Arresting slowdown: Export focus fine, but there’s more to growth

The Financial Express

From purely a financial perspective of current account deficit, the distinction between goods and services does not matter

The exports performance of Vietnam continues to be contrasted with that of India: the most recent example being the editorial in this newspaper, “Can India learn from Vietnam to manage export-led growth?”. The article, similar to other analyses on this topic, focusses on the significant ramp-up in the exports of Vietnam, especially over the last decade or so. With Indian merchandise exports remaining range-bound over the last few years in the $300-330 billion annual range and Vietnamese exports having risen from $150 billion in FY14 to $244 billion in FY18, there is hand-wringing for India having missed a trick. It is important to acknowledge the growth of exports in Vietnam but before we jump to conclusions and recommendations for India, we need to explore this growth more deeply so that we can draw the right lessons.

Exports is one part of the story
Vietnam’s GDP over the period FY14-18 has risen from $186 billion to $245 billion, a cumulative growth of $59 billion. As noted above, exports have cumulatively grown by $94 billion. Why has the spectacular growth in exports not lead to a similar growth in GDP? Indeed, the cumulative growth in annual GDP is significantly lower than the growth in exports.

The calculation of GDP is the sum total of consumption, investment, government expenditure and net exports, or GDP=C+I+G+NX. Net export refers to exports minus imports. So, while increase in exports leads to a direct increase in the GDP, any increase in imports is deducted from the calculation of GDP. In effect, what the GDP number captures is the ‘net value addition’ in the economy. If the economy imports a lot to export, only the value added to the imports for the purpose of exports is added to the calculation of the GDP.

In the case of Vietnam, imports over the same period have risen from $138 billion to $229 billion, a cumulative growth of $91 billion. Compared with the $94 billion of cumulative growth in exports, we note that the net GDP effect of the increased imports and exports on the GDP is $3 billion. The net trade over the period has, hence, added only $3 billion to the $59 billion of incremental growth in the GDP, or a contribution of only around 5%.

Trading is important…
The ‘right’ lesson from the Vietnamese export miracle, hence, is not that its exports have increased dramatically but that the overall trade-to-GDP ratio of the country has materially changed. While in FY14, the total of import and export was $288 billion on a GDP of $186 billion (implying a trade to GDP ratio of 1.54), the FY18 trade was $473 billion on a GDP of $245 billion, or a ratio of 1.93. The country now does more trading as a proportion of its GDP. Wall Street Journal, among other publications, have reports that suggest Vietnam may now be a conduit for trade as barriers come up in the USA for Chinese exports.

The increase in overall trade-to-GDP ratio is an important entry point for any country before it starts to build an ecosystem of forward and backward linkages in any industry. For example, India is a major importer and exporter of crude and its refined products, and of rough diamonds and polished gems. Over the last many decades, as India has engaged in these trades, it has built an entire ecosystem that supports these industries. Over time, such industries can build scale on their own, or bring in other players as suppliers or customers domestically. In due course, this can attract capital investment in various segments of the value chain.

It must be noted that these changes are gradual and sometimes take many years, or maybe decades, before the country moves from being a trading partner to being a large value-addition intermediary to being a large reservoir for capital and skills. To establish presence in the global value-chain requires a holistic approach in trade, production and investment, and not merely the building of an export engine.

…but not the only way
There are other, possibly faster, ways to build scale which need not start with trading. One way is to identify sectors which are expected to grow and to frontload investments in them to build global scale—for example, renewables, electronic vehicles, battery technologies, etc. The other is to build globally-competitive products in sectors where there is a large local market, for example, in agriculture, two- and four-wheelers, etc. In natural or primary sectors like minerals, oil, etc, opening up exploration for domestic consumption as well as exports (either raw or processed), can create scale.

The above measures relate to the more tangible outputs, which count as export of goods. Another aspect that has recently gained some attention is that India will soon export more services than goods. From purely a financial perspective of current account deficit, the distinction between goods and services does not matter—though, admittedly, service exports may not be as capital or labour intensive as manufacturing. Globally-competitive services have been the forte of India and new segments can now be built out of India, whether in payments, entertainment, or in technologically high-end segments, like machine learning, artificial intelligence, gaming, etc.

Approaching development of industries and the economy holistically, as opposed to maximising one variable, will make it more balanced and sustainable.

Author of The Making of India. Views are personal.