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India Must Boost Productivity to Help South Asia Become the Next Export Powerhouse of the World

November 9, 2016

NEW DELHI, November 9, 2016 — South Asia could become the fastest growing exporting region of the world if India and its South Asian neighbors enhance the productivity of their firms by at least two percentage points each year, says a new World Bank report.

To do that, the report, South Asia’s Turn: Policies to Boost Competitiveness and Create the Next Export Powerhouse, suggests a set of policy actions not only aimed at improving the business environment, but more importantly draws attention to less-well-researched areas such as the role of cities and clusters, global value chains (GVC), and firms’ abilities to innovate and efficiently use resources, including technology.

Today, a broad set of constraints limit the growth and export potential of Indian firms’ vis-à-vis their competitors in East Asia and the rest of the world. The report argues that increasing productivity of firms in India and the rest of South Asia is the only sustainable path to improving competitiveness. Improving productivity requires a greater shift of resources from agriculture to manufacturing and services, reforms to current practices inhibiting firm formation and growth, strengthening of “agglomeration economies” that take advantage of proximity of suppliers and qualified workers, more widespread adoption of new technologies and investments into skills training.

“India’s leading firms are comparable to many in OECD countries when it comes to productivity and technology adoption,” said Junaid Ahmad, World Bank Country Director in India. “However, with stronger global competitive pressures and slowing world trade, ensuring that all firms in India are able to improve their productivity to create jobs, reduce poverty, and boost shared prosperity is the key policy and regulatory challenge for the government,” he added.

The region’s great potential to boost its competitiveness is evidenced through a number of examples in the report, ranging from the highly successful apparel industries in Bangladesh and Sri Lanka to India’s auto parts, agribusiness, software and Business Processing Offshoring (BPO) sectors. India in particular has made substantial progress in developing top of the value chain capabilities, such as becoming a global research and development (R&D) hub for major auto-parts and electronics producers.

With the right set of productivity-enhancing policies, South Asia, led by India, could more than triple its share in global markets of electronics and motor vehicles and come close to doubling its already significant market share in wearing apparel (excluding textiles and leather) by 2030.

India also leads many global competitors when it comes to wage competitiveness and proximity to key markets, but remains behind on other GVC capabilities including physical capital, human capital, institutions and logistics. As a result, while India’s 14 percent annual export growth between 2000 and 2013 puts it in the first tier of South Asian countries when it comes to merchandise exports, its goods reach only 1.5 percent of the global exports market.

Much of India’s resources are currently trapped in small, low-productivity firms that neither grow nor exit,” said Denis Medvedev, Lead Economist and one of the authors of the report. On average, an Indian firm that is more than 24 years old employs only 50 percent more workers than a new firm (aged less than 5 years), while firms in China, Indonesia and Vietnam are able to increase employment by 2-5 times over their lifecycle. If product and factor market distortions in India were to be brought down to levels similar to those in the US, productivity could rise by as much as 60 percent.

Productivity of India’s firms could also be enhanced by improving managerial capabilities and making more effective use of technology, the report says. While nearly all firms in India have access to the internet (similar to the levels observed in high income countries), only 50 percent (a level similar to Africa) use it to better connect with customers and suppliers. And while innovation is widespread, it consists mostly in adopting existing technology, with only 2 percent of Indian firms introducing new products and processes to the world.

“The region has a significant untapped potential in raising productivity through development of urban ecosystems providing thick markets for skilled labor, large tracts of industrial land, and world class logistics,” said Vincent Palmade, Lead Economist and one of the report’s co-authors. According to the report, firms realize significant productivity benefits from locating in areas with a wide diversity of workers, suppliers, and customers. In India, a number of top firms in the automotive sector fostered innovation by locating close to customers to enable their engineers to work together with those of the client, and gradually built up their capacities from simpler to more complex components, the report adds.

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Industry Case Studies

Agribusiness: passive and non-targeted subsidies (e.g. water, fertilizers, minimum support price) have encouraged farmers to continue to produce low value crops using low productivity and unsustainable techniques while restrictions on agriculture markets have constrained productive private investments in higher value food products. The success of Basmati rice and mint oil in India shows the value of public private partnerships in R&D and extension services.

Apparel: India needs to reform the duty drawback scheme to facilitate the import of fabrics for exports. The current system imposes delays that are unacceptable to global buyers, cutting Indian exporters from the increasingly important man‐made fiber segment. A large part of Bangladesh and Sri Lanka’s success in apparel has resided in the fact that exporters have no difficulties importing fabric.

Automotive: a growing number of auto-parts manufacturers are becoming world class after having acquired their skills from leading OEMs (e.g. Suzuki-Maruti) and following increasing exposure to global value chains (import tariffs have been gradually reduced on auto parts).  The spread of good managerial practices has slowed down by high level of protection on final cars. The announcement by the Indian government of adopting Euro VI norms by 2020 is a key step forward.

Electronics: companies like Samsung and Dixon show that it is possible to achieve world class productivity performance in this ultra-competitive and rapidly growing global industry.  To become a significant player, India needs to facilitate the development of clusters (reducing transaction costs and facilitating access to large pools of skilled labor and services) and improve its trade logistics to enable the seamless import and export of hundreds of components.

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