor.
Myth 1: Growth can be based on the domestic market because it is big

Since 2014, the Prime Minister has spoken often of India's advantageous three Ds: demography,
demand and democracy. The invocation of the first two Ds reflects a conviction that India's
domestic market size can be the basis for long-run growth.

This is a new idea. Circa 1980, import substitution always came with the caveat that even (or
especialy) if the strategy worked, it would soon exhaust itself. After all, domestic supply could
not expand that much when domestic demand was so small!

Four decades of rapid growth later, there is a belief that India is a now large market, with a middle
class endowed with considerable purchasing power. Metrics such as the number of Facebook users
or telecommunications subscribers, running into hundreds of millions, occasionally billions, only
serve to reinforce this belief5

Underlying the India-is-big view are three claims. First, a large domestic market increases the
scope for import substitution: when domestic demand is large, it makes sense for firms to set up
factories in India, rather than supply from abroad.

Second, it makes sense to use India as a global export base, since the large population means that
there is a large labour force that can be tapped. In particular, India's large population, combined
with financial assistance (zero input tariffs, production and other subsidies), could lure firms that
are now exiting China for geo-political reasons. After all, India is the only other country in the
world with a population size comparable to China.

Third, with a large market, India-like the US and China-can create national champions in the
new technology and technology-intensive sectors: This can be done through restricting
competition, domestic and foreign, as well as through domestic regulatory assistance.

So, how big is India as a market for consumption? The answer is sobering, illustrating how
population size can obscure market realities. Table 1 below provides some rough comparisons with
China and the rest of the world. I shows that the Indian market is smaller than commonly believed.
The "true" market is:
a fraction ofthe headline GDP number, somewhere between 15 and 45 percent of GDP
much smaller than China's, roughly 15-20 percent of China's true market size; and
atiny 1%-5percent oftheglobal market

I5 A recent cxposition of this vicw is byrespectedbanker and former government-appointed head of the BRICs bank,
anath: "India and China have had very ditterent growth paths, he said, adding that the neighbour to the cast
d i n t o exports because they didn't have a big enough domestic market for the goods. India, the world's second-
most populous country, will nkcly Tous on tne "Atmanirabhar Bharat' plan championed by the government. That.
Kamath, willbenefit India's
according
to economy and balance of account."
(https://www.bloombergguint.com/ cconny-tinancc/ ndian-banking-system-in-a-much-better-place-than-carlier-says-
kv-kamath)
Several factors explain this result: India has a large
consume (much) middle-class goods; population of relatively poor people. who don t
while the smaller group of
rates, reducing their consumption. high earmers have hugh savng

Table 1. Rough Estimates of "Middle Class" Market Size:

India, China and Worid 201
India hina
GDP (S trm.) 2.9 14.3
Middle-class 1|Middle-class2 Midile-ciass 1 Miieies
Cut-of is Rs. (cut-of is Rs. (cut-of is Rs ( s

S200 per month 8550 per month 3200 per month 8550 per munc
or S5.5 PPP per | or $5.5 PPP per or $5.5 PPPper or S55 PPP per
Definition of middle-class day) day)_ dav)
Moderate (-15 Tiny (-1-2 Large 75 Reasvnabie
Population share percent) percent) percent) -25 percert)
Large (65-75 Moderate (-25 Very large (-90 Large (-S0-
Incomeshare percent) percent)_ percent)_ percent)
Estimated "middle class"
market size (S trn.)_ 1-1.3 0.5 6.5 3.545
Memorandum Item
26
World trade (S trn.)
Population share estimates are based on World Bank (2016). Lakner and Mfilanovic (2016) a i
PovcalNet; Income share estimates are based on World Inequality Database: market consumption
estimates assume savings rate of 40 percentfor India and 50 percent for China

The first row shows the 2019 GDP in dollars for India and China. The obvious point is that India's
market size is reasonably big (fifth in the world) but still only one-fifth the size of China's

But as a gauge of a "middle class" consumer market, overall GDP is misleading. We nead to make
three adjustments. The first is to realize that there is a large population with limitei purcbasig
power. Data from Lanker and Milanovic (2016) allows us to get a rough estimate ofthe population
share that commands decent purchasing power. We employ two definitions of middle ckass". the
population that spends more than:
$15 per day per person (roughly Rs. 8550 per month at purchasing power parity, or PPP
or
$5.5 per day (roughly Rs. 3200 per month at PPP)

The Lakner and Milanovic data suggests that between I and 2 percentof Indian pogulation share
falls into the former category in 2011) and about 12-15 peroent falis intothe lauer categer For
China, these numbers are substantially bigger.

