‘India's Labour Laws Still A Problem': Economist Arvind Panagariya On India's Export Challenges

India’s merchandise exports dipped 22 percent year-on-year in June, marking the most substantial decline over the past three years. According to data released by the Ministry of Commerce and Industry, the value dropped to $32.97 billion. The steep decline was attributed to weakening global demand and high inflationary conditions in developed countries.

Due to a drop in exports and imports, the trade deficit for June was recorded at $20.3 billion, as opposed to the $22.07 billion during the same month in the previous year. 

To understand the significance of exports in global trade, policy reforms, growth prospects and more, The Core’s founder and financial journalist Govindraj Ethiraj spoke to economist Arvind Panagariya. He is the Jagdish Bhagwati Professor of Indian Political Economy at Columbia University and is also the Director of Deepak and Neera Raj Center on Indian Economic Policies at School of International and Public Affairs at Columbia University in New York City. 

Panagariya, who has also served as first vice-chairman of the government of India think-tank NITI Aayog between January 2015 and August 2017 spoke about how exports influence economic growth, how Indian real estate laws restrict growth, why businesses should focus more on non-tech related sectors and more. 

“We have about 1.8% share in global exports. On the import side, we are about 2.5%, little over 2.5%. That's for merchandise services. We are about 4% of the total global exports. So there is enormous scope. Compare that to China, which is about 13% to 14% for merchandise exports. For services, China is larger than us, but not much larger,” Panagariya said on India’s trade potential. 

Here are the edited excerpts from the interview:  

In India, we are seeing merchandise exports now fall. So, that is affecting us, but that is also helping us elsewhere because input costs for companies are going down, margins are better, consumers are benefiting, and so on. But with our own role in trade seemingly going down, where do we stand as India in a larger global landscape of trade at this point, given the geopolitical situation and the Ukraine-Russia war and the impact that it has had on so many things.

Let me begin with the question on the falling exports. I look at these figures in a much longer term context. Monthly figures can see a decline. And in this case, of course, you have yourself provided a good explanation that the commodity prices have been declining, and that would impact the value of exports, as well as the value of imports. So most likely what we would also observe is that the value of imports would be correspondingly declining as well. To me, it is the longer term prospects that worry the most or that concern me the most. 

Now, to where we stand, how do I see this unfold? First of all, a common concern, of course, is expressed about what is going on geopolitically and more generally on the global markets. That part I have always maintained is to me not a big source of worry for the following reason. I come to geopolitics in a minute. But first, what has been the kind of very recent history, if I look at these longer term trends, pre-Covid peak of global total exports was in 2018, and that was a figure of about $19 trillion total global exports, that is, for merchandise. And then there was $6 trillion of services exports again. So altogether $25 trillion pre-Covid period in the year 2018. 

Now look at the year 2022. By 2022, which is coming out of Covid, and yet the merchandise exports have bumped up to about $25 trillion from $19 trillion, and services exports have bumped up from $6 trillion to $7 trillion. So now the global marketplace total exports is about $32 trillion, compared with what was about $25 trillion. So it is a large economy. It is a large market. Compare that to India's GDP for example. It is about $3.4 trillion now in the year 22-23. No matter how one likes to look at geopolitics, politics, etc, one fact that remains to me is that the global marketplace, even if it were to decline by some 5-10% in the years to come, will remain a very large marketplace. So what really matters is how large a slice of that very large pie India is able to get for itself. 

Currently, it is very small. We have about 1.8% share in global exports. On the import side, we are about 2.5%, little over 2.5%. That's for merchandise services. We are about 4% of the total global exports. So there is enormous scope. Compare that to China, which is about 13% to 14% for merchandise exports. For services, China is larger than us, but not much larger. So that is where we stand, I think, enormous scope. 

Now we can talk about Ukraine, Russia, if you wish, and also US-China. 

So what you are saying is that the overall trade pie, that is the global trade pie, has grown, but it seems to me that shares have again shifted around. So India perhaps does not have the same share it even had in 2018. Would that be correct? 

