New Delhi
India will soon become the third-largest economy overtaking Japan and Germany. However, the journey from the third largest to the second largest or the largest is going to be extremely difficult given the large gap (The US at 7 times and China at 4.5 times the current size). Now, in order to bridge the gap with existing poles of the global economy and geopolitics, India has to focus more on the structure of the economy than size. The structure of the Indian economy remains shallow as we are dependent on foreign countries for most critical parts of the value chain and these vulnerabilities get reflected from time to time - most recently during Covid when API imports stopped.
India remains at the lower end of the value chain in the majority of the sectors. Among the 10 largest companies in the United States, 9 are IP-driven technology/Product companies, and the 10th is an investment firm with stocks of technology companies around the world. These companies are at the forefront of innovation and enjoy a premium in the market valuation based on their ability to be at the top of the game in their respective sectors.
<img alt="India economy" data-align="center" data-entity-type="file" data-entity-uuid="63b4b160-ede9-4d84-8782-67ba5fc14dfd" src="https://img-cdn.thepublive.com/filters:format(webp)/wion/media/post_attachments/sites/default/files/inline-images/1aa.jpg"/>
On the other hand, none of the 10 most valued Indian companies are IP-driven. Most of the Indian companies are banking or technology service providers. Innovation is not at the core of any Indian companies among the top 10. If the structure of the economy remains the same, a few decades down the line, the Indian economy will become stagnant just like the European economy.
<img alt="India economy" data-align="center" data-entity-type="file" data-entity-uuid="8ce1cf8d-5c74-4fff-94df-6c405c8485b2" src="https://img-cdn.thepublive.com/filters:format(webp)/wion/media/post_attachments/sites/default/files/inline-images/2aa.jpg"/>
The story is the same for European countries despite the fact these countries have lost in the innovation game in the last two decades. Among the top 10 European companies, Novo Nordisk, SAP, ASML, and Siemens are IP-driven product companies. What this tells us is that all the countries that escape the middle-income trap do it on the back of IP-driven product companies, not with process innovation-driven service companies that dominate the Indian economy today. 
<img alt="India economy" data-align="center" data-entity-type="file" data-entity-uuid="8bc00696-96db-430a-a706-9773583a02ab" src="https://img-cdn.thepublive.com/filters:format(webp)/wion/media/post_attachments/sites/default/files/inline-images/3aa.jpg"/>
<h2>What makes the move from middle-income status to high-income status so difficult? </h2>
One reason is that as they move through middle-income status, countries cannot leap all at once from investment-driven growth to innovation-driven growth. (From WB’s World Development Report 2024)
So, to become a developed nation, we need our existing companies to transition from a process innovation-driven revenue model to a product-driven innovation model. And for this, we need next-gen products because it is extremely difficult to beat the incumbent in the current-gen products. Be it India's UPI for payments or China's EVs, the countries and companies have been able to defeat the incumbent only by focusing on the next-gen products and offering solutions that are 10X better than the existing products.
Coming up with next-generation products also needs to bring some of our diaspora back, which is doing cutting-edge R&amp;D in American universities and firms. These researchers won't come to the current CSIR setup for obvious reasons (some left this setup to go to the US). The Rs 1 lakh crore fund, announced during the interim budget, can be used to do pre-commercial research at universities (Institute of Brain Sciences at IISc model), academic institutions and firms (corporate labs like Bell Labs, Xerox PARC) and startups.
In the last few years, we have succeeded in building the first generation of IP-driven product companies in some sectors. In telecom equipment, there is Tejas Networks, in vaccine development, we have Bharat Biotech, in making trains, we have also made some progress with Vande Bharat, which was developed at the Integrated Coach Factory in Chennai shows that the private and public sectors can both develop IP-driven products that will be globally competitive. The mindset of the government as well as the private sector needs to change for this. 
Services companies can be built without significant government involvement, it is extremely difficult to build a product company without the support from the government on the day. The product companies need a large sum of money for pre-commercial investment before the product hits the market. Moreover, these companies also need market access, preferably from the government at an early stage, in order to iterate and improve the product. 
In most of the products, the government acts as a safe buyer. The government will buy only if the product has been used by the private sector before and the trials will be on No-Cost-No-Commitment (NCNC) basis. These steps have been taken to prevent corruption and cronyism in public procurement. For the product companies to succeed, the government needs to act as a first buyer to mitigate risk and spur innovation. 
Moreover, the government needs to fund pre-commercial research at corporations and startups instead of doing it as autonomous labs where the researchers are employed full time without any accountability on outcome. Throughout the world, the product companies, from America’s defense industrial complex to China's new energy domination, were built by public funding for private innovation. 
India also needs to bank on public funding for private innovation and government buying to build its IP-driven product companies. The public funding should be designed in a way that it could spur private investment in R&amp;D, which has been abysmally low at 0.3% of GDP.  What propelled India to become 5th and soon to be 3rd largest economy in the world from 17th in 1991 will not enable it to compete with the United States and China. We need a new way of thinking on political economy that could change the structure of the economy from shallow services and manufacturing to an IP-driven economy. It will enable the country to overcome the middle-income trap and set the path to overtake the United States and China in the coming decades. 
Disclaimer: The views of the writer do not represent the views of WION or ZMCL. Nor does WION or ZMCL endorse the views of the writer.

