Digitalization and India’s Losing Export Competitiveness

Abstract

The digital revolution is rapidly transforming global manufacturing and trade, thereby altering export competitiveness of developing countries. This paper examines the impact of growing digitalization on India's exports, using both sector- and firm-level analyses. At the sectoral level, the paper estimates the value added by digital services in India's exports and compares it to its competitor countries, using Leontief's decomposition and input–output data from the World Input-Output Dataset. At the firm level, the paper empirically estimates the impact of increasing digital assets on export intensity of Indian manufacturing firms in period 2000–2015, using panel data methodologies of system GMM and random effects Tobit. Results indicate that the value added by digital services in manufacturing exports of India is much lower than in other developing countries. A closer examination reveals that most of the value added by digital services is contributed to India's exports of computer programming and telecommunication services, which together account for 88% of total value added contributed by DS to total exports. India is found to be losing competitiveness in some key traditional sectors, including tea, spices, clothing and leather, which are found to be less digitalised compared to other sectors. Firm-level empirical results confirm the important role of digitalization as driver of export competitiveness in Indian manufacturing firms. System GMM and Tobit results reveal that as the share of digital assets in overall plant and machinery increases in a firm, its export intensity rises and other things constant. There is thus a need for targeted policies and strategies for increasing digitalization of India's exportable sectors, particularly of traditional exports like textiles and clothing and leather and leather products as these sectors generate large-scale employment for low-skilled workers.