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The Truth About India’s Booming Toy Exports

Context:

India’s toy industry, though small in scale, has been a significant topic in policy discussions spanning the era of the “permit license raj” to the current ‘Make in India’ initiative. According to a recent official press release, between 2014-15 and 2022-23, toy exports surged by 239%, while imports saw a decline of 52%, transforming India into a net exporter.

Relevance:

  • GS-2 Government Policies and Interventions
  • GS-3 Industrial Growth

Mains Question:

Analyse the factors that have contributed to the noteworthy turnaround in toy industry in India over the past years. Is protectionism bigger reason than an upswing in investment in achieving this feat? (15 Marks, 250 Words)

Further Studies on the Growth of India’s Toy Industry:

  • An undisclosed case study sponsored by the Department for Promotion of Industry and Internal Trade (DPIIT) and conducted by the Indian Institute of Management Lucknow (IIM-L) attributes this export success to promotional efforts within the ‘Make in India’ framework, initiated since October 2014.
  • While the detailed case study remains unpublished and not publicly available, we analyze official statistics to understand the potential factors behind the reported success.

Kindly refer the table given below:

  • Examining net exports (exports minus imports) of toys under HS code 9503 and total toys (HS codes 9503+9504+9505) in the table (columns 2 and 3), the trade balance was negative at ₹1,500 crore in 2014-15 but turned positive from 2020-21, marking a reversal after 23 years.
  • This noteworthy turnaround in the labor-intensive industry, particularly during a period when such sectors face challenges, is undeniably commendable and makes us curious on analysing it further.

Possible Reasons Behind the Such Feats:

In essence, there are two potential reasons- protectionism or/ and a rise in investments.

Protectionism:

  • An increase in import duties might decrease the demand for toys. The implementation of non-tariff barriers could constrict the supply, elevate prices, and consequently diminish demand.
  • In February 2020, customs duty on toys (HS code 9503) experienced a threefold increase from 20% to 60%.
  • Starting January 2021, non-tariff barriers (NTBs), including a quality control order (QCO) and mandatory sample testing for each import consignment, were introduced, limiting imports.
  • Consequently, in the fiscal year 2020-21, imports decreased, leading to a positive shift in net exports. Additionally, considering the disruptive effects of the COVID-19 pandemic on global supply chains during this period, imports were adversely impacted.
  • With the restoration of the global supply chain in 2022-23, net exports decreased to ₹1,319 crore from ₹1,614 crore in the preceding year for all toys, as exports moderated and imports surged.
  • The decline in net exports is more pronounced (31%) for toys under HS code 9503 despite the high import duty, while it is comparatively more modest (18%) for all toys.
  • Notably, in response to the renewed increase in imports, the government took further measures by raising the basic customs duty to 70% in March 2023, up from the previous rate of 60%.

Alternatively, an upswing in investments could expand capacity and enhance labor productivity, thereby boosting competitiveness and exports.

Using Data to Understand the Growth Story and Actual Reason Behind it:

Annual Survey of Industries (ASI):

Scrutinising the data from the Annual Survey of Industries (ASI) spanning the years 2014-15 to 2019-20 revealed that:

  • According to the most recent combined figures available for the organized and unorganized sectors in 2015-16, the organized or factory sector constituted 1% of the total number of factories and enterprises.
  • It employed 20% of the workforce, utilized 63% of fixed capital, and generated 77% of the total output value.
  • Over the six-year period from 2014-15, the ASI data in real terms indicate a negligible increase in fixed capital per worker and gross output value.
  • Significantly, labor productivity has consistently decreased from ₹7.5 lakh per worker in 2014-15 to ₹5 lakh in 2019-20 (more recent data is not available).
  • Additionally, the growth in exports during the periods pre- and post-2014-15 does not exhibit notable differences.
  • Therefore, it becomes challenging to attribute India’s transition to a net toy exporter to an improvement in domestic supply and competitiveness.
  • Consequently, it can reasonably be inferred that the transformation in India’s toy trade since 2020-21 is a consequence of escalating protectionist measures.

Advocating Temporary Protectionism:

  • Temporary protectionism, aligning with the infant industry argument, can potentially empower domestic industries to make substantial investments, facilitate experiential learning, and improve productivity, thereby enhancing their global competitiveness.
  • This protective approach should be coupled with strategic investment policies and the provision of localized, industry-specific public infrastructure.
  • This combination aims to initiate a positive cycle of expanding domestic capabilities to effectively confront international competition.
  • However, without these essential prerequisites, there is a legitimate concern that protectionism might become deeply rooted in the industry, leading to what Anne Krueger famously termed as “rent-seeking.” India has witnessed past instances of such policy failures.

Conclusion:

In essence, the toy industry transitioned into a net exporter since 2020-21, purportedly facilitated by ‘Make in India’ policies, as suggested by an officially sponsored research. However, as per the available industry and trade data this shift is due to the imposition of increasing tariff and non-tariff barriers. It is possible that the study conducted by IIM-L relies on different evidence to support its argument which can be revealed only when the report is made public for a meaningful policy review.


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