India remains at the lower end of the value chain in the majority of the sectors. Among the 10 largest companies in the United States, 9 are IP-driven technology/Product companies, and the 10th is an investment firm with stocks of technology companies around the world.



New Delhi India will soon become the third-largest economy overtaking Japan and Germany. However, the journey from the third largest to the second largest or the largest is going to be extremely difficult given the large gap (The US at 7 times and China at 4.5 times the current size). Now, in order to bridge the gap with existing poles of the global economy and geopolitics, India has to focus more on the structure of the economy than size. The structure of the Indian economy remains shallow as we are dependent on foreign countries for most critical parts of the value chain and these vulnerabilities get reflected from time to time - most recently during Covid when API imports stopped. India remains at the lower end of the value chain in the majority of the sectors. Among the 10 largest companies in the United States, 9 are IP-driven technology/Product companies, and the 10th is an investment firm with stocks of technology companies around the world. These companies are at the forefront of innovation and enjoy a premium in the market valuation based on their ability to be at the top of the game in their respective sectors. On the other hand, none of the 10 most valued Indian companies are IP-driven. Most of the Indian companies are banking or technology service providers. Innovation is not at the core of any Indian companies among the top 10. If the structure of the economy remains the same, a few decades down the line, the Indian economy will become stagnant just like the European economy. The story is the same for European countries despite the fact these countries have lost in the innovation game in the last two decades. Among the top 10 European companies, Novo Nordisk, SAP, ASML, and Siemens are IP-driven product companies. What this tells us is that all the countries that escape the middle-income trap do it on the back of IP-driven product companies, not with process innovation-driven service companies that dominate the Indian economy today. What makes the move from middle-income status to high-income status so difficult? One reason is that as they move through middle-income status, countries cannot leap all at once from investment-driven growth to innovation-driven growth. (From WB’s World Development Report 2024) So, to become a developed nation, we need our existing companies to transition from a process innovation-driven revenue model to a product-driven innovation model. And for this, we need next-gen products because it is extremely difficult to beat the incumbent in the current-gen products. Be it India's UPI for payments or China's EVs, the countries and companies have been able to defeat the incumbent only by focusing on the next-gen products and offering solutions that are 10X better than the existing products. Coming up with next-generation products also needs to bring some of our diaspora back, which is doing cutting-edge R&D in American universities and firms. These researchers won't come to the current CSIR setup for obvious reasons (some left this setup to go to the US). The Rs 1 lakh crore fund, announced during the interim budget, can be used to do pre-commercial research at universities (Institute of Brain Sciences at IISc model), academic institutions and firms (corporate labs like Bell Labs, Xerox PARC) and startups. In the last few years, we have succeeded in building the first generation of IP-driven product companies in some sectors. In telecom equipment, there is Tejas Networks, in vaccine development, we have Bharat Biotech, in making trains, we have also made some progress with Vande Bharat, which was developed at the Integrated Coach Factory in Chennai shows that the private and public sectors can both develop IP-driven products that will be globally competitive. The mindset of the government as well as the private sector needs to change for this. Services companies can be built without significant government involvement, it is extremely difficult to build a product company without the support from the government on the day. The product companies need a large sum of money for pre-commercial investment before the product hits the market. Moreover, these companies also need market access, preferably from the government at an early stage, in order to iterate and improve the product. In most of the products, the government acts as a safe buyer. The government will buy only if the product has been used by the private sector before and the trials will be on No-Cost-No-Commitment (NCNC) basis. These steps have been taken to prevent corruption and cronyism in public procurement. For the product companies to succeed, the government needs to act as a first buyer to mitigate risk and spur innovation. Moreover, the government needs to fund pre-commercial research at corporations and startups instead of doing it as autonomous labs where the researchers are employed full time without any accountability on outcome. Throughout the world, the product companies, from America’s defense industrial complex to China's new energy domination, were built by public funding for private innovation. India also needs to bank on public funding for private innovation and government buying to build its IP-driven product companies. The public funding should be designed in a way that it could spur private investment in R&D, which has been abysmally low at 0.3% of GDP. What propelled India to become 5th and soon to be 3rd largest economy in the world from 17th in 1991 will not enable it to compete with the United States and China. We need a new way of thinking on political economy that could change the structure of the economy from shallow services and manufacturing to an IP-driven economy. It will enable the country to overcome the middle-income trap and set the path to overtake the United States and China in the coming decades. Disclaimer: The views of the writer do not represent the views of WION or ZMCL. Nor does WION or ZMCL endorse the views of the writer.

