Manufacturing Exports and Policy Formulations

Abstract

The paper follows a methodology where exports are seen as the endogenous outcome of cost reduction practices in the domestic economy characterized by greater industrial differentiation and specialization; it is this competitiveness in the domestic environment that guides exports and induces the support bases such as infrastructure, human capital formation, R&D, etc., not the other way around. On the other hand, the actual behaviours of Indian manufacturing exports (and productivity growth) could be seen as mere (passive) adjustments to demand conditions created by liberalization of trade (exchange rate adjustments), which shifts the focus to an analysis of as to why big corporate firms, despite evidence of periodic productivity growth, could not sustain exports growth (and productivity growth). The focus then is on the nature of productivity growth. Lack of exports could be due to the fact that the observed productivity growth in India could be a reflection of increasing returns to scale phenomenon that (i) takes place with given technology (and endowments, preferences, etc., remain the same) and (ii) could be associated with higher market power, reducing export competitiveness.

Depreciation and Trade Deficits in India: Problems of Foreign Exchange and Domestic Industrialisation Base

“…However, it can be seen that India at present is open to new technology-based imports of capital and intermediate goods. The imports-led growth is domestic market oriented (see Padhi, 2013), which would result in higher pressure on foreign liability. A possible policy response, via stability of Equation (1), could a higher (internationally comaprable) rate of interest to induce higher net capital inflows.…”

“…Moreover, it has been discussed that such higher fixed cost-based industrialisation targets higher monopoly profits that reduce the scope of an intense competition-based endogenous growth processes (see Chandra & Sandliands, 2005), and can support more rent seeking activities. Perhaps, most important, this transition (under the protection of import substitution regime) is a mere adaptation to the (imported) technologies and cannot be important for exports success (Padhi, 2013); the higher prices, arising from higher monopoly profits, may in fact make the industrialisation a domestic market oriented. Then, the reliance on long-term imports of capital goods can lead to long-run trade deficits, creating serious foreign exchange problems.…”

“…Here, Goldberg et al (2010) show that specialisations in intermediate products supports production of variety, and India’s imports of capital good and intermediate parts have resulted in the vibrancy of domestic economy in terms of production of variety. However, as Stigler (1951) noted, underdeveloped regions can adapt to the new production techniques developed in developed countries, but if the domestic capabilities (and existence of the specialists, knowledge base) are lacking, the underdeveloped regions would always lag behind, that is, in the present context, ‘the lagging behind’ would refer to that the imports of technology per se cannot provide the vibrancy that can achieve exports success (see Padhi, 2013). Porter (1992) and Rodriguez-Clare (1996) also highlight different circumstances in which the domestic capabilities with respect to the division of labour-led increased variety matter in favourable international trade/capital flows.…”

“…In a sense, the decrease in price can be attributed to increased incidence of imports of capital and intermediate goods in India, post-1991 market reform era (see Goldberg et al, 2010). If these imports induce mere static (i.e., increasing returns to scale) adjustments, the price decrease is not enough to achieve exports success (see Padhi, 2013), though they get reflected in the addition to variety in the domestic market (and reduce the need of imports of ‘consumer goods’, to some extent). In fact, the implied exports of such capital goods by other developed countries add to their greater dynamism (of their capital goods base), and India would always lag behind with respect to competitiveness.…”

“…Second, more important perhaps, imported technology-led productivity growth does not translate into exports growth and the projection of any steady state trade deficits raises serious issues. Following Padhi (2013), if Indian domestic firms depend on imports on the basis of foreign finance, and therefore imports are tied up with payment obligations, the firms would view imports as a fixed cost that has to be recouped with a higher margin for profits, and domestic market orientation, rather than exports, provides the greater scope. Since trade deficits become inbuilt, depreciations add to production cost of firms that rely on imports, which reinforces the tendency towards higher prices-led margin that reinforces the domestic market orientations.…”