A tale of India’s two big export industries: And a lesson on incentives
India boasts of vast production capacity in one industry. The country is the world’s third largest exporter of its industrial products, which are essential for any economy to function. This is a distinction that no other sector in India can claim.
One disturbing fact, however, is that it benefits very few Indians. Over 90% of the value generated in this sector accrues to capital owners. Thus, the positive wealth effect of these exports is limited.
As it is one of the least labour-intensive industries, it employs only around 300,000 people. Almost all its raw material is imported, resulting in the highest foreign value-added content in Indian exports among all industries, and low employment generation via backward linkages. It appears unthinkable for this to have occurred.
But it did. This is India’s refined petroleum industry, which contributes more than 20% to our merchandise exports in value terms. Contrast this with India’s leading services export: information technology (IT).
Today, its exports in value terms are 1.5 times that of petroleum exports. Back in 2012-13, both were at nearly similar levels. The domestic value-added content of IT exports is among the highest.
The labour share of value addition is only a bit less than 50%, compared to under 10% in refined petroleum. Close to 60% of employment in the sector is related to exports. Direct employment by IT services in India is estimated at 5.1 million, so about 3 million jobs are export-related.
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