Focus on Innovation for high tech manufacturing

India’s trade balance is not improving, India is still more dependent on imported inputs as there are limited domestic options. However, as the domestic ecosystem develops, domestic production will substitute for imports, and exports will rise, leading to a more visible improvement in the balance over time.

How can Indian exports be globally competitive when they need import protection?

There is nothing unusual about India’s policy. Looking back at the industrial policies of Japan and South Korea, such inward protectionism was common in early stages. However, this has to be temporary and government subsidies will need to be phased out at the right time.

Even as India integrates with GVCs, it remains heavily reliant on China for imported intermediate inputs of industrial goods, electronic components, solar panels, etc. This is leading to a widening trade deficit with China, but more importantly, it limits the development of the domestic ecosystem, led by the micro, small and medium-sized enterprises. For India to benefit from the trickle down effects of GVC integration, there has to be a policy focus on increasing the domestic value added.

India’s initial objective should be to gain export market share in low-tech manufactured goods that are more cost sensitive. This requires lower tariffs on intermediate goods, entering into new free trade agreements, easier labour market regulations, good infrastructure, lower logistics costs, and a favourable investment climate.

Sides to protect local manufactures should have a sunset clause and focus should be on making domestic products more competitive.

The next stage involves moving up the value chain (i, e., from basic to more advanced products). This needs improved quality of human capital and a focus on innovation, for which the government can offer incentives to firms that engage in more research and development (R&D) spending.

Countries that rank high on high-tech manufacturing, such as South Korea, have transformed the quality of their exports through innovation and have succeeded in moving from low-tech to high-tech manufacturing over time. That should also be India’s medium-term goal.

Overall, India is placed well, both economically and geopolitically. Government policies will need to constantly evolve to ensure higher domestic value addition and to move up the value chain, such that this remains a multi-decade growth driver.

For India this is only the beginning.

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