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STORIES abound of India's growing presence as a global player. Much has been written about the country's success in the export of software and information technology-enabled services, about the successes of the Indian diaspora and of the global expansion, through new investments and acquisitions, of India's corporations and business groups.
But until recently there has been one disappointing indicator: the inadequate presence of "Made in India" products in the global market for manufactures, in fact, in the market for goods as opposed to services. This was a shortcoming in itself but more so because an expanding global presence in the market for manufactures was an explicit objective of the programme of neoliberal reform launched a decade and a half ago.
Liberalisation was expected to boost commodity exports in two principal ways. First, exposure to international competition as a result of trade liberalisation was expected to restructure economic activity in ways that would enhance exports. Domestic firms' share in total production of goods in which India had a competitive advantage globally was expected to rise. And goods actually produced would be delivered through technologies and processes that were internationally competitive. Second, international firms were expected to seek out India as a location for world market production, making it one more hub for manufactured exports by international firms. It was argued that if China could do it, so could India, so long as it was more open.
But with a decade and a half of continuous liberalisation behind us, these expectations remain largely unrealised. There were individual years of rapid export growth, but the long-term trend is disappointing.
Yet, more recently, there is talk that as an intrepid explorer of the global economic space, India has begun to find its place in the global market for manufactures as well. Even if belatedly, it is argued, India has added this to its list of economic successes. Such optimism is not without basis, even if occasionally exaggerated. It stems from the fact that the past five financial years have been characterised by rates of growth in the dollar value of merchandise exports (balance of payments basis) in excess of 20 per cent per annum (Chart 1).
Though there was a short period in the early 1990s and a single year thereafter when this occurred, this is the first sign of a sustained rate of growth of India's merchandise exports since the beginning of the reforms.
This shift to what appears to be a higher growth trajectory is also accompanied by a shift in the composition of the overall merchandise trade. But this does not seem to be in the expected direction. A comparison of the performance on average between the three-year period ending financial year 2000-01 and that ending 2005-06 shows a shift away from manufacturing and agriculture and towards ores and minerals and petroleum products (Chart 2).
The increase in the share of ores and minerals is explained by enhanced demand for commodities such as iron ore from countries such as China. The shift is indicative of changes in international demand conditions rather than major changes in India's competitive position.
On the other hand, the exports of petroleum possibly reflect the volume and structure of India's refinery capacity, with India remaining a large net importer of petroleum, oil and lubricants. This is not to say that the exports of manufactures are not growing. But changes in the overall composition of India's exports during the years of export recovery do not point to a major contribution by manufacturing to those changes and therefore to any significant shift in India's competitive position in manufactures exports.
A more significant change is in the composition of India's manufactures exports itself (Chart 3). In the short period under review, the share of its traditional manufactures exports such as textiles, gems and jewellery, and leather in the total exports of manufactures has declined, while that of chemicals has risen modestly and that of engineering goods quite sharply. This is the feature that gets captured in anecdotes of India's success in global markets in areas such as automobile parts and chemicals and pharmaceuticals. It points to a diversification of manufactures exports into new areas and markets. But that diversification has not helped export growth to an extent where it has become the driving force in India's moderate export success.
This picture of qualified and limited success is strengthened if we examine the more disaggregated evidence of merchandise trade available from the Directorate of Commercial Intelligences and Statistics (DGCIS) for the first seven months (April to October) of financial year 2006-07 and compare it with the performance during the corresponding period of the previous year. These data, too, point to a creditable 25 per cent annual increase in India's merchandise exports in dollar terms.
But the growth in exports appears to be extremely concentrated. If we take the top 10 fastest growing exports between these two periods, we find that they account for as much as 55 per cent of the increase in overall merchandise exports. This in itself should give no cause for concern. Success in a few areas of competitive advantage is still success. But the difficulty lies in the nature of this commodity set. In order of rank in terms of export growth rates, it consists of sugar, molasses, non-ferrous metals, raw cotton, man-made staple fibre, groundnut, petroleum crude, aluminium, dyes, and primary and semi-finished iron and steel.
Among these, commodities such as sugar, molasses, raw cotton and groundnut, growth could reflect specific international conditions and may not be sustainable. In others, such as non-ferrous metals, aluminium, staple fibre, dyes and steel, they represent India's competitiveness at the lower end of the global value chain. But with the global market booming because of demand from countries such as China, exports and profits are growing.
There is some success here, but nowhere near the expectations that had been generated by the advocates of liberalisation. India is still to encash the competitive capabilities it built in the commodity-producing sectors during the import substitution years. One consequence is that after many years of economic reform India is still plagued by a large deficit in its merchandise trade account, with imports growing much faster than exports.
This, however, has not mattered as much as it should for two reasons. First, the runaway success the country has recorded in the new area of trade in services, especially software and IT-enabled services, has helped boost foreign exchange earning. Second, the continuing ability of Indian workers to mine available opportunities in the global labour market has delivered large remittances into the country through the liberalisation years. Together, these flows of foreign exchange have helped finance a large portion of the deficit in the merchandise trade account. This has kept the current account deficit on the balance of payments at reasonable levels and even delivered surpluses in a couple of years.
But these developments have a downside. Success in services and high growth without balance of payments difficulties has made India, with its large domestic market and overtly favourable policies, an attractive destination for foreign investors. The net result has been the large flow of capital into the country and signs of a growing inability of the Reserve Bank of India to intervene in India's liberalised foreign exchange markets to limit the appreciation of the rupee.
An appreciating rupee renders India's exports more expensive and reduces the possibility that India would improve on its export success at the lower end of the global commodity value chain. The possibility that India would enter higher-end segments with a higher proportion of final value added being generated within its own geographical boundaries is weakening.
Foreign Acquisitions
Bigger Indian firms seem to be seeking a way out of this conundrum with new strategies involving acquisitions abroad. Flush with foreign reserves, the RBI has relaxed regulation of capital account transactions and increased the access of Indians and Indian firms to foreign exchange both domestically as well as from abroad. This has permitted the new experiment.
Rather than waiting to build domestic capacities at the top end of the value chain that are internationally competitive, firms are seeking to buy into capacities and brands abroad. This would allow them to do the lower-end processing in India, export the intermediate to acquired facilities abroad for further processing and then deliver the output to global markets.
This seems to explain acquisitions such as that of Corus by the Tata group, which seeks to leverage the latter's access to quality iron ore and basic steel processing facilities. These intermediate products would be delivered to Corus at low cost to be processed for end-product markets that Corus has access to. Indian firms are, it appears, seeking to bypass a phase in development with the aid of finance that facilitates acquisition.
This is obviously a high-risk strategy. When the global system is flush with liquidity, acquisitions are the norm as the ongoing mergers and acquisitions wave across the world proves. Firm values are therefore at their peak, making acquisitions costly. Integrating or synchronising the activities of existing and acquired units is a problem even within a country and for firms with experience across vertically integrated segments of an industry. They could prove a nightmare for firms without such experience attempting it globally. And betting on brands available for sale is often a gamble. The strategy could easily fail.
It is yet to be seen, therefore, whether such strategies are a substitute, however partial, for making India a manufacturing hub for global markets. It would not, in one obvious sense. The products concerned may be made by firms controlled by Indians, resident or otherwise, but they would not be Made in India. And experience elsewhere has shown that what is good for a country's corporations need not necessarily be good for the country. But, pursuing a strategy that makes the country an export hub of one kind or another may not be either.
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