India needs to build IP-driven companies to escape middle-income trap

India will soon become the third-largest economy overtaking Japan and Germany. However, the journey from the third largest to the second largest or the largest is going to be extremely difficult given the large gap (The US at 7 times and China at 4.5 times the current size). Now, in order to bridge the gap with existing poles of the global economy and geopolitics, India has to focus more on the structure of the economy than size. The structure of the Indian economy remains shallow as we are dependent on foreign countries for most critical parts of the value chain and these vulnerabilities get reflected from time to time - most recently during Covid when API imports stopped.

India remains at the lower end of the value chain in the majority of the sectors. Among the 10 largest companies in the United States, 9 are IP-driven technology/Product companies, and the 10th is an investment firm with stocks of technology companies around the world. These companies are at the forefront of innovation and enjoy a premium in the market valuation based on their ability to be at the top of the game in their respective sectors.
<img alt="India economy" data-align="center" data-entity-type="file" data-entity-uuid="63b4b160-ede9-4d84-8782-67ba5fc14dfd" src="//cdn.wionews.com/sites/default/files/inline-images/1aa.jpg" />
On the other hand, none of the 10 most valued Indian companies are IP-driven. Most of the Indian companies are banking or technology service providers. Innovation is not at the core of any Indian companies among the top 10. If the structure of the economy remains the same, a few decades down the line, the Indian economy will become stagnant just like the European economy.
<img alt="India economy" data-align="center" data-entity-type="file" data-entity-uuid="8ce1cf8d-5c74-4fff-94df-6c405c8485b2" src="//cdn.wionews.com/sites/default/files/inline-images/2aa.jpg" />
The story is the same for European countries despite the fact these countries have lost in the innovation game in the last two decades. Among the top 10 European companies, Novo Nordisk, SAP, ASML, and Siemens are IP-driven product companies. What this tells us is that all the countries that escape the middle-income trap do it on the back of IP-driven product companies, not with process innovation-driven service companies that dominate the Indian economy today.&nbsp;
<img alt="India economy" data-align="center" data-entity-type="file" data-entity-uuid="8bc00696-96db-430a-a706-9773583a02ab" src="//cdn.wionews.com/sites/default/files/inline-images/3aa.jpg" />
<h2>What makes the move from middle-income status to high-income status so difficult?&nbsp;</h2>

