India’s foreign policy has been of no help till now in raising our exports
When erudite S Jaishankar says it’s time to ‘engage America, manage China, cultivate Europe, reassure Russia and bring Japan into play’, it is at best a poetic prayer, not policy, says Sonali Ranade
Exports are unconstrained by domestic demand. Exports depend only on global demand and they can grow without limits set by domestic determinants of demand.
That’s the beauty of export-led growth. It breaks free of internal demand dynamics, and doesn’t require frequent “stimulus” packages like domestic demands do.
But exports do require production capacities, which means somebody has to invest, which in turn means the investment must come out of the existing pool of domestic Savings of 30% of GDP, which means we are back to the same ICOR of 5 and Alpha of 6%?
You would be absolutely right except for one factor. To create capacities for exports, you can borrow from the deep pool of Global Savings that have virtually no limits. The only constraint here is that you must export most of what you create capacities for, and you must have something to export in a form that the world needs.
So, through export led growth, like say software services, the economy can grow without constraints coming from the internal demand side, as also from lack of Domestic Savings, because you can borrow without limit from abroad. PROVIDED you have robust exports lined up.
India’s main weakness since independence has been the inability to export, and build a culture and capacity for exporting. All successful global champions, on the other hand, even our fastest growing neighbour Bangladesh, were created by building capacities for exports.
If Bangladesh beats us today on per capita income, or Pakistan does so a few years from now, it will be on the back of their exports, in products and markets where India has excellent competitive strengths; but which lie fallow because we are chasing the false Gods of glorious Hindu Nationalism, whose INR needs to be as strong as Bhima so that our elite can pretend that they also run a super-power.
What we can export and how
Fixated in our minds is the idea of how our cheap labour can be used to break ships - and earn foreign exchange, which is the same as exports. This is however a rather stupid way of looking at the whole idea of exporting our biggest asset - labour.
To understand our competitive advantage in its proper perspective, we need to break free from this mental model, and see any product as a product of labour, if labour constitutes more than 10% of its total cost of production. Our labour, all told, costs less than half its global value, and 10% input means a competing Indian product, for a given quality, is already 5% cheaper than its global counterpart. And 5% of selling price is a very decent competitive edge.
Viewed in this wider context, everything from rice to rye to corn to soya becomes an export product that essentially exports labour. Only the “for” varies according to what is in demand and how to price labour to make the world use our labour in preference to that of our competitors without reducing local wages. This I will discuss separately.
Exports then will include the whole gamut of industries like textiles - from cotton, to yarn to fabric that constitute 20% of our total exports. [Agricultural commodities are another 20% of our export basket. Software services at about $130 billion constitute about 30% of our total export basket of 440 billion, which itself is roughly 15% of total GDP in Dollars.
So, we are already a significant exporting power, provided we don’t let China harm our exporters any more than it already has. Exporting 15% of your GDP, which is currently $2.88 trillion, is not a small achievement. The escape velocity for a 10% GDP growth can be achieved by stepping up exports from 15% of GDP to 30%.
Having said that, the 15% of GDP exports, as we traders say, are already in the price. The question is, how much MORE do you need to export to get to 10% which gives a decent chance of catching up with China in order to escape being marginalized or even Balkanized by it?
For 4% additional growth, we need 20% of GDP as additional Savings coming from abroad by way of FPI and FDI. To service these additional Savings, you would have to earn an additional 20% of GDP as exports from this investment, [over a period of time of course] which means that we must up exports by at least 20 percentage points, - over a period of time - which in turn means exports have to double from $450 billion at present, to about $900 billion per annum.
Those are the numbers.
Summing up the challenge
• To catch up with China India needs to step up GDP growth rate from 6% Alpha to 10% Alpha as quickly as possible.
• To get the extra 4% GDP growth, at an ICOR of 5, India needs to increase available Savings in the economy from 30% of GDP to 50% of GDP at current levels.
• All of the above incremental savings, 20% of GDP, or some $600 billion must come through FDI or FPI, since domestic sources have been exhausted by Government borrowings + local investment demand.
(For scale & perspective, note that existing FDI + FPI barely touch $100 billion a year)
• The scale of foreign investment we need dwarfs what the Government is talking about, like 51% equity in insurance or 50% in banks or 74% in defence related industries. All these are chicken feed compared to what we need.
And this won’t happen by celebrating a “Yoga Day” once a year, and asking to be appointed Vishwa Guru to the world and collect a rent for it.
The world pays little Guru Dakishina to deluded Vishwa Gurus. The world knows and understands our economy, and our need, better than we do. It is just that they are too polite to say to our face that we missed the bus long ago; and that we risk losing our seat on the next bus as well to our neighbours, because of misguided policies.
So, in a nut-shell, we need 4% of GDP as incremental growth per annum, and this means we must double our exports from $450 billion to 900 billion annually, for which we need something like $600 billion in additional FDI + FPI over the next 2 to 3 years.
Whither Foreign Policy?
That is the true economic meaning of the Kautilyan imperative for the Indian economy: To grow our economy at 10% plus per annum with 900 billion in exports.
But where is the credible foreign policy to achieve this objective? Where is the credible national security doctrine to make this feasible?
Who are our friends, who are our foes in this endeavor? Who should we partner with in this venture, and at what terms? Where do we begin to build initial credibility for others to join the bandwagon? Who do we ally with? What is price of such alignment? What hard choices do we need to make?
These things are the nuts and bolts of security and foreign policy; and not harebrained boilerplate like the following that our erudite EAM spouts at every fleeting opportunity.
“This is a time for us to engage America, manage China, cultivate Europe, reassure Russia, bring Japan into play, draw neighbors in, extend the neighborhood and expand traditional constituencies of support.” - Jaishankar, S.
I dare say the above is more a poetic prayer than policy, but hardly commands any respect even as boilerplate; which is why I think he is a bigger disaster than Modi himself.
Reverting to the connection among economics, strategy, and security policies, at the core of our strategy, we need to understand labour arbitrage in a fair amount of detail and depth. It is a difficult topic conceptually, as all arbitrage is by nature counter-intuitive, but once understood, the concept is easy to apply.
So, I will defer that discussion to another article, and after that revert back to my original topic, which was and is: “How can we break free of Chinese containment policies for us?”
Meanwhile bear in mind the Kautilyan imperative:
Add 4 percentage points to our alpha GDP growth, by doubling exports from $450 billion to $900 billion, for which we need $600 billion [annually] in FDI over the next 3 to 5 years.
Mind you, this is eminently doable. And so should be done. Without this, we will keep sinking to the bottom of the global heap in prosperity, power & prestige.
Here are the links to the first three parts of the essay for those who may have missed reading them:
(The writer is an independent trader. Views are personal)