Terms of Trade | We need a new development economics

The first is a discussion on Chinese EVs which was covered in some detail in this newspaper earlier this week. The essence of the story is simple. An IMF study has found that the Chinese are so much more productive in making electric cars that they sell similar products at much lower prices than their European counterparts. This, the paper argues, means that both the Europeans, the Chinese and the environment can gain from selling Chinese EVs in foreign markets. The reason the Chinese are so competitive in this field is a sharp rise in their labour productivity, the WEO report says. China’s dominance in making EVs, the report says, can lead to a global disruption which is bigger than the one caused by the rise of Japanese automobiles in the 1970s.

It is useful to think of a related question about India. What is it that Indians are really competitive in making when compared to the rest of the world?

Looking at India’s disaggregated export numbers between 1991-92 and 2023-24 is useful to answer this question. India’s goods exports increased by a multiple of 24.3 in nominal dollars during this period. The sub-sector shows the largest proportionate increase in petroleum exports, which is largely a reflection of the growth in the country’s refinery and petrochemical industry’s prowess, also a big source of Reliance Industry Limited’s growth. Petroleum exports (POL) now account for almost 20% of India’s goods exports compared to just about 2% in 1991-92.

To be sure, India still runs a large petroleum trade deficit because we import most of our crude requirements. Non-POL exports have increased by a multiple of 22 times during this period. Among non-POL goods, electronics and engineering goods have seen the largest proportional increase, the numbers being, 115.9 and 55.7 respectively. To be sure, engineering goods have a much bigger share in overall goods exports (23.5%) than electronics (7.1%).

Ironical as it sounds, the performance of India’s labour-intensive manufactured exports such as ready-made garments has been pretty underwhelming. They have increased by a multiple of just 6.6 and their share in India’s goods exports has actually fallen from 12.3% in 1991-92 to 3.3%.

Even in high-tech (and capital-intensive exports) such as engineering goods and electronics, India’s performance is much more sobering when seen internationally. India’s high-tech manufactured exports, according to data from the World Bank, were $35 billion in 2022, ranked 21st and just 4.6% of China’s exports which were worth $769 billion. While the Chinese economy is bound to lose its growth momentum going forward, it is unlikely that it will lose its dominance in cutting-edge sectors such as renewables and EVs. The WEO commentary on Chinese EV exports cited above suggests precisely this.

What does this mean for a country like India? The short answer is, that it should try everything to boost its economy. This will have to include harvesting opportunities in labour-intensive sectors such as garments and cutting-edge sectors such as microchips and electronics at the same time.

So, what is to be done? Once again, the WEO report gives an idea. “In India’s 2014 elections, the Bhartiya Janata Party campaigned on the “Gujarat model” for growth and development, featuring business-friendly policies with simplified regulatory frameworks and relatively flexible labour laws to attract industries. Successful election outcomes may have signalled some public buy-in of the new government’s economic policy agenda”, the report says while discussing various ways to unleash reforms which can give a sustainable boost to productivity and growth. The reality, in this case, could be very different from the WEO’s take.

While a lot of commentators saw Narendra Modi’s 2014 campaign and eventual victory as India’s Reagan-Thatcher kind of moment which would put in place a strongly pro-business regime and push the envelope on reforms, the reality, especially since the 2019 elections — they were won on the basis of a large economic handout to farmers after a string of losses in key states in 2018 — has been very different. The second Modi government saw no big bang reforms and it had to take back the ambitious farm laws in the wake of large-scale protests from primarily the well-off peasantry in north-west India.

The 2024 elections, which cost the BJP its parliamentary majority, seem to have led to another round of fiscal populism, in which the BJP prioritises cash transfers as an issue in important state elections. To be sure, the opposition too has invested heavily in such schemes and the BJP’s pivot is largely a reactive strategy. This bipartisan consensus has channelled a lot of spending, which is coming at the cost of investments which are beneficial for growth and human capital in the long term.

It is important to note here that not all of the policy shifts in India are regressive. For example, the Tamil Nadu state government chose to carefully arbitrate worker-capital disputes rather than take an explicit pro-capital stance as was seen during the conflicts in Haryana during the UPA days. That protests and interventions such as the one in Tamil Nadu’s Samsung plant could chip away if not outrightly destroy the competitiveness of manufacturing in India is something one must not outrightly condemn. Democracies ought to allow for bargaining between workers and capital despite the fact that its long-term consequences need not always be growth enhancing just as they are not necessarily anti-growth.

Even countries which do not allow for such collective bargaining realise that there are limits to this strategy. The Chinese have been finding it difficult to motivate their younger workers to work in sweatshops their earlier generation worked in and made China the global leader in manufacturing. China's loss in labour cost arbitrage is perhaps a bigger driver of the relocation of manufacturing than the geopolitical motivation of diversifying supply chains.

Does all this mean India must resign itself to a low-level equilibrium trap — it would not hurt if India could face a China-like problem at China-like levels of income — where the economically and politically prudent will always find it difficult to converge? This ought to be the central question which should interest and drive development economics. While India is the largest democracy in the world, other countries, including in the West, are also facing a similar question where rightful democratic discontent against the extant economic order is forcing a policy pivot which is not necessarily best suited to address the problems that matter.

Unfortunately, development economics which is in fashion and favour today is interested in either running microscopic experiments which does not want to engage with big-picture problems or sweeping generalisations which violate Einstein’s cardinal rule that everything should be made as simple as possible, but not simpler.

While the IMF chief economist has adopted a much less provocative way to express this sentiment, he has rightly identified the central contradiction facing economics as a discipline today. “Building trust between the government and its people—a two-way process throughout the policy design—and the inclusion of proper compensatory measures to mitigate distributional effects are essential features (of building social acceptability of reforms). This is an important lesson that should also resonate when thinking about ways to further improve international cooperation and bolster our multilateral efforts to address common challenges as we celebrate the 80th anniversary of the Bretton Woods institutions”, Pierre-Olivier Gourinchas has said in his foreword to the latest WEO. Economists everywhere, including within the IMF, will do well to introspect whether they are doing justice to this goal.

Roshan Kishore, HT's Data and Political Economy Editor, writes a weekly column on the state of the country's economy and its political fall out, and vice-versa