One reason is that as they move through middle-income status, countries cannot leap all at once from investment-driven growth to innovation-driven growth. (From WB’s World Development Report 2024)

So, to become a developed nation, we need our existing companies to transition from a process innovation-driven revenue model to a product-driven innovation model. And for this, we need next-gen products because it is extremely difficult to beat the incumbent in the current-gen products. Be it India's UPI for payments or China's EVs, the countries and companies have been able to defeat the incumbent only by focusing on the next-gen products and offering solutions that are 10X better than the existing products.

Coming up with next-generation products also needs to bring some of our diaspora back, which is doing cutting-edge R&amp;D in American universities and firms. These researchers won't come to the current CSIR setup for obvious reasons (some left this setup to go to the US). The Rs 1 lakh crore fund, announced during the interim budget, can be used to do pre-commercial research at universities (Institute of Brain Sciences at IISc model), academic institutions and firms (corporate labs like Bell Labs, Xerox PARC) and startups.

In the last few years, we have succeeded in building the first generation of IP-driven product companies in some sectors. In telecom equipment, there is Tejas Networks, in vaccine development, we have Bharat Biotech, in making trains, we have also made some progress with Vande Bharat, which was developed at the Integrated Coach Factory in Chennai shows that the private and public sectors can both develop IP-driven products that will be globally competitive. The mindset of the government as well as the private sector needs to change for this.&nbsp;

Services companies can be built without significant government involvement, it is extremely difficult to build a product company without the support from the government on the day. The product companies need a large sum of money for pre-commercial investment before the product hits the market. Moreover, these companies also need market access, preferably from the government at an early stage, in order to iterate and improve the product.&nbsp;

In most of the products, the government acts as a safe buyer. The government will buy only if the product has been used by the private sector before and the trials will be on No-Cost-No-Commitment (NCNC) basis. These steps have been taken to prevent corruption and cronyism in public procurement. For the product companies to succeed, the government needs to act as a first buyer to mitigate risk and spur innovation.&nbsp;

Moreover, the government needs to fund pre-commercial research at corporations and startups instead of doing it as autonomous labs where the researchers are employed full time without any accountability on outcome. Throughout the world, the product companies, from America’s defense industrial complex to China's new energy domination, were built by public funding for private innovation.&nbsp;

India also needs to bank on public funding for private innovation and government buying to build its IP-driven product companies. The public funding should be designed in a way that it could spur private investment in R&amp;D, which has been abysmally low at 0.3% of GDP. &nbsp;What propelled India to become 5th and soon to be 3rd largest economy in the world from 17th in 1991 will not enable it to compete with the United States and China. We need a new way of thinking on political economy that could change the structure of the economy from shallow services and manufacturing to an IP-driven economy. It will enable the country to overcome the middle-income trap and set the path to overtake the United States and China in the coming decades.&nbsp;

Disclaimer: The views of the writer do not represent the views of WION or ZMCL. Nor does WION or ZMCL endorse the views of the writer.

India will soon become the third-largest economy overtaking Japan and Germany. However, the journey from the third largest to the second largest or the largest is going to be extremely difficult given the large gap (The US at 7 times and China at 4.

India will soon become the third-largest economy overtaking Japan and Germany. However, the journey from the third largest to the second largest or the largest is going to be extremely difficult given the large gap (The US at 7 times and China at 4.5 times the current size). Now, in order to bridge the gap with existing poles of the global economy and geopolitics, India has to focus more on the structure of the economy than size. The structure of the Indian economy remains shallow as we are dependent on foreign countries for most critical parts of the value chain and these vulnerabilities get reflected from time to time - most recently during Covid when API imports stopped. India remains at the lower end of the value chain in the majority of the sectors. Among the 10 largest companies in the United States, 9 are IP-driven technology/Product companies, and the 10th is an investment firm with stocks of technology companies around the world. These companies are at the forefront of innovation and enjoy a premium in the market valuation based on their ability to be at the top of the game in their respective sectors. On the other hand, none of the 10 most valued Indian companies are IP-driven. Most of the Indian companies are banking or technology service providers. Innovation is not at the core of any Indian companies among the top 10. If the structure of the economy remains the same, a few decades down the line, the Indian economy will become stagnant just like the European economy. The story is the same for European countries despite the fact these countries have lost in the innovation game in the last two decades. Among the top 10 European companies, Novo Nordisk, SAP, ASML, and Siemens are IP-driven product companies. What this tells us is that all the countries that escape the middle-income trap do it on the back of IP-driven product companies, not with process innovation-driven service companies that dominate the Indian economy today. What makes the move from middle-income status to high-income status so difficult? One reason is that as they move through middle-income status, countries cannot leap all at once from investment-driven growth to innovation-driven growth. (From WB’s World Development Report 2024) So, to become a developed nation, we need our existing companies to transition from a process innovation-driven revenue model to a product-driven innovation model. And for this, we need next-gen products because it is extremely difficult to beat the incumbent in the current-gen products. Be it India's UPI for payments or China's EVs, the countries and companies have been able to defeat the incumbent only by focusing on the next-gen products and offering solutions that are 10X better than the existing products. Coming up with next-generation products also needs to bring some of our diaspora back, which is doing cutting-edge R&D in American universities and firms. These researchers won't come to the current CSIR setup for obvious reasons (some left this setup to go to the US). The Rs 1 lakh crore fund, announced during the interim budget, can be used to do pre-commercial research at universities (Institute of Brain Sciences at IISc model), academic institutions and firms (corporate labs like Bell Labs, Xerox PARC) and startups. In the last few years, we have succeeded in building the first generation of IP-driven product companies in some sectors. In telecom equipment, there is Tejas Networks, in vaccine development, we have Bharat Biotech, in making trains, we have also made some progress with Vande Bharat, which was developed at the Integrated Coach Factory in Chennai shows that the private and public sectors can both develop IP-driven products that will be globally competitive. The mindset of the government as well as the private sector needs to change for this. Services companies can be built without significant government involvement, it is extremely difficult to build a product company without the support from the government on the day. The product companies need a large sum of money for pre-commercial investment before the product hits the market. Moreover, these companies also need market access, preferably from the government at an early stage, in order to iterate and improve the product. In most of the products, the government acts as a safe buyer. The government will buy only if the product has been used by the private sector before and the trials will be on No-Cost-No-Commitment (NCNC) basis. These steps have been taken to prevent corruption and cronyism in public procurement. For the product companies to succeed, the government needs to act as a first buyer to mitigate risk and spur innovation. Moreover, the government needs to fund pre-commercial research at corporations and startups instead of doing it as autonomous labs where the researchers are employed full time without any accountability on outcome. Throughout the world, the product companies, from America’s defense industrial complex to China's new energy domination, were built by public funding for private innovation. India also needs to bank on public funding for private innovation and government buying to build its IP-driven product companies. The public funding should be designed in a way that it could spur private investment in R&D, which has been abysmally low at 0.3% of GDP. What propelled India to become 5th and soon to be 3rd largest economy in the world from 17th in 1991 will not enable it to compete with the United States and China. We need a new way of thinking on political economy that could change the structure of the economy from shallow services and manufacturing to an IP-driven economy. It will enable the country to overcome the middle-income trap and set the path to overtake the United States and China in the coming decades. Disclaimer: The views of the writer do not represent the views of WION or ZMCL. Nor does WION or ZMCL endorse the views of the writer.

In the last few years, India’s policy community has been divided into three groups, with the first arguing for an East Asia-like development led by manufacturing, supported and subsidised by the state through industrial and trade policy. The second group, to which non-resident Indian economists especially subscribe, is that India should pursue a novel approach to services-led development given its inherent strength in the sector and limitations in manufacturing due to democracy. The third group, which comes not from the cohort of economists but mostly from industry leaders, is that given its size, the scale of the domestic market, and fertile land (India has the world’s largest arable land), it should try all three - agriculture, industry, and services.