We next need to ask how much income these populations command. Now, a key point is that we
cannot get these numbers from consumption surveys because as documented firt by Banerjee ni
Piketty (2005), consumption surveys do not capture a lot of the top incomes, almost 40 perrt of

15
This corresponds roughly to the median purchasing pouer estimated in Ghatak ee 0
 the total. So, we turn to the worldinequality data base, which provides data (better not perfect)
income shares by population groups. This allows us to approximate the incomes of the
on
class", according to the two definitions. "middle

Finally, we need to convert middle class incomes into

to be high savers (Ghatak et. al. 2020), consumption because better-off groups tend
population. ranging from 35-50 percent for the top three deciles of the

Based on all these

numbers calculations, we get estimates for market size for India
are by no and China. These
show definitive, but the broad orders of
mcans
that-contrary popular belief-India's
to magnitude
real market size is
are still
revealing. They
China's, and substantially smaller than modest, much smaller than
trade because that is the the potential global market which we equate with world
potential market that Indian firms and producers can
compete for.
Admittedly, these calculations are based on a
straightforward cross-check, by examining China'snumber of assumptions. But one can make a
of
development as India growth strategy when it was at a
today. That would be in the early similar
around $3 trillion. And what 2000s, when China's GDP wasstage
domestic market was too strategy did China embrace at that also
small, and that the real point? It considered that its
and embarked on the
biggest opportunities lay overseas. So, it joined the WTO
export binge the world has ever seen?
Myth 2: India's growth has not been driven
by exports and
certainly not manufacturing
exports
Normally, it is failure that is an
intellectual orphan. In contrast, India's
of spectacular success.
In may be
the three decades since thepart, this success is not well making an orphan
this is occuring because
in services but also in early 1990s India has been an known. In fact, for
manufacturing.
Its export exemplar of export-led growth, not
esque, which in turn has driven and/or growth has been only
sustained high GDP positively
East Asian Tiger-
growth.
Figure 3a. Export growth of Goods and Services
1995-2018
31
Vietnam (15.7%)
l Chine (16.5
hdia (134%)

addAvg 6.-

10 15 20
25 30 35 40 45
Souroe: World Developmerm Indicators. Country
Exporta of
Rank 50
Goode +
Non-Factor Servioe
Figure 3b. Exports growth of
Manufactured Goods 1995-2018

Vietnam (19.9%)

China (14.0%)
India (12.1%)

--oddA9=64-.

5 10 15 20 30
25 35 40 45 50
Country Rank
Source: BACI dataset,
CEPI

Source:
Chatterjee and Subramanian (2020a)
Between 1995 and 2018, India's overall export growth (in dollars)
has averaged 13.4 percent
annually, the third best performance in the world amongst the top 50 exporters, nearly twice the
world average growth (Figure 3a) and not far behind China's growth
of just over 15 percent.

Table 2. Contribution to Growth of "Exogenous" Demand Components

Period Governnment | Investment Exports Government Investment Exports
consumption consumption
percentage points share of total
1992-
2001 0.77 1.55 0.79 25% 50% 25%
2002
2011 0.90 3.14 1.94 15% 52% 32%
2012-
| 2018 0.66 0.73
Source: Chatterjee and Subramanian (2002a).
0.73 31% 35% 34%
Moreover, this is not just because India is a services export powerhouse but also because it is a
successful exporter of manufacturing products. Over the same period, India's manufacturing
exports (in dollars)long considered to bethe country's Achilles' Heel-grew onaverage.hy121
percept, nearly twice the world average (Figure 3b). This was the third-best performance in the
World, surpassed only by China and Vietnam.
 These exports have made a substantial contribution to (GDP gowth. In cach of the thre deaes
since the 1990s, czports have accounted for abxout onethird of "eogenous agyreyate deiati
(Table 2). " A d m s t t e d l y , I n d i a ' s e x p o r t growmh h a s s k o w e d i n r e c e n t y c a r s , a s g l h a l trade a t

growth collapsed (Figure 4). Even o, India has contiued to gain global market share, suggsting
that the domestic productivity performance has renained reasonable. Por ezarnple, post-2012,
word exporte were virtually fat and yet India's exports grew by about 3 percent. This was true in
both manufacturing and services. In fact, during this period, India's manufacturing ezpot groranh
rithirste op 10(arnongst the S0 major exporters).
Figure 4. Export Growth Decomposed into World Growth and Exces over World Growth
20%

15%
Subor (inemdu Pyp-n.
Oond
10.3%
10%
8.2%
9.3% laos, Toit Tvoilo
Cabeda, Viotuo
4.5% u s
5% 3.8%
2.9%
e2.5%

0%
1995-2001 2002-2011 India
India World CA GMS 20122013
World

Remarkably, this aghievement oequred in the face of several anti-export developments:

PreGFC, pharmaceutical exports performed well based on exports of Ezpk o
but afterwards their generics to the Us
to the US
reputational advantage was undermined by the exposure ofdU iak
AstOngdoinq bya malfeasance fraud at some Indian pharmaceutical manufacturers.
Mincrals (espggially exporis of iron ores) did well pre-2014 because of Chinese hnds
and lax regulatory policy. QneetheSupreme Court foreed- growth
ninerabexports'declined. atightening of reguatians, Lno o
erpord
Social policy-on livestock-also changed post-2014
enforcement of the bon on bee, contributing to the
because of more zealous
decine inagriculturalexports. Deenau i

eapone

17
d to bra on
We do not include
consumption for two reasons: the pragmatic one is that the mismeasurement in
consumpion, especially for the last two decades, and hence GDP affects
Subramanian, 2002a). The more conceptual reason is that misleading for analysis (vre Appendix 4 in Chatterjee and
the other demand corrclates, although supply factors couldconsumption
be
is likely to be more
endogenous to income than
driving all these correlates.
 nat
Perhaps most importantly, the real effective.exchange rate appreciated by.abouk 20 percent.
Worsening worsened non-oil export growth and the non-oil current account balance (Figure 12
5; Chinnoy and Jain, 2018).8

Figure 5. Real Effective Exchange Rate (REER) and Non-Oil Exports, 2005-2020
REER; index, reverse scale Non-oil, Exports; «GDP, 40MA, rt. scale
98 14
103
13

108
12
113
11
118
REER 10
123 appreciation
9
05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20
Source: Chinnoy and Jain, 2018 (updated)

Despite these setbacks, and unfavourable global conditions over the past decade, India's export
GDP ratio remains a substantial 20 percent, more thantwieeas-highas inthre earty 1990s (Figure
6). 90 peru1 in GDP t t o despite hese set bac
Figure 6: Ratio of Exports of Goods and Services to GDP, 1991-2018 (in percent)

26

N
24
22
20
18
16
14
12
10

Thestrongcorrelation between non-oil exports and the real exchange rate is also true for the non-oil eurreat account
balance and the real exchange rate. And, as ligure 5 shaws, the correlation holds for earlier periods as well.
 This has significant consequences for India's growth outlook. For example, if export growth slows
by 5 percentage
points,
this will shave 1 percent in overall GDP
growth.
In other words, abandoning the export (outward orientation) model is akin to killing the goose that
lays the golden cggs.

Myth 3: Export-led growth is not possible in the post-Covid world

Some advocates of inward orientation
argue that even if India's have done well in the past,
the füture is
going to be different. In particular, export growth exports
will
qlobal Covid world. After all, inevitably be slow in a post-
global export growth decelerated from 15 percent to 5
percent after the
fnan ual GEC, and things will surely become worse
from dependence on post-COVID as countries consider the risks
arising
imports, least for essential commodities such as food and medicines.
the same time, domestic
at
At
export capability has diminished, as shown by India's laoo ve
2 09 advantage the big opportunity created by China's
of inability takeA cderke &
to
Thus, supply and demand considerations vacating of export space over the past decade.
our growth. support turning inward to find our own market to
support thkn it
sho n l a
Thispessimism is the modern-day counterpart of the
pessimism (now forgotten) in the 1980s.about Prebisch-Singer hypothesis and also the S
whether other.counties.could
export strategy-of Japan-and then.af the Bast Asian Tigers inmitate the successfut evn ot
(Reidel, 1984). r co
We analyze this new-style export pessimism in three parts,
Deglobalisation is not inevitable; structural changes arguing that:
could actually
tradable services; boost demand for
even if overall
global imports of goods grows slowly, Indiais small
share, thereby.maintaining high
rates of export growth; and enough to gain market
in particular,
there is enormous potential to inerease unskilled labor exports, which India
is vastly under-exploiting.

