Introduction: The Need for Labor-Intensive Export Growth

India, the world’s fastest-growing major economy, recorded a robust 6.7% year-on-year growth in the April-June 2024 quarter. However, while these figures reflect the country’s economic strength, significant challenges remain—particularly in the area of job creation. The World Bank, in its latest “India Development Update” report released on September 3, 2024, highlighted the critical need for India to focus on labor-intensive exports as a strategy to boost employment and foster more inclusive growth.

India’s Manufacturing Sector: Missed Opportunities

India’s manufacturing sector, despite its potential, has not fully capitalized on the opportunities that have arisen from China’s gradual exit from labor-intensive manufacturing sectors. Over the past decade, China has shifted focus from low-cost, labor-intensive manufacturing to more capital-intensive, high-tech industries, creating a gap that other countries like Bangladesh and Vietnam have effectively filled. These countries have seen substantial growth in sectors such as apparel, leather, and textiles—areas where India has traditionally been strong but has recently lost ground.

The World Bank report emphasized that India’s share in global apparel exports has declined from 4% in 2018 to 3% in 2022, a trend attributed to rising costs of production and declining productivity within the country. This decline is concerning given that the apparel sector is one of the most labor-intensive industries, offering significant employment opportunities, particularly for young, low-skilled workers.

Untapped Markets: Opportunities in Africa and Latin America

One of the key recommendations from the World Bank is for India to explore less advanced markets with high demand for its goods. Auguste Tano Kouame, the World Bank Country Director for India, noted that regions like Africa and Latin America present untapped opportunities for Indian exports, especially in sectors like textiles and footwear. These markets, which have not been fully exploited by Indian exporters, could serve as new growth frontiers for the country’s manufacturing industry.

Africa, in particular, has been experiencing rapid population growth and urbanization, leading to increased demand for affordable, durable goods—areas where Indian manufacturers could have a competitive advantage. Similarly, Latin American markets, though geographically distant, offer potential due to their need for diverse consumer goods, which India can supply at competitive prices.

Challenges in Job Creation: The Urban Unemployment Conundrum

Despite its impressive economic growth, India faces a significant challenge in translating this growth into job creation. The World Bank report pointed out that the urban unemployment rate in India remains high, averaging 17%. This is a critical issue in a country with a large and growing youth population, where millions of young people enter the labor market each year.

The high unemployment rate, particularly among urban youth, underscores the need for policies that can create jobs at scale. Labor-intensive industries, such as manufacturing of apparel, textiles, and footwear, are well-suited to absorb large numbers of workers, including those with relatively low skill levels. However, the decline in India’s share of global exports in these sectors indicates that more needs to be done to revitalize these industries.

The Role of Production Linked Incentives (PLI)

In response to these challenges, the World Bank suggested that India could attract more investment into labor-intensive sectors by offering concessions under its Production Linked Incentive (PLI) scheme. The PLI scheme, introduced by the Indian government, aims to boost domestic manufacturing by providing financial incentives to companies that achieve specified production targets. While the scheme has been successful in attracting investment into high-tech sectors like electronics and pharmaceuticals, there is significant potential to extend similar incentives to labor-intensive industries.

By doing so, India could not only increase its exports in these sectors but also generate substantial employment opportunities. The World Bank emphasized that focusing on low-skilled manufacturing exports, which have higher job potential, could be a game-changer for India, helping to address the persistent issue of urban unemployment and ensuring more inclusive economic growth.

Integrating into Global Value Chains: Reducing Import Tariffs

Another key recommendation from the World Bank is for India to reduce its import tariffs and integrate more deeply into global value chains (GVCs). GVCs are essential for modern manufacturing, where production processes are spread across multiple countries, allowing each nation to specialize in specific stages of production. However, India’s relatively high import tariffs have been a barrier to its deeper integration into these value chains, limiting the country’s ability to become a global manufacturing hub.

