Focus on Skill Exports
The Prime Minister has been
promoting "Make in India" during his visits to foreign countries. But the moot question is whether India can really push for exports of manufactured goods or of services. The difficulties to be faced in increasing the exports of manufactured goods is seen in the emerging crisis in China. The demand for Chinese goods in the developed countries is stagnating. However, China has continued to make investments in factories in the hope of making increased exports. Stagnant demand in the developed countries along with increasing production in China has led to a glut in the global markets. Chinese factories are closing down. In the result, China was forced to devalue its currency. Main point here is that China's crisis is not internal. It is driven by stagnant demand in the developed countries.
Developing countries are trying to sell increasing quantities of their goods in this placid market. As a result they will descend into a price war. India has allowed its ruppe to fall in tandem with the Chinese Yuan. Currencies of other exporting countries like Vietnam and the Philippines are falling too. They are all engaged in a race to the bottom. There will be no winners here. Devaluation of currency by one country will be matched by others. In the end, only the developed countries who are buying these goods will gain. They will get cheap goods both from China and India. But, as said above, the demand from the developed countries is already flat. Therefore, the devaluation of currencies of the developing countries and the consequent reduction in price of these goods for the American consumers will not create much additional demand. A patient in coma does not start eating large quantities of fruits if the price of the fruits declines. Similar is the situation of the developed countries today. Consumers in these countries simply do not have the money to buy goods.
There may yet arise a window of opportunity for India in this dismal scenario. Stressed households in the developed countries will look for cheaper substitutes. For example, they may want to buy cheaper textiles instead of designer clothes, ordinary rice instead of basmati, and smaller cars instead of luxury sedans. India's software exports had not taken a hit in the aftermath of the global crisis of 2008. This happened because American Corporations closed down their in-house software development facilities and call centers and started outsourcing them from India in order to reduce costs. The present crisis will see a repeat of the same.
Wages in the developed countries are moving down; while those in India are moving up. Many software engineers and senior managers in India are nowadays drawing salaries nearly equal to their counterparts in the developed countries. As a result India's "natural advantage" of low wages is being eaten away. Previously India competed with the developed countries on wages alone. A Call Center operated from India may have provided the same quality of service as a Call Center located in the United States. But it was cheaper to establish it in India due to lower wages here. This wage differential has much reduced and will continue to reduce as time passes by. Therefore, it will no longer be profitable for the US Corporations to establish Call Centres in India due to wage savings alone. The skill development programme initiated by Prime Minister Modi can turn out to be a game changer here. India may be able to provide better skills at cheaper prices. US Corporations will find it profitable to shift their operations to India if they can get the desired quality of workers in India and not in the United States.
The other component of cost is compliance with government regulations. The policies of Indian Government are not favourable in this respect. Export procedures have been made more cumbersome.
The Prime Minister, however, appears to be singularly focused on increasing exports of manufactured goods under the "Make in India" campaign. He has simultaneously said that human capital is the biggest strength of "Make in India". The skills of engineers will make it possible to produce goods at cheap prices and India may be able to compete in the global markets. The problem is that the global market for manufactured goods is shrinking. It will be difficult to make a big entry into a collapsing market. On the other hand the global markets for services is expanding. New services are emerging such as customized video games and space travel. Therefore, it will be easier to enter the market of services than that of manufactured goods.
Vol. 48, No. 21, Nov 29 - Dec 5, 2015