A. India-friendly upside to globalization post-Covid

The reports of globalisation's demise have been greatly
ofgoodshavedeclined-to exaggerated. Iis true that-world.exports Thouj
(Figure 6). But world
about-21-percent ofworld-GDP-from about 25-percent prior to the GFC ba e
exports of services
global GDP from 6.5-pereent prior to thehave continued-to inerease,
GFC. In other words, the rising to about-7 pereent-of ha
continuing. globalization of services is bat ckoih
adDods What are the prospects for services exports post-Covid? Quite inenMd .
accelerate. After all, the pandemic is possibly, the trend might actually
opposed to those that
encouraging activities that can be done at a
distance, as
require physical contact. For
i ttA websites-which could be designed and serviced inexample, physical shops are being replaced by
to allow employees to work
India. Similarly, if firms in the West are
permanently from home, these going
more cheaply-be located in India. employees could as just easily-and
w

t e
Aich
haical shops ant being N plaul i t saine
conlo be i t t o in Cndia.
it there is a renewed impetus to globalize service provision, it would represent-or rather continue
to represent-a big opportunity for India. After all, India has a clear revealed comparative
advantage in this area: its servicesexports havegrown faster than worldexportsby an average of
percentage points-every year,resaltingin substantial gains in global market share.

Figure 7. Globalization of Goods and Services, 1990-2019

(share of world exports ofgoods and services, respectively in global GDP)

7.0 %
24% 6.5%
6.0%
22%
Services rigbt sale 5.5%
20% 5.0%

18% 4.5%
Goods
4.0%
16%
3.5%

14% TT 3.0%
2000
200 2010 2018

India might even benefit from post-Covid trends in the production of goods. The pandemic has
of in the
highlighted the risks of depending-entirely onone.country-for provisions key goods; could
the of supply. And India be a
future there will be a concerted effort diversify
to sources

majarbeneficiary of this search for new, low-cost suppliers.

B. Gaining marketshare even ina deglobalizing world

But even on the assumption that globalization in goods comne to a halt post-Covid, the export
outlook would still remain far from bleak-because India could continue to gain market share.
Often, this possibility is dismissed, on the grounds that: "yes, Vietnam could do it but India is not
Vietnam;it is too big" But in this argument is not well-founded. In fact, India isnotabigexporter
onthe giobalscale;its share of global manufacturing exports is only-.7percent, marginally less
thanVietnám'sat i.75 percent (Table 3). So on the relevant metric India is not big, compared to
Vietnam.

So, let's consider an extreme scenario. Suppose pessimistically that over the next 10 years world
real export growth is just 2 percent per year, while India'sexport growthis 8 percent. What would
this imply for India's market share? Would this inchease be politically feasible?
 Table 3. India's Impact Global
on
Exports and Export-GDP ratio: An Extreme Scenario 1/
(percentage points)

Gain in India's global export market share|13

Increase in global cxport-GDP ratio
on
account of India's gain 2/ 0.3
Source: Authors' calculations.
T1/ India's
manufacturing cxports grow by8 percent cvery and world exports by 2 percent
2/ Assuming global export-GDP ratio in manufacturingyear
of 25 percent.

Under the scenario, India's

global market share would increase to a
points over a decade (Table 3, firststill-modest 3 percent, an
increase of merely 1.3
percentage
increase in perspective, over the row). Just to place this
span of just three years-from 2015 to
space of ncarly I percentage
point in low-skill labour exports. 2018-China ceded export
But let's become even more
cede any more pessimistic and assume that China and other countries don't actu:
export space over the next
decade. In that case, India's
push up theglobal export-GDP ratio. If the world's rapid export growth would
this indicator, then the
estimate in the second row
appetite for globalization can be
proxied by
performance will then test the world's carrying capacityisfora rough measure of how much India's
Even if India's exports grow four times
as
globalization. The answer is not much.
only account for about 0.3 percent of fast as world exports, India's increased exports will
world GDP.
Put another way,
rapid Indian export growth would not seriously test the
system. This is one of the advantages
of past under-performance: the capacity of the global Ta'
CLgn
accommodating to India and less
intimidating for the world.
future can be more
Ja lot,t
In other words, the o ne t efect
is the specific
global environment is not as forbidding as it worLd iunaN
opportunity? appears on first blush. But
whereo i t h
CIndia's big unexploited opportunity of unskilled labor MDOM to
exports
Consider Figure 8 below from
Chatterjee and Subramanian (2020a). It shows, on the
country's share of global exports of
low-skilled exports, and on the y-axis,
unskilled labor force. We expect that x-axis, its share of global
countries should line up roughly along the
that outcomes--the share in the unskilled 45-degree line so
manufacturing exports--is close to endowments, the share
in labor force.

