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November 27, 2017

CRISIL India exim chartbook: Labour pain

It is disquieting that India’s export growth is decelerating at a time when the global environment is becoming more conducive for trade. The International Monetary Fund (IMF) expects global growth to rise to 3.6% in 2017 from 3.2% in 2016. Global merchandise trade is expected to grow stronger at 4.2%, boosting trade intensity of growth for the first time in six years i.e. world trade growth being higher than world GDP growth .Yet, India’s exports have not been able to take as much advantage of the stronger trade growth unlike many of its Asian peers like Vietnam, South Korea and Indonesia.


To be sure, the subdued export performance in recent months cannot be attributed to unfavorable currency competitiveness. In fact, a relatively stable rupee and improving global growth suggest that domestic developments might have had a greater role to play in the current export growth slowdown – in particular the disruption caused by Goods and Services (GST) implementation. This is evident in the low export growth in sectors such as gems and jewellery, textiles, and leather. Incidentally these sectors are also the most labour-intensive. So employment in these sectors could have faced a setback.


Still, disruptions due to GST are transitory but there are other structural issues that need to be addressed. The revealed comparative advantage (RCA), or generally speaking, competitiveness of these labour intensive sectors, has been on a sequential decline. The 2006-2016 decade saw RCA markedly diminish for three of these sectors. The latest disruptions, earlier on account of demonetisation and now due to GST, might have pushed the competitiveness of these sectors further to the brink.


Hence, even though disruptions related to policy changes are transitory, the structural issues plaguing these sectors need to be addressed in order to boost their competitiveness in the global market. High export growth, particularly in the labour-intensive sectors, is vital to sustain growth that is employment intensive.