The previous phase of globalisation rested on four pillars of free movement of goods, services, capital, and people. The developing countries benefitted enormously by offering cheaper goods, services, and labour and getting capital. The East Asian countries, and most notably China, built unprecedented dominance in manufacturing, accounting for around one-third of the global share while consuming just one-tenth of it. The supremacy in manufacturing resulted in a considerable merchandise trade surplus and jobs for its billion-plus people.

China’s experience is not unique among the East Asian countries. All the East Asian countries like Japan, Taiwan, and South Korea built a competitive edge in manufacturing through the smart use of industrial policy, which protected the domestic markets while propping up national champions that tried to capture the global market.

Japan was the leader and the first to adopt this model, while its followers tweaked it to fit their needs and the prevailing global environment. The model adopted by these countries has delivered results so similar that today, Japan, South Korea, and Taiwan have almost similar per capita income at market rates. And all these countries run huge goods trade surpluses with the rest of the world.

On the other hand, India built an edge in services and labour exports, although not on the scale of China. The huge merchandise success story of China masks its competitiveness in services, where it is 4th largest exporter in the world after the US, UK, and Germany, while India is ranked 6th after China and Ireland.

China and India doubled their share of global commercial services exports from 2005 to 2022, from 3.0 per cent to 5.4 per cent, and from 2.0 per cent to 4.6 per cent, respectively. The global goods export list is headed by China, with USD 3.6 trillion or 14 per cent of total exports against India’s 1.8 per cent. The country has been the largest exporter of goods in the world since 2009.

Also read:&nbsp;<a data-ved="2ahUKEwjazdKau5eGAxUozzgGHcsGCt8QxfQBKAB6BAgLEAE" href="https://www.wionews.com/business-economy/data-lab-are-chinas-women-turbocharging-the-economy-can-india-keep-up-629435" jsname="YKoRaf" ping="/url?sa=t&amp;source=web&amp;rct=j&amp;opi=89978449&amp;url=https://www.wionews.com/business-economy/data-lab-are-chinas-women-turbocharging-the-economy-can-india-keep-up-629435&amp;ved=2ahUKEwjazdKau5eGAxUozzgGHcsGCt8QxfQBKAB6BAgLEAE">Data Lab | Are China`s women turbocharging its economy? Can India catch up?</a>

In terms of net secondary income, which consists mainly of remittances, India is five times ahead of China at USD 97 billion. On the net primary income, which is the return on FDI and FPI, China transfers almost 4.5 times to the investor nations. The reason behind the high outgo from China is that the country attracted many times more FDI and FPI than India or any other developing country in the last four decades.

The combined value of services exports and net secondary income (read remittances) is around USD 438 billion, the third highest in the world after the United States and the United Kingdom. On the other hand, the combined value of services exports and net secondary income for China would be around USD 401 billion.

In the four pillars of current account balance, India beats China in labour and outgo on capital investment but needs to catch up on goods and services exports. In terms of services, India is close to China, but in terms of goods, Beijing has built an advantage of almost eight times, and that gap will not be bridged easily.
<img alt="Economy" data-align="center" data-entity-type="file" data-entity-uuid="87f1b9d5-7839-4e13-bd7a-e28009d65732" src="//cdn.wionews.com/sites/default/files/inline-images/Capture_65.JPG" />
India and China Current Account Balance Data<a href="#_ftn1" name="_ftnref1" title="">[1]</a>/World Bank (Figures in USD)

<div>
<div id="ftn1">
<a href="#_ftnref1" name="_ftn1" title="">[1]</a> 2022/23, whichever is available for the metric because there is not much difference, either in data or to the macroeconomic argument
</div>
</div>