No, I think we are about where we were. So it's 1.8, we have not exceeded 1.8, and that is roughly where we stand currently for the year 2022. 

So India has not grown in this pie, but has maintained the same share. So why is that?

Well, this is where I think our internal policies are still not fully conducive to rapid growth in exports. I think we are decent, but not conducive to rapid growth. What is missing is, firstly, in 2018, we had raised a lot of the custom duties, and many of these even include many inputs that go into the production of the final products and so forth. So that naturally works towards reducing trade. Meaning although these are duties on imports, and you might think that reduction in imports is not going to impact exports, but it does not work that way. At the end of the day, when you try to expand exports, resources flow out of somewhere, and that somewhere is also the export industries. And therefore, regardless of whether you are restricting imports, it also means restricting the exports. So that is one factor at work. 

The second is the exchange rate. I still think that our exchange rate rupee is a bit overvalued. Some correction has happened, but we need a bit more correction. And to me, I think the exchange rate is absolutely critical. You look at any country which has done well on exports, expanding rapidly at paces of 15% or 18% a year, on a sustained basis—these are countries which keep the domestic currency very competitive and we have consistently kind of a bit overvalued the rupee. So that is the other major factor.

And the third, of course, we need to do more free trade agreements. That is for looking ahead. 

In the past, you have said basically that we should roll back tariffs because after many, many years, since we started in 91, we have actually now increased the level of protection. You also added that one should strike more free trade deals with major economies and trade blocs and also cut back on anti-dumping. Anti dumping is something that is maybe more situational. But are you also linking the static share in world trade with our increase in tariffs or protectionism?

I would say, look, the level of the share, right, the level itself, as opposed to how it changes over time, is also a function of the economy size. We are still a 3.5 or 3.4 trillion dollar economy. China is four times our size. So remember that even with the same exports to GDP ratio for India, if GDP were to become four times, then our exports to GDP ratio would be four times of what they are. And that of course means 1.8 times four. It is not quite 8%, but it is close to about 7%. The economic size also matters for the level. But still, even if we do that correction, we are well below China's. And there, of course, the old impact of the policies we followed starting from the 1950s are still remaining…because one of my favourite themes is that we have not reoriented and restructured the economy towards the factor which is most abundant in our country, which is labour. China was very quick in the 80s and the mid 90s to reorient its entire economy from this heavy industry, capital intensive industries, towards the labour intensive industries. We have not successfully done that. We were so slow.. till as late as mid 2000s, meaning 2005-06, we had still not completely knocked down the small scale Industries reservation, which is where the labour intensive industries were sitting. 

Then we still have not done the labour laws still, although 2019, we passed all the four codes, but we have not implemented them. They have not been notified yet. So as a result, if you look at our economic structure, it is heavily capital intensive or skilled labour intensive. 

What are the successful industries? You got petroleum refining, machinery industry, chemical industry, pharmaceutical industry, IT industry, finance industry. They are all either skilled labour intensive or capital intensive. You are not making use of the big factor of production which you have got—which is labour. And that is the reason we are not as export oriented as China was or has been. 

I am going to come to that in a moment. But as for my previous question…you are saying that there is no real linkage between our ability to grow or not grow in the global trade pie and the level of import tariffs that we have or the level of protection that we have now imposed on ourselves?

No, that is not what I am saying. Of course, the tariffs do matter. 

But does that make us more uncompetitive? Does that make us less of a player in the international market is my question. 

Yes, look, I mean it is very simple. Just think of the extreme. Suppose you were to raise the tariffs to a level where your imports are zero. There will be no reason to export. There will be absolutely no reason to export. That is what we did for about 4-5 decades pre-1991. I mean, if you go to 1970, imports were 4% of the GDP. Exports were therefore even less than 4% of the GDP. So absolutely, of course, the level of protection makes a big, huge difference. 