The results are striking. China and

India are stark outliers but in the
a has share of global labor force far
exceeds its share of low-skill opposite direction. India's
reverse. India's share of exports. For China, it is
exactly the
of the labor force. The global
low-skilled exports is about 15
percentage points less than its share
implication is that India is exporting about S60 billion of
p a nit annually less than it should be. Ideally, low-skill exports
should be calculating how
in t m production of unskilled activities is fallingwe,short much of the
should match production not because trade theory suggests that underlying
o necessarily exports. We don't have cross-country data onendowments
prodüction
teat
dor sk ed tabew', Th deipartyis o4 I prntoge peink 14
tA a intae oont oLition i to Le lnoked open
 of unskilled sectors but we do have it
for a key sector, textiles and
estimate that India should be clothing. For this
producing
an extra $140 billion in these sectors, amountingsector, we
to about
percent of GDP.
There are, of course, two
ways to look at this finding. On the one hand, it is an indictment of
performance. On the other, it is also an indicator past
of potential future opportunity if the
problems are addressed. underlying

Figure 8. Labor Endowment and performance in low-skill exports of developing countries in

2018

China

45 deg. line

Gap= 15% (-$60 bn)

Vietnam india

10 5 20 25
Share of Workding Age Populetion emong Non-HIC countrles (%)

This is not just a theoretical opportunity. It isa very real one, sinceChina is curently vacatingthe
low-skill export space, creating a large opening for India. Consider Table 3 from Chatterjee and
Subramanian (2020b). The table shows that post-GFC, China vacated about $140 billion in exports
in unskilled-labor intensive sectors, including apparel, clothing,leather and footwear. India did
not take
Table 4. Major Beneficiaries of China's 1oss in Global Market Share 1/
Chinese Ioss Incrcase in India's gain in
Seetor in Global Top 3 Gainers Market Global Market
Market Share | |Share Share
Victnam 5.9%
Footwear 7.5% CGermany 1.4% 0.1%
Belgium 0.7%
Ceramics
Spain .2%
6.0% Italy 1.1% 1.0%
India 1.0%
Vietnam 2.9 %
|Apparel 5.8% Bangladesh 2.8% 0.2%
| Spain 0.7%
Vietnam 2.5%
|Leather 3.4% Italy |1.6% 0.2%
lFrance |1.5%
India 0.4%
Iron and Steel 2.7% Belgium 0.3% 0.4%
Indonesia 0.3%
India 3.5%
Pearls, Gems, etc. 2.3% Isracl 1.1% |3.5%
United States 1.0%
Poland 0.9%%
Furniturec 2.2% Victnam 0.8% .1%
Czcch Republic 0.4%
/ China's lass is measured as tlhe ditjerence hetween the peak market share (post-GFC) and the average of the share
in the last three yeas

advantage of the first China opporturnity post-GIC, created by China's organic process of
becoming richer and hence less competitive in unskilled labour intensive activities.Now, post-
Covid sccond opportunity stenning from geo-politics has becen created and that is
a
prize waiting to be scized.
India's big

A final recason for not succumbing to export pessimism also relates to China. If China as
producer
can contribute by vacating export space, China as consumer could become' a bigger market for
low-skill consumer goods. In cflect, China would do for poorer countries what the West did for
China-providing a ready market for its goods. This, of coursce, would require China to become
more open and less protectionist at least for low-skill
goods.
s there any
guarantee that any of these
factors will actually lead to export cess for India? Of
course, not. India will still have to do the hard work of creating the conditions for firms to compete
effectively in global markets. But the export opportunities are there.