Make in India: Which Exports Can Drive the Next Wave of Growth?

IMF Blog, May 5, 2016

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India’s expansion of exports of services between 1990 and 2013 has been described as “nothing short of spectacular,” placing India on par with the world’s high-income economies in terms of service-product sophistication and as a share of total exports.
At 32 percent, the share of services in total exports is now more than double the average for emerging markets (EMs) and exceeds that of many advanced-income economies.
The share of goods exports in total exports declined from nearly 80 percent in 1990 to 67 percent in 2013.
India’s rapid growth in service exports is driven by modern services (products that can be stored and traded digitally).
- Exports of modern services account for nearly 70 percent of India’s total commercial-services exports, double the average for emerging markets.
India’s manufacturing exports show mixed signals:
- Manufacturing exports as a share of total goods exports rose from 58 to 64 percent.
- However, India’s product quality in manufacturing trails that of both China and other EMs.
Destination markets have shifted:
- Exports moved from the European Union and the United States toward emerging and developing economies.
- East Asia and the Middle East have emerged as the top two destination markets.

Goods differ in productivity; development requires not only producing more but introducing new, more sophisticated products.
Revealed comparative advantage influences how export baskets expand:
- A country has revealed comparative advantage when the share of a given product in a country’s total exports is larger than the share of that product in total global exports.
- India tends to add products closely related to those already manufactured (example: existing comparative advantage in textiles leads to growth in related clusters such as fabrics and garment technology).
- Emerging comparative advantage in research and development could lead to expansion of other high-value exports of modern services.

Timeframe emphasized: 1990 to 2013.
Services share of total exports: 32 percent.
Goods share of total exports: decline from nearly 80 percent in 1990 to 67 percent in 2013.
Modern services share of commercial-services exports: nearly 70 percent.
Manufacturing exports as a share of total goods exports: increased from 58 to 64 percent.
Comparative performance: India’s modern services sophistication is comparable to high-income economies; manufacturing product quality lags China and other EMs.
Market shift: Increased orientation toward East Asia and the Middle East.
Illustrative comparison: California’s population is described as “barely 3 percent of India” while having GDP “very similar to India,” highlighting the role of concentrated, specialized export hubs.

Increase the value and quality of high- and medium-tech manufactured exports (avoid focus on low-skill or low-tech products that face incumbency disadvantage relative to lower-cost producers).
Diversify services that underpin the modern manufacturing supply chain and capitalize on emerging comparative advantage in:
- Aerospace
- Pharmaceuticals
- Chemical and mechanical-engineering research and development
Expand exports to new markets, especially South Asian neighbors.
Optimize policies to promote exports by:
- Reducing trade costs
- Liberalizing foreign direct investment rules
- Improving urban infrastructure
- Developing labor’s technological skills and future market flexibility
- Fostering innovation and entrepreneurship to enable higher-productivity activities
Encourage the development of concentrated, specialized hubs of exports (analogous to the California example) through an enabling environment for openness and creative inventions to help accelerate convergence.

Rahul Anand, Kalpana Kochhar, Saurabh Mishra — May 5, 2016