A report in The Economist talks about the manufacturing delusion and essentially it argues that countries like India and China, the industry share of economic output has been roughly the same, or rather is roughly the same today as it was about three decades ago. Secondly, even in the West, manufacturing was about 19% in 1997. It is down to about 16% today. o if that is the case—I mean that is assuming you agree with this proposition—is manufacturing or labour-linked manufacturing the way out at this point of time as we speak today? 

So there is a lot of scepticism. First of all, of course, if you look at the western economies, they are highly capital abundant economies. I mean they are not even doing as much manufacturing as China or South Korea or Taiwan are doing. But for them to do labour intensive manufacturing courses is neither here nor there. And so their manufacturing share being low, being at the level where we are, of course tells me nothing at all. 

I have to compare myself to the labour abundant economies. I can look at where Korea was, let us say in 1980 or 1970, or I can look at where Taiwan was, or I can look at where Singapore was at one point, or where China has been for the last 3-4 decades. So if I compare with that, I am well below their levels in my share of manufacturing and the GDP. And I return to the theme that in the end it all has to do with the fact that …we started, as did China of course, initially in the 1950s with a very heavy industry kind of approach to development. China got out of it after Deng Xiaoping came along. We started in 1991, but …we did open up the industries and so growth did happen a lot faster than it had happened before, but we did not restructure the economy because a lot of the other regulations remained in place. You cannot be in the industries, in which genuinely your factor endowments are not pushing you towards comparative advantage where it is a set of distortions that had existed from the past, which has left you there. So you are not going to become a gigantic exporter in those products but your scope really remains still with such a large labour force. 

But the thing is that in the psyche of everybody, whether I look at the businessmen in India, whether I look at the policymakers in India, whether I look at intellectuals in India, they all want to do the high-tech stuff, they all want to do high-tech stuff. The industries like the clothing industry, the footwear industry, the furniture industry, the everyday light manufacturers, and the kitchenware that we use—are not on at least our leadership's minds. But in the end, if you look at the Chinese exports from the 80s and 90s that is what they exported. 

The electronics, even the electronics industry, which is also relatively more labour intensive, arrived more in late 1990s, and then it grew very rapidly in the 2000s, China really exploded. China 2000s, basically, China was adding every year more to exports than India's level of exports. India's total exports often would fall short of the annual increase in exports of China. 

So there was a rate, but the structure was very important.

 
I remember visiting a toaster factory in Shenzhen in the early 2000s and obviously they made so many toasters that they actually had a percentage of global toaster production and supplying to all the big OEMs, including Phillips, Black and Decker and so on, at that time. 

Absolutely. 

Is that something that is replicable today ?

Why not? You see, this is a question we repeatedly ask, or we use the expression like the ship has sailed or the bus has left or something. But the ship resails all the time. Another bus leaves. 

 

And even in the Shenzhen example I quoted, I remember meeting the entrepreneur who ran it classically, a US returned or Chinese American who had come back to China and had set this up. So in India, there is no shortage of entrepreneurship. Maybe, let us say a good part of them are attracted to tech industries, but there are many who are not. And as we can see, for example, right now in initial public offerings on the stock exchanges, we are seeing fairly traditional companies who are raising money and growing and so on. But these people are not getting into these industries that you speak of.

I completely agree with you.I will tell you, whenever I went to speak to CII, occasionally I will sort of tease them, ask them, who is Harish Ahuja? Nobody would know who Harish Ahuja is? Harish Ahuja is the largest single employer in India employing about 120,000 people for an entrepreneur. Nobody knows who he is or most of them do not know. And then what I have to tell them is that his son is married to Sonam Kapoor. Then they quickly connect. 

But there is something intellectual about the businessmen also that somehow I sometimes actually refer to this as the brahminical attitude of our businessmen that we will do machines, we will do refineries, we will do IT industry but stitching clothes is not for us; making shoes is not for us—something of that sort. But we have got to change that. But there is a policy aspect to that also. I mean, I do not deny that for sure because that's a battle I have been fighting. First, the small scale industry reservation took so long. I mean, believe it or not, the last 20 items on that reservation list went out under PM Modi. So that is how long it took us to completely get rid of small scale industry reservations which were all labour intensive, by the way. They were all labour intensive. So we really did a great job of hardwiring our businessmen to keep away from all labour-intensive industries.

