External Sector

Model Answer

Factors Limiting India’s Export Competitiveness

India’s export potential is significantly constrained by several key factors:

1. Higher Tariffs on Intermediate Goods: A major obstacle to India’s export competitiveness is the high tariff on intermediate goods, which make up about 70% of anti-dumping duties. These duties increase production costs for downstream industries, ultimately affecting the pricing of finished export goods. This, in turn, makes Indian products less competitive in global markets.
2. Traditional Export Basket: India’s export basket is largely dominated by low-value, traditional products such as textiles and raw materials, which account for around 70% of its exports. These goods target markets that represent only 30% of world trade, many of which are declining in demand. India’s lack of diversification into higher value-added products limits its export potential.
3. High Logistics Costs: India’s logistics costs are approximately 16% of GDP, significantly higher than those of China (10%) and the U.S. (8%). These high costs erode the competitiveness of Indian exports, making them less price-competitive in international markets (Source: Ministry of Commerce).
4. Complex Business Ecosystem: The trade environment in India is marked by bureaucratic red tape, complex taxation laws, power subsidies, and high non-tariff barriers. These factors increase the cost of doing business and hinder the ease of exporting.
5. Lack of Sector-Specific Export Strategies: India’s export policy lacks a targeted, sector-specific approach. There is a need for customized strategies that cater to the unique strengths and challenges of various industries and international markets.

Measures to Boost Export Competitiveness

1. Decentralized Export Strategy: The government should adopt a more state-specific, decentralized export policy. Encouraging states to compete in export promotion will foster innovation and tailored industrial policies, enhancing export performance.
2. Aggressive Participation in Global Value Chains (GVCs): India must ramp up its involvement in GVCs by focusing on labor-intensive manufacturing, which will create more job opportunities and boost exports of network products.
3. Enhance Export Ecosystem: Efforts like the PM Gati Shakti initiative, the Trade Infrastructure for Export Scheme (TIES), and the Remission of Duties or Taxes on Export Products (RoDTEP) should be fully implemented to streamline exports and reduce barriers (Source: Ministry of Commerce).
4. Boost Domestic Manufacturing: Encouraging domestic manufacturing through lower corporate tax rates, PLI schemes, and infrastructure development can significantly increase the supply of competitive products for export.
5. Move Away from Protectionism: India should adopt a more open trade policy, forging preferential trade agreements and regional trading arrangements, especially in light of the growing trend of the China-plus-one strategy.

By addressing these issues and implementing targeted measures, India can significantly enhance its export competitiveness and contribute more to global economic growth. These steps will help the country achieve its target of $1 trillion in merchandise exports by 2027-28 and $1 trillion in services exports by 2030.

Model Paper

Factors Contributing to India’s Rise as a Preferred Outsourcing Destination

India’s rise as a preferred outsourcing hub in the post-reforms era can be attributed to several key factors:

1. Cost-Effective Services
   • India offers significant cost advantages, making it more affordable for foreign companies to hire Indian professionals compared to local talent in developed countries. Despite the lower cost of labor, India maintains high-quality standards, which makes it an attractive outsourcing destination (Source: Various industry reports).
2. Large Pool of English-Speaking Workforce
   • India is home to one of the largest skilled talent pools in the world. With nearly 1.5 million engineering graduates annually, including from prestigious institutions like the IITs and NITs, India’s workforce is highly skilled. Additionally, English proficiency in India is widespread, making communication seamless with global clients (Source: Government reports, education statistics).
3. State-of-the-Art Infrastructure
   • Cities like Delhi, Mumbai, Bangalore, and Hyderabad are known for their world-class infrastructure, which is crucial for facilitating efficient outsourcing operations. Many tier-2 cities, such as Jaipur and Indore, are also rapidly developing with competitive infrastructure at lower costs, which further attracts companies (Source: Ministry of Urban Development).
4. Flexible Corporate Environment
   • India offers a highly adaptable work environment, making it easier for multinational corporations (MNCs) to set up operations. The relatively stable political and economic conditions compared to other countries in the region make India an ideal outsourcing destination.

Role of Outsourcing in India’s Economic Development

Outsourcing has had a profound impact on India’s economic growth:

1. Contribution to GDP
   • The Information Technology Outsourcing (ITO) and Business Process Outsourcing (BPO) sectors together contribute approximately 9.5% of India’s GDP. In FY21-22, the services sector, which includes outsourcing, contributed 53% to India’s Gross Value Added, highlighting its role as the engine of economic growth (Source: Ministry of Statistics and Programme Implementation).
2. Job Creation
   • The outsourcing sector employs around 5 million people, with a notable increase in the participation of women in the workforce. This sector has become one of the largest job creators in India, providing employment across various skill levels.
3. Urbanization and Growth of Cities
   • Outsourcing has spurred the development of major cities like Bangalore, Chennai, and Pune, which are among the world’s top outsourcing destinations. This growth has led to urbanization, creating a multiplier effect on local economies and contributing to infrastructure development, real estate, and other industries.
4. Leapfrogging Effect
   • The rapid growth of the IT and outsourcing sectors has allowed India to bypass traditional stages of economic development, such as heavy industrialization. The focus on export-oriented services has brought substantial economic benefits, allowing India to leapfrog from agrarian-based development directly into a services-driven economy.

Conclusion

Outsourcing has been a key driver of India’s economic transformation in the post-reforms era, making it a global leader in IT and BPO services. The factors like cost-effectiveness, skilled workforce, modern infrastructure, and a conducive corporate environment have made India a preferred outsourcing destination. Additionally, outsourcing has significantly contributed to job creation, GDP growth, urbanization, and the leapfrogging of India’s economic development. With these strengths, India is well-positioned to capitalize on the future trends in outsourcing and continue its upward economic trajectory.