India may never be able to build a merchandise trade surplus of USD 800 -900 billion, which China ran with the rest of the world. India’s services exports have not even crossed a 5 per cent share in the global services market, while China reached around 2023. Even if India doubles its share to get 10 per cent of global services exports and 4 per cent of global exports by 2030, that would put the country in a respectable position. India should aim to capture at least 5 per cent of international trade by 2030 from its current share of around 2.2 per cent.
<img alt="Economy" data-align="center" data-entity-type="file" data-entity-uuid="3179b6fd-1c87-43f4-b657-daa588ecbbd0" src="//cdn.wionews.com/sites/default/files/inline-images/Capture_66.JPG" />
In 2022, merchandise exports accounted for around 73 per cent of global trade, while services accounted for just 27 per cent. Though the composition is changing with increasing tariffs and non-tariff barriers, for services to reach the level of goods will take at least more than a decade. Overall, the value of global trade fell by 3 per cent in 2023. It dropped by 5 per cent for trade in goods but grew by 8 per cent for trade in services.

Even more soothing data point is that India's services exports jumped 11.4 per cent to USD 345 billion in 2023 despite global economic uncertainties, while China's shipments from the sector contracted by 10.1 per cent to USD 381 billion, according to a UNCTAD report.

However, even after these soothing developments, one must recognise that none of the top 10 trading nations have a service export share more than goods exports. The United Kingdom comes closest to it with a 49 per cent services share in total exports, and India is its nearest competitor with a 40 per cent share of services in total exports.

Also read:&nbsp;<a data-ved="2ahUKEwjazdKau5eGAxUozzgGHcsGCt8QxfQBKAB6BAgHEAE" href="https://www.wionews.com/business-economy/china-overtakes-us-as-indias-top-trading-partner-in-fy24-data-shows-720883" jsname="YKoRaf" ping="/url?sa=t&amp;source=web&amp;rct=j&amp;opi=89978449&amp;url=https://www.wionews.com/business-economy/china-overtakes-us-as-indias-top-trading-partner-in-fy24-data-shows-720883&amp;ved=2ahUKEwjazdKau5eGAxUozzgGHcsGCt8QxfQBKAB6BAgHEAE">China overtakes US as India`s top trading partner in FY24, data shows</a>

The East Asian economies are skewed toward merchandise, with 90 per cent for China, 84 per cent for South Korea, and 81 per cent for Japan, while the UK (51 per cent), India (60 per cent), and the US (69 per cent) are at the other end of the spectrum. India needs nearly double-digit growth for around two decades to become a developed country, and for that, the economy must fire all three engines.

The debate on goods vs. services is unnecessary, and India must spend time and effort on something other than this luxury. The country's policymakers must make a sustained effort to increase the merchandise (including agricultural produce) and services to achieve the goal of a developed nation by 2047.

(Disclaimer: The views of the writer do not represent the views of WION or ZMCL. Nor does WION or ZMCL endorse the views of the writer.)

In the last few years, India’s policy community has been divided into three groups, with the first arguing for an East Asia-like development led by manufacturing, supported and subsidised by the state through industrial and trade policy.

