There is a great deal one can learn from the past on how trade impacted economic growth and job creation. India provides a rich data set that can shed light on whether trade helped or hindered shared prosperity

India is exploring a new trade agenda, which is being driven by the crisis in global supply chains, coronavirus epidemic, crisis in Ukraine, and rising trade tension between China and USA. Trading partners in Europe and USA want to diversify the global supply chains and look for reliable and friendly partners. This provides a golden opportunity for India to expand its presence in world markets. 

Policymakers are exploring how India can benefit from this new opportunity.  A new trade policy is being formulated by the Ministry of Commerce, and it will be announced soon. There is a risk that this golden opportunity may get hijacked by anti-trade sentiments that are on the rise. If this were to happen, India’s demographic dividend will become a demographic disaster.  

There is a great deal one can learn from the past on how trade impacted economic growth and job creation. India provides a rich data set that can shed light on whether trade helped or hindered shared prosperity. 

Three structural trends stand out from India’s experience during the last three decades. First, India’s manufacturing sector experienced job growth in the tradable sector, and it contracted in the non-tradable sector. Second, the tradable sector experienced an explosion of small and informal enterprises, and the non-tradable sector experienced a contraction. Jobs are largely created by new enterprises. 

Entrepreneurship is a key driver of economic and job growth, and trade liberalization enabled many more people to open their plants and join global supply chains. Third, India has made a leap from being an agricultural economy to becoming the largest exporter of services. India has benefitted from the expansion of global value chains. This has gone hand in hand with increased vertical and horizontal linkages across enterprises, particularly between small and large enterprises, and formal and informal sectors.  

Rise of small enterprises in global trade 

The rise of small and informal enterprises in the tradable sector has been exceptional. Its contribution to job growth in the tradable sector is equivalent to the entire net growth of the manufacturing sector. India’s experience with the rise of small enterprises in the tradable sector conflicts with the conventional wisdom that economies of scale are the bedrock for trade success. The rise of small informal enterprises in global supply chains remains a mystery for many people. Small enterprises are known to face significant hurdles in competing in export markets.  

What explains the rise of small informal enterprises in the tradable sector in India? India’s trade liberalisation in 1991 played a key role, as it enabled small enterprises to join the global supply chains. The number of small informal enterprises in the tradable sector exploded thanks to India’s large youth bulge. India’s demographic dividend promoted “push” entrepreneurship, where entrepreneurs start businesses out of necessity. The current golden opportunity provided by expansion and diversification in global supply chains provides will accelerate many more small enterprises to join the global supply chains. 

The rise of small informal enterprises in the tradable sector in India has a striking spatial development trend. The employment growth in the tradable sector took place in the urban areas. The share of small informal enterprises in tradable employment increased from under one-third in 1990 to over 60% by 2020 in the urban areas. The rise of small informal enterprises in urban areas was driven by all industries, and not just the textile and apparel sectors. Urban areas provided the physical infrastructure needed for small enterprises to join the global supply chains. India’s fast pace of urbanization was a key driver in the rise of small informal enterprises. 

Unfortunately, increased trade has failed to reduce gender segmentation. The share of female-owned plants in informal manufacturing has recorded a decrease, and employment of females in services is still lower than in manufacturing. Global trade seems to have failed in achieving gender equality. 

The most striking structural trade trend for India is its rapid growth in service exports. Services have contributed more than manufacturing to economic growth and job growth. The long-held view that services are non-tradable no longer holds.  

India’s service miracle can be explained by the expansion of digital infrastructure in India.  Internet usage has grown globally, but its growth has been much faster in India, with one million new users of mobile phones being added every month. India also has the benefit of a large young population, which tends to be more connected with technological changes.  

India has benefited from the presence of a large diaspora, as diaspora connections have promoted trade, investment, and knowledge diffusion. The increased role of the diaspora in outsourcing to India did not reflect nepotism and corruption but increased productivity and growth. 

Global trade will take twists and turns in the future, which will be shaped by technological changes, disruptions in global supply chains, and China-USA trade tensions.  This may result in global supply chains moving in different directions--reshoring, diversification, or regionalization. However, it will not reverse the momentum in global trade. In the past, global supply chains have withstood the shocks of economic downturns, epidemics, and trade tensions. 

What can India do to shape its future? First, and foremost, India should resist temptations to raise trade protection. A push for trade protection will transform India’s demographic dividend into a demographic disaster. Past evidence has shown that most of the job growth in India has come from the expansion of the tradable sector. 

As global trade and investment networks further divide production into many more discrete steps, India is well positioned to benefit from the expansion of global supply chains. Global value chains now account for most of the world trade, and this will only increase as many more enterprises exchange inputs and outputs in cross-border value chains. 

To benefit from global supply chains, India needs a fiscal policy that boosts entrepreneurship and job growth. New enterprises and push entrepreneurship require good physical and human infrastructure. Given its large youth bulge, India needs more supply-side measures to promote entrepreneurship and job growth.  Fiscal policies can scale up supply-side measures without stoking inflation.  

Trade policy needs to be supported with regulatory reforms. The biggest impediments are domestic impediments--distortions in land, labour, energy, and capital markets. Trade liberalization agreements in future will require deeper ‘behind the border’ integration of standards relating to labour, gender, environment, intellectual property rights and even investment protection.  

Disclaimer: The views expressed in the article above are those of the authors' and do not necessarily represent or reflect the views of this publishing house. Unless otherwise noted, the author is writing in his/her personal capacity. They are not intended and should not be thought to represent official ideas, attitudes, or policies of any agency or institution.

Ejaz Ghani is currently a Senior Fellow at the Pune International Center. He was previously the Lead Economist at the World Bank and has worked on Africa, East Asia, South Asia, Corporate Strategy, and Independent Evaluation Unit.

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