Reducing import tariffs would make it easier for Indian manufacturers to import raw materials and intermediate goods, which are often necessary for producing export-ready products. This could enhance the competitiveness of Indian goods in the global market, particularly in labor-intensive sectors. Furthermore, deeper integration into GVCs would attract more foreign direct investment (FDI) into India’s manufacturing sector, creating additional jobs and boosting economic growth.

India’s Export Performance: A Mixed Bag

India’s total goods and services exports for the fiscal year 2023/24, which ended in March, surpassed $776 billion—a record high for the country. However, this achievement is tempered by the fact that imports for the same period were nearly $855 billion, resulting in a trade deficit. While the export figures are impressive, the persistent trade deficit highlights the challenges India faces in maintaining a favorable balance of trade.

High-tech exports, such as mobile phones and IT services, have been the driving force behind India’s export growth in recent years. However, the decline in low-skilled sectors like apparel, textiles, and leather products is a cause for concern, particularly from an employment perspective. These sectors are crucial for generating jobs that can absorb the large number of low-skilled workers entering the labor market each year.

Government Spending and Economic Growth

The World Bank also noted that one of the factors contributing to India’s robust economic growth is increased government spending on infrastructure. The Indian government has been investing heavily in infrastructure projects, such as roads, railways, and ports, as part of its broader strategy to enhance connectivity and support economic development. This spending has not only boosted GDP growth but also created jobs in the construction and related industries.

However, the sustainability of this growth depends on the government’s ability to continue funding these projects without exacerbating fiscal deficits. The World Bank raised its economic growth forecast for India to 7% for the current fiscal year, up from an earlier estimate of 6.6%, citing government infrastructure spending as a key driver. However, it also cautioned that maintaining this growth rate would require addressing structural challenges in the labor market and manufacturing sector.

The Path Forward: Strategic Recommendations

To address these challenges and maximize its economic potential, India needs to adopt a multi-pronged strategy. First, revitalizing labor-intensive sectors should be a top priority. This can be achieved by offering targeted incentives under the PLI scheme, reducing import tariffs, and facilitating greater integration into global value chains. By doing so, India can increase its share in global exports of labor-intensive goods and create millions of jobs.

Second, India should explore new export markets, particularly in regions like Africa and Latin America, where demand for Indian goods is growing but remains largely untapped. Expanding into these markets would not only diversify India’s export base but also reduce its dependence on traditional markets like the United States and Europe.

Third, the government should continue its focus on infrastructure development, as this is essential for supporting both domestic and export-oriented industries. However, this spending must be carefully managed to avoid creating unsustainable fiscal pressures. The private sector also has a critical role to play in financing and implementing infrastructure projects, and the government should explore public-private partnerships (PPPs) to leverage private capital.

Finally, addressing the high urban unemployment rate requires targeted interventions to improve labor market outcomes. This includes not only creating jobs in labor-intensive industries but also investing in skills development programs to enhance the employability of young workers. Additionally, policies that promote entrepreneurship and support small and medium-sized enterprises (SMEs) can help create new employment opportunities.

Conclusion: A Strategic Imperative for Inclusive Growth

The World Bank’s recommendations underscore the urgent need for India to focus on labor-intensive exports as a strategy for job creation and inclusive growth. While India has made significant strides in high-tech exports, the decline in labor-intensive sectors is a concern that needs to be addressed. By revitalizing these sectors, exploring new markets, and integrating more deeply into global value chains, India can create millions of jobs and ensure that its economic growth benefits all segments of society.

As the world’s fastest-growing major economy, India has the potential to become a global leader in manufacturing and exports. However, realizing this potential requires strategic planning, targeted policies, and effective implementation. By following the recommendations of the World Bank and other experts, India can overcome its current challenges and pave the way for sustained, inclusive economic growth in the years to come.

Photo source: Google

By: Montel Kamau

Serrari Financial Analyst

4th September, 2024