In the last few years, India’s policy community has been divided into three groups, with the first arguing for an East Asia-like development led by manufacturing, supported and subsidised by the state through industrial and trade policy. The second group, to which non-resident Indian economists especially subscribe, is that India should pursue a novel approach to services-led development given its inherent strength in the sector and limitations in manufacturing due to democracy. The third group, which comes not from the cohort of economists but mostly from industry leaders, is that given its size, the scale of the domestic market, and fertile land (India has the world’s largest arable land), it should try all three - agriculture, industry, and services. The previous phase of globalisation rested on four pillars of free movement of goods, services, capital, and people. The developing countries benefitted enormously by offering cheaper goods, services, and labour and getting capital. The East Asian countries, and most notably China, built unprecedented dominance in manufacturing, accounting for around one-third of the global share while consuming just one-tenth of it. The supremacy in manufacturing resulted in a considerable merchandise trade surplus and jobs for its billion-plus people. China’s experience is not unique among the East Asian countries. All the East Asian countries like Japan, Taiwan, and South Korea built a competitive edge in manufacturing through the smart use of industrial policy, which protected the domestic markets while propping up national champions that tried to capture the global market. Japan was the leader and the first to adopt this model, while its followers tweaked it to fit their needs and the prevailing global environment. The model adopted by these countries has delivered results so similar that today, Japan, South Korea, and Taiwan have almost similar per capita income at market rates. And all these countries run huge goods trade surpluses with the rest of the world. On the other hand, India built an edge in services and labour exports, although not on the scale of China. The huge merchandise success story of China masks its competitiveness in services, where it is 4th largest exporter in the world after the US, UK, and Germany, while India is ranked 6th after China and Ireland. China and India doubled their share of global commercial services exports from 2005 to 2022, from 3.0 per cent to 5.4 per cent, and from 2.0 per cent to 4.6 per cent, respectively. The global goods export list is headed by China, with USD 3.6 trillion or 14 per cent of total exports against India’s 1.8 per cent. The country has been the largest exporter of goods in the world since 2009. Also read: Data Lab | Are China`s women turbocharging its economy? Can India catch up? In terms of net secondary income, which consists mainly of remittances, India is five times ahead of China at USD 97 billion. On the net primary income, which is the return on FDI and FPI, China transfers almost 4.5 times to the investor nations. The reason behind the high outgo from China is that the country attracted many times more FDI and FPI than India or any other developing country in the last four decades. The combined value of services exports and net secondary income (read remittances) is around USD 438 billion, the third highest in the world after the United States and the United Kingdom. On the other hand, the combined value of services exports and net secondary income for China would be around USD 401 billion. In the four pillars of current account balance, India beats China in labour and outgo on capital investment but needs to catch up on goods and services exports. In terms of services, India is close to China, but in terms of goods, Beijing has built an advantage of almost eight times, and that gap will not be bridged easily. India and China Current Account Balance Data[1]/World Bank (Figures in USD) [1] 2022/23, whichever is available for the metric because there is not much difference, either in data or to the macroeconomic argument India may never be able to build a merchandise trade surplus of USD 800 -900 billion, which China ran with the rest of the world. India’s services exports have not even crossed a 5 per cent share in the global services market, while China reached around 2023. Even if India doubles its share to get 10 per cent of global services exports and 4 per cent of global exports by 2030, that would put the country in a respectable position. India should aim to capture at least 5 per cent of international trade by 2030 from its current share of around 2.2 per cent. In 2022, merchandise exports accounted for around 73 per cent of global trade, while services accounted for just 27 per cent. Though the composition is changing with increasing tariffs and non-tariff barriers, for services to reach the level of goods will take at least more than a decade. Overall, the value of global trade fell by 3 per cent in 2023. It dropped by 5 per cent for trade in goods but grew by 8 per cent for trade in services. Even more soothing data point is that India's services exports jumped 11.4 per cent to USD 345 billion in 2023 despite global economic uncertainties, while China's shipments from the sector contracted by 10.1 per cent to USD 381 billion, according to a UNCTAD report. However, even after these soothing developments, one must recognise that none of the top 10 trading nations have a service export share more than goods exports. The United Kingdom comes closest to it with a 49 per cent services share in total exports, and India is its nearest competitor with a 40 per cent share of services in total exports. Also read: China overtakes US as India`s top trading partner in FY24, data shows The East Asian economies are skewed toward merchandise, with 90 per cent for China, 84 per cent for South Korea, and 81 per cent for Japan, while the UK (51 per cent), India (60 per cent), and the US (69 per cent) are at the other end of the spectrum. India needs nearly double-digit growth for around two decades to become a developed country, and for that, the economy must fire all three engines. The debate on goods vs. services is unnecessary, and India must spend time and effort on something other than this luxury. The country's policymakers must make a sustained effort to increase the merchandise (including agricultural produce) and services to achieve the goal of a developed nation by 2047. (Disclaimer: The views of the writer do not represent the views of WION or ZMCL. Nor does WION or ZMCL endorse the views of the writer.)

What India can learn from China on manufacturing vs services-led growth debate

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Zee News Rajasthan

Editor

Amit Agrahari

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