Aatmanirbhar Bharat: India needs to focus more on these areas for self-reliance - Check SBI Ecowrap Economic Research report

A research report from State Bank of India’s Economic Research Department – SBI Ecowrap - reveals that India needs to focus more on increasing productivity and less on import tariffs in its quest for Aatmanirbhar Bharat.

As per the report authored by Dr. Soumya Kanti Ghosh, Group Chief Economic Adviser, State Bank of India, "A cross country comparison of Manufacturing Value Added of top world manufacturers shows that between 2004 and 2017 China gained around 18% market share in Manufacturing GVA, while India gained 1.5%, the second highest(6th largest in global manufacturing share at 3%). Other emerging markets viz. Brazil, Indonesia, Turkey, Thailand have also increased their share in world manufacturing. However, the respective increase is less than 1% for each country. However, the per capita manufacturing still shows the lack of achievement of India’s full potential."

Further, the report authored by Dr. Soumya Kanti Ghosh, adds, "We believe to accelerate India’s progress towards Atmanirbhar Bharat, India needs to reduce its tariff. After 2004, India had witnessed rapid reduction in AHS Weighted Average (%) across all product categories. Despite the reduced tariffs, India has one of the highest weighted average tariffs in the world on manufactures. A regression of India’s imports of raw materials, intermediate goods, capital and consumer goods in the respective AHS weighted average import tariff rates for the time period 1990-2017 shows that with even 1% increase in tariff the imports decline by around $2 billion on an average, thus possibly making a cause for improving the manufacturing base of the country, but they do not encourage improving productivity and are tantamount to taking the easy route. Also, in the export basket, the highest share is of consumer goods which are mostly manufactured products. This is followed by intermediate goods and these two attract the highest tariffs in the import basket, thus making a case against the fact that the higher import tariffs have not protected these industries. Other countries with much lower tariff structures have built manufacturing bases, which have helped them in their exports.  

We believe to accelerate India’s progress towards Atmanirbhar Bharat, India needs to reduce its tariff. After 2004, India had witnessed rapid reduction in AHS Weighted Average (%) across all product categories. Despite the reduced tariffs, India has one of the highest weighted average tariffs in the world on manufactures. A regression of India’s imports of raw materials, intermediate goods, capital and consumer goods in the respective AHS weighted average import tariff rates for the time period 1990-2017 shows that with even 1% increase in tariff the imports decline by around $2 billion on an average, thus possibly making a cause for improving the manufacturing base of the country, but they do not encourage improving productivity and are tantamount to taking the easy route. Also, in the export basket, the highest share is of consumer goods which are mostly manufactured products. This is followed by intermediate goods and these two attract the highest tariffs in the import basket, thus making a case against the fact that the higher import tariffs have not protected these industries. Other countries with much lower tariff structures have built manufacturing bases, which have helped them in their exports.      

"The high tariffs are clearly impacting India’s position in Global Value Chains / GVC. Countries can participate in GVCs by engaging in either backward or forward linkages. Backward linkages are created when country A uses inputs from country B for domestic production. Forward linkages are created when country A supplies inputs that are used for production in country B. Countries with a larger position index are relatively more upstream, i.e., they contribute more value added to other countries exports than other countries contribute to theirs. When we construct these indices from the available data, we see that for India the GVC Participation has slowly increased over the years as the economy opened up and moved towards globalization. However, the Position index has followed a downward trend as the backward linkages have been more pronounced than the forward linkage. This is perhaps prompting India to raise tariffs but it could actually boomerang on India creating a self sustaining manufacturing base. With Atmanirbhar Bharat, the Government is hoping to increase the forward linkage."

Dr. Soumya Kanti Ghosh, in the report, concludes, "Finally, an example of textile and apparel exports from India to the US, whose major imports have not changed looking back to 2004. However, what definitely changed was that by 2020, US textile and apparel imports became heavily sourced from China which had just 17% share in 2004 (peaked at 36.3% in 2016 and currently at 26.9%) .Bangladesh and India have gained comparable market share of around 3%-4% each. But given that the Bangladeshi economy is much smaller this gain in market share translates into bigger gains for Bangladesh vis-à-vis India. Bangladesh has chosen to specialise more in certain product categories viz. in trousers/slacks/breeches/short made out of cotton and has remarkable dividends since 2015 by increasing its market share in this category by 6-7% in just 5 years! Much more focused attention to apparel and textiles sector is thus required if India wants to compete with its Asian neighbours like Vietnam, Bangladesh and even Cambodia which surprisingly has shown a positive exports growth rate even in 2020! This can only happen through enhancing competitiveness in manufacturing and not by raising tariffs."

The high tariffs are clearly impacting India’s position in Global Value Chains / GVC. Countries can participate in GVCs by engaging in either backward or forward linkages. Backward linkages are created when country A uses inputs from country B for domestic production. Forward linkages are created when country A supplies inputs that are used for production in country B. Countries with a larger position index are relatively more upstream, i.e., they contribute more value added to other countries exports than other countries contribute to theirs. When we construct these indices from the available data, we see that for India the GVC Participation has slowly increased over the years as the economy opened up and moved towards globalization. However, the Position index has followed a downward trend as the backward linkages have been more pronounced than the forward linkage. This is perhaps prompting India to raise tariffs but it could actually boomerang on India creating a self sustaining manufacturing base. With Atmanirbhar Bharat, the Government is hoping to increase the forward linkage.

Finally, an example of textile and apparel exports from India to the US, whose major imports have not changed looking back to 2004. However, what definitely changed was that by 2020, US textile and apparel imports became heavily sourced from China which had just 17% share in 2004 (peaked at 36.3% in 2016 and currently at 26.9%) .Bangladesh and India have gained comparable market share of around 3%-4% each. But given that the Bangladeshi economy is much smaller this gain in market share translates into bigger gains for Bangladesh vis-à-vis India. Bangladesh has chosen to specialise more in certain product categories viz. in trousers/slacks/breeches/short made out of cotton and has remarkable dividends since 2015 by increasing its market share in this category by 6-7% in just 5 years! Much more focused attention to apparel and textiles sector is thus required if India wants to compete with its Asian neighbours like Vietnam, Bangladesh and even Cambodia which surprisingly has shown a positive exports growth rate even in 2020! This can only happen through enhancing competitiveness in manufacturing and not by raising tariffs.