Then the labour laws still are a problem. Land is still a problem. Now, these are industries, by the way, that operate on very small margins, very highly competitive to survive… for the Bangladesh clothing industry in the global marketplace is no joke. They really have to work hard. So these are small margins. Small things matter. Electricity prices, if they are overly high. I mean, I talked to Harish Ahuja and he says he would never dream of locating himself in a Tier-1 city. He will always go to Tier-2 or Tier-3 cities because that is where you can do the wages at which you are competitive in the global marketplace. So he supplies… Harish Ahuja, Shahi Exports supplies to all the major brand names in the clothing industry. But why is it that we have only one Harish Ahuja? Another 20 Harish Aujas in the country? And I don't see that I fear. 

So it is a combination also of the history, the way we hardwired everybody and the policy. 

So I'll come to policy. So we have said that yes, India can have a larger share in the global trade market. We can do that by really injecting more labour into labour intensive industries for which, as you say, we still have a lot of scope. Now, some of the biggest policy boosts right now are happening via productivity linked incentives (PLI). And these PLIs are giving benefits to companies like LG, companies like Samsung for devices because the production has started and they are able to supply in India. But again, none of these PLIs at this point at least, seem to be touching the industries that you speak of. 

Yes.

Assuming that is a key policy input?

To me that is not the key policy. I think to me, fix the labour law. Look, PLI is basically a second best that when the manufacturer comes in I got this disability, I got that disability, say, well, we are not going to correct the disability, but we will give you crutches. And those crutches are the PLI. 

But I think we ought to really remove the disabilities themselves. And that is labour laws, obviously.  But land prices have to be fixed, meaning not fixed, but it is a sort of series of laws which are a problem. Why is land so expensive? And if anybody is trying to assemble even 50 acres worth of land piece contiguous pieces of land together, it's a pretty serious challenge for the industry. And this all goes back to a number of things.

First, land titles are not well defined, but also very importantly, usually these industries want to locate on the periphery of a particular city. And the periphery of the city is agricultural land. There has to be conversion of that land into other uses. And often it is a state level issue. States often are very reluctant to do the conversion because the power of this resides with the Revenue Department of the state government and revenue departments do not want to let go. That power should be transferred to the urban ministry. Urban ministry has an interest in urbanisation, so they will be more willing to do the conversion. But the number of these land restrictions that keep land in India incredibly expensive.  A lot of our land is in agriculture, actually and a lot of very inefficient agriculture because half of your farms are less than half hectare. So what are they going to produce? It cannot give living to even five people, a family of five. They have to do other things to make ends meet.This all links to me because in the end, why are they doing these small little farms? Because they have not got good job opportunities in the industry and services. If we create good job opportunities in the industry and services, which is through these labour intensive manufacturing activities, they would themselves want to move.

I mean, children of the farmers, most of them want to be in the city, they don't want to be doing the farming. And particularly when the farm is only half hectare or less than one hectare, they would rather do something else.

 
We started out by talking about international trade and India's potential role in it, but that in some ways presumes that we want to have a big role in international trade and that is an important way out for economic growth. Some of course argue against that, saying that that is not as critical and exports are not necessarily the way out of wherever we are or the path to where we want to go. What are your comments on that?

We are a totally knowledge proof society. That is the problem. But we are not comment proof. We comment on everything regardless of our knowledge of history. How did we get to where we are today? 

The exports to GDP ratio in 1991 was 9% or 7%. Actually not even 9%, I am overstating. The growth that happened...you think that happened without exports? I mean, our fastest growth is from about 2003 to today. In real dollars, my calculations are that growth has been about 8% between the two decades 2003 to 2022. And just look at what is happening to exports and what is happening to imports during that period. Why don't they look at it? I mean, we used to be about 0.7% or 0.8% in the market in terms of our share in the global economy.

So it has more than doubled actually to 1.8%. And this is happening while GDP is rising. So obviously at peak, actually the exports GDP ratio had touched about 25%. That was from 7% to today it is more like 19-20%. So you think we did it without exports? So this is pure lack of knowledge of history.

 
The last point, and something I mentioned in the beginning, I talked about the Russia-Ukraine war. So not the war in itself, but really your views on where you see the global trade and economy landscape at this point. And looking at the rest of 2023…

I think we are incredibly well situated. So I am very upbeat going forward. In the next 2-3 decades, I expect us to be growing 8% or more in real dollars. Finally, I think we will see, whether it pans out or not, but I am very optimistic that finally this whole China plus one is coming together in favour of India. Now the buzz is all around. Perceptions have changed and even a lot of the western newspapers and magazines, economists, Time magazine, which had been so incredibly negative for the last eight or nine years are suddenly, they are not explaining why, they are changing. But you can see that in all their write ups, I am beginning to see the change. So the buzz is very different today from what it was even two years ago. And you also see that translating into Apple coming in and a lot of the other manufacturers are coming in. Also, I am very glad the Prime Minister has made a big push on the microchip industry, the semiconductors and all that is also somewhere we ought to be. There is no question our factor endowments, this also requires a fair bit of labour. It all varies which particular component of that industry we are doing. But certainly there are certain parts of that industry in which we ought to be big players. So I think this is coming together. The politics very much is in our favour because I do not see this reconciliation happening between the US and China. As long as that remains and China clearly remains very much determined to become first both a regional power, which is the big 500 pound Gorilla in Asia, but also in about ten years time, it has the ambition to become number one kind of country. And that of course simply means that India is the major country which stands in the way. And the United States sees that and the Europeans see that. So we geopolitically are incredibly well situated. 

We also have a really vigilant government in place, very much guarding the interests of India, speaking for the interests of India and a stable government very willing to make the changes that need to be made. So I think the situation from the Indian perspective I see is actually more positive than there has ever been probably right.

And the larger question is that how are you seeing overall global trade and trade flow trends for the rest of the year or the next couple of years at least? I mean, are you seeing apart from a war in Russia-Ukraine, which of course has a lot of destabilising effect, which may have been controlled to some extent now, do you see things being somewhat conducive to at least a certain level of growth at a global level?

I do not see this slowing down. Everybody was predicting that after Covid, that somehow the global economy, you cannot be in it. It is very uncertain this, that and the other. What happened? I mean, all these supply chain disruptions we are talking about. Even the US-China trade is still booming in spite of all the press to the negative. If you look at the figures, the exporters are a very powerful force. They are determined people. Exporters are basically in their own industries, the most successful people. They are the most successful and therefore they find ways to get their goods out to wherever they need to go. Look at the oil trade itself, all the embargoes,etc. In the end, what happened? Russian oil is still flowing everywhere. It's not just Indians, but the policy itself. I mean, the Europeans have also designed their policies in such a way that once it comes through India, having been refined into India, then they can buy it. Their own laws also are allowing this. Likewise, Americans where they needed very critical minerals from China, they never became subject to or even, you know, there are some critical minerals they get from Russia. They never became subject of the embargo.

So both from the policy side as well as the determination of the entrepreneurs, particularly the export-oriented entrepreneurs, will continue. There are a lot of tensions in the trading system. I understand that even the multilateral training system, World Trade Organisation (WTO), the appellate body is in some stress and all. But at the end of the day, if I look at the trade figures, I generally take the lesson or I conclude that for us, for India, the real issue is how well do we continue with our own policy reforms? There is no reason to worry on account of the marketplace itself, that is a large marketplace, whether it shrinks a little or whether it grows a little, is of far less consequence. It is the total size of that market that matters the most for us. 

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