India should resist domestic market allure: policy paper

17 Oct '20

3 min read

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India’s former chief economic advisor Arvind Subramanian and Pennsylvania State University professor Shoumitro Chatterjee have said India should resist the misleading allure of the domestic market and zealously boost exports. In a policy paper, both said India is turning inward, domestic demand is assuming primacy over export-orientation and trade restrictions are increasing, reversing a three-decade trend.

"...Abandoning export orientation will amount to killing the goose that lays golden eggs and indeed to killing the only goose laying eggs. Alas, to embrace atmanirbharta is to choose to condemn the Indian economy to mediocrity," the paper, titled ‘India's Inward (Re)Turn: Is it Warranted? Will it Work?', noted.

The policy paper was published by the Ashoka Centre for Economic Policy of the Sonepat-based Ashoka University.

It said the consensus to favour an inward orientation was emerging even before COVID-19 had struck India, reflected in increasing calls to atmanirbharta or self reliance.

This shift is based on three misconceptions that India's domestic market size is big, India's growth has been based on domestic not export markets, and export prospects are dim because the world is deglobalising, the paper noted.

The paper also said that India still enjoys large export opportunities, especially in labour-intensive sectors like clothing and footwear, but exploiting these opportunities requires more openness and more global integration.

"Indeed, given constraints on public, corporate and household balance sheets, abandoning export orientation is akin to killing the only goose that can lay eggs," it said.

The paper said that India's real market size, defined as consumers with a modicum of purchasing power is not big.

"It is much smaller than the headline GDP [gross domestic product] number, much smaller than China's, and only a small fraction of the world market. The reason is that India has many poor consumers, while the rich tend to be large savers, limiting their consumption," it added.

Similarly, the prognosis that export prospects are dim because the world is deglobalising is overly pessimistic, the paper pointed out. It is unclear whether the world is really deglobalising, at least in services, and even if it is, India's export share is so small—even smaller than Vietnam in manufacturing exports—that its exports could grow rapidly by gaining market share, according to the paper.

In particular, the paper said, India has major unexploited opportunities in low-skill manufacturing and services, which it could exploit in the post-COVID-19 environment where firms are looking to exit China and diversify their sources of supply.

"Meanwhile, protectionism is unlikely to succeed as an export strategy because exploiting the big opportunities in the key labour-intensive sectors requires more openness and more global integration, as the experience of China and Vietnam have shown," it added.

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