Trends in India's Merchandise Exports | Land Use Zoning

Source: Ideas and Institutions Issue #29

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1. Analysis
2. Review

Analysis

Analyzing the Trends in India’s Merchandise Exports

2021–22 was one of the best years for India’s merchandise exports. At $422 billion, the year recorded by far the highest-ever merchandise exports, and as a percentage of GDP, they were the seventh-highest on record. This included $355 billion of non-petroleum exports. This performance was noteworthy because it followed many years of slow growth in exports. Between 2012–13 and 2018–19, merchandise export growth averaged just 1.5 percent and non-petroleum product exports grew only by 2 percent on an average. This seemed like a significant decline when compared with the average growth of 15.8 percent in merchandise exports between 1993–94 and 2011–12. Export performance was a major driver of growth for India during those years.

The years 2019–20 and 2020–21 were affected by the pandemic and the policy responses to it. During 2019–20, merchandise exports shrunk by 5.2 percent, while non-petroleum product exports shrunk by 4.1 percent. In the following year, 2020–21, merchandise exports shrunk by 7.1 percent, while non-petroleum product exports shrunk by 2.5 percent. The revival of exports began in 2021, starting from the April–June quarter of that year. To avoid being misled by the base effect when gauging this revival, it is important not to use year-on-year change as a benchmark for quarters in which the corresponding quarter of the previous year was affected by the pandemic-related constraints. In India, the fourth quarter of 2019–20 (January to March 2020, especially the month of March) and the first and second quarters of 2020–21 (April to June 2020 and July to September 2020, respectively) were heavily impacted by these constraints. So, for the corresponding quarters in the following year, we should consider the growth over the corresponding quarters in the year just before the pandemic and annualize this growth. For all the quarters thereafter, the growth can be assessed on a year-on-year basis.

In the following table, we have provided the growth in non-petroleum merchandise exports by using such an approach—for the three quarters from January to September 2021, we have calculated growth over the corresponding quarters two years earlier and then annualized it. For all the other quarters, we have provided year-on-year growth.

As the table shows, the growth in merchandise exports was quite robust in most of 2021–22 and the first quarter of 2022–23. In fact, the growth rate of India’s merchandise exports between 2019–20 and 2021–22 was more than double the growth rate in world merchandise exports in this period. However, since then, merchandise exports have slowed down considerably.

How should we interpret this trend?

One way is to see the export boom as a temporary phenomenon, which occurred because of the unique situation of global trade. 2021–22 was a time of significant frictions in supply chains, and there was also possibly some pent-up demand from the previous year. While the volume index of global merchandise exports rose by 13.7 percent between 2020 and 2021, the value of merchandise exports jumped by 28.2 percent. This suggests that the prices of merchandise exports increased due to the frictions in the global markets.

Together, these factors created opportunities for those firms and countries that were able to meet the demands. Many Indian exporters across a range of sectors made good use of these opportunities. In the textile industry, for instance, manmade yarn fabrics and cotton fabrics saw significant export growth for a few quarters. Despite this, growth within these categories has slowed down considerably since mid-2022. A similar pattern can also be seen in several categories of engineering goods, such as iron and steel, ferrous and non-ferrous metals, machine tools, hand tools, cutting tools for metals, and so on.

However, this rise and fall in export growth is not a universal pattern across all product categories. On the one hand, certain categories did not enjoy an export boom at all, such as that of readymade garments. On the other hand, a few merchandise categories, such as those of major electronic goods, have reported robust export growth even in recent quarters—electronic components, electronic instruments, telecom instruments, and medical and scientific instruments have continued to register considerable growth. Interestingly, some of the engineering goods categories have also seen continued export growth in recent quarters. For instance, some of the machinery and instrument categories have reported only a moderate slowdown, albeit the total exports in these categories are small.

Some of these are the categories in which certain sub-categories have received support from production-linked incentives. Increased tariff barriers have also encouraged the manufacturing of certain products in India. Given this, a more detailed study is required to understand the net benefits of these measures, because there are both costs—such as fiscal costs and the loss of consumer surplus—as well as benefits—such as an increase in domestic value addition and employment generation—to them. For instance, while a combination of tariffs and fiscal incentives can lead to an increase in the production, and consequentially the export of mobile phones, the benefits depend on the extent to which the value chain of producing mobile phones moves to India and what new technological know-how this helps create. The overall cost of such measures must be fully accounted for—for example, given these measures, mobile phones might become more expensive, thereby reducing the consumer surplus, and fiscal resources also have opportunity costs.

It must also be noted that the growth in global merchandise exports decelerated from mid-2022 onward, especially in the October–December quarter, when merchandise exports had about the same value as that in the corresponding quarter of the previous year. So, the slowdown in India’s merchandise exports is happening at a time when world merchandise trade is also slowing down. However, the slowdown in India is more pronounced than that in the aggregate merchandise trade in the world.

At the same time, the recent slowdown does not necessarily mean that India’s export boom is over. A comparison with India’s years of export boom can also be instructive here. During the period of export boom from the early 1990s to the early 2010s, there were short periods of contraction in merchandise exports, particularly in 1998–99, 2001–02, and 2009–10. But the exports picked up again and continued to grow rapidly. So, while it remains to be seen if the recent slowdown will persist, the fact that it has continued for three consecutive quarters is a cause for worry.

India’s merchandise exports face certain headwinds. In the latest World Economic Outlook, the International Monetary Fund projects that the baseline forecast for growth will fall from 3.4 percent in 2022 to 2.8 percent in 2023, before increasing slightly to 3.0 percent in 2024. It expects advanced economies to see a more pronounced growth slowdown, from 2.7 percent in 2022 to 1.3 percent in 2023. This may dampen the demand for India’s merchandise exports. However, the impact would depend on how well India is able to adapt to raise its share in world trade.

Note: Unless a separate hyperlink is given, the data used in this analysis can be found through the Department of Commerce’s website at the following link: https://commerce.gov.in/trade-statistics/

—By Suyash Rai

Review

The Problem of Zoning Cities: A Review of Arbitrary Lines by M. Nolan Gray

Land use regulations have been instrumental in planning cities throughout history. The twentieth century, however, saw the development of a novel mechanism of land use regulation and urban planning—zoning. As an instrument of urban planning, zoning is now used ubiquitously, to the extent that people frequently conflate an absence of zoning with an absence of planning. In truth, zoning is just one of the many planning tools aimed at controlling land use and its intensity in cities.

The stated purpose of zoning is to promote orderly urban development by preventing “incompatible” land uses and to control congestion, pollution, and other negative externalities. This is done by directly allowing and disallowing certain activities on any given piece of land in an urban area. Because zoning has direct implications for what is permissible on a parcel of land, it affects property rights and property values. In addition, zoning presupposes that a centralized planning vision can account for all likely problems with urban land use.

India’s experience with zoning as part of master plans is reflective of this high modernist, centralized idea of planned development. As Alain Bertaud’s Order without Design and Jane Jacobs’ The Death and Life of Great American Cities explain, this centralized idea of planning cities is incapable of accounting for the organic dynamism of city life. There are therefore good reasons for why the practice of zoning is a contested one.

Proponents of zoning argue that it allows cities to deal with negative externalities in an orderly fashion. For example, zoning allows you to avoid costly negotiation and litigation when a noisy bar opens up next to your house. The technocratic literature on zoning—E. Sclar et al. (2020) and Murphy (2019), by way of examples—sees a way to use the practice to maximize social benefit and argues for a distinction between “good zoning” and “bad zoning.” Meanwhile, opponents to the practice of zoning—for example, Fischel (2015)—argue that it is mostly used for protecting the interests of incumbent groups at the cost of the economic development of the city.

Within this opposing group, M. Nolan Gray’s book, Arbitrary Lines: How Zoning Broke the American City and How to Fix It (2022), provides clear and lucid arguments against zoning as an instrument of planning and a means of land use regulation. Gray explains how the seemingly banal activity of segregating land uses and regulating population densities is a significant contributor to several issues—the stagnation of economic development in U.S. cities, spatial racial segregation, highly inefficient use of land (making housing unaffordable for many Americans), and a significant negative impact on the environment. The book is a breezy read about the different ways in which the use of zoning is problematic, and it makes its case succinctly.

Though zoning is a planning tool, Gray provides a political account of its national adoption as one. The city of New York first adopted zoning to meet the interests of the following groups—landlords desirous of remaining insulated from the falling rent of commercial real estate, homeowners interested in protecting the aesthetics of their communities, and politicians interested in promoting the ideal of single-family housing.

The introductory chapters introduce the concept and its origins. According to Gray, zoning was both a progressive central planning idea aimed at a rational restructuring of cities as per the planner’s vision and an idea promoted by local incumbents in cities to control land prices and protect the character of existing neighborhoods.

Gray emphasizes the political and ideological purposes that the concept of zoning has served since its inception. To burnish this argument against the more technocratic and utilitarian arguments for zoning, he points out that cities had already started regulating areas for certain kinds of activities, such as brickyards and tanneries—these were barred from city limits. In other cases, residents could register common law claims against nuisance by neighbours, routinely receiving relief from courts. Many cities had also begun to adopt stricter housing standards during the early nineteenth century. In this milieu, the introduction of zoning had more political purposes. However, Gray claims that the rationalist appeal for the scientific management of cities was sold to local constituencies by bureaucrats in a way that appealed to their interests. He writes:

Early Progressive promises of rationally planned cities quickly yielded to a basic pitch designed around this constituency: zoning will maintain your real estate investments, keep your neighborhood as it exists today, keep unwanted groups out of your community, and prioritize—above all else—the protection of your beloved detached single-family home.

Under President Hoover, zoning received a push from the U.S. federal government. Hoover, according to Gray, was “moved by an urban ideal of mass ownership of detached single-family houses, both to restore the ‘national character’ and to stimulate the building industry.” During Hoover’s presidency, the federal government provided incentives and grants to push the implementation of zoning regulations. By the 1970s, most U.S. cities had adopted zoning regulations in some form or the other.

For Gray, the practice of zoning is pernicious not merely because it regulates land use, but specifically because it regulates land uses and densities. This determines factors such as the height or size of a building one can construct on a plot of land, and whether it should be allocated for residential, commercial, or industrial purposes. These powers have been used to restrict development to such a degree that, according to Gray, zoning is essentially about preventing growth and controlling development. He provides startling facts to bolster this argument, such as:
 

1. According to one study, a startling 40 percent of buildings in Manhattan couldn’t be built today, owing mainly to density restrictions.
2. In nearly every major U.S. city, apartments are banned outright in at least 70 percent of residential areas.
3. In addition to heavily restricting apartments, many zoning codes ban the most affordable housing typologies outright. In cities, this means prohibiting single-room occupancies . . .

The restrictions imposed by zoning essentially make housing and real estate unaffordable because of the degree to which they control urban development. This intense degree of control is, however, more recent than the advent of zoning. According to Gray, this development began occurring from the 1970s onward for the following reason:

Beginning in the mid-1960s, inflation crept up and remained high through the 1970s… At the same time, the federal government enforced a tax code that heavily favored homeownership, with generous deductions for mortgage interest payments and the capital gains made off of home value appreciation. As a result, many Americans parked their life savings into their home.

This issue, of increasing the stakes in the value of housing, is discussed in much greater detail in Fischel’s The Homevoter Hypothesis (2005). As Fischel points out, housing is not an easily diversifiable asset—this makes homeowners much more invested in protecting not only the value of their property but also the value of their neighborhood. For Fischel, this is not necessarily a bad thing. In some cases, it encourages greater community involvement and often leads to better outcomes in the delivery of local services. However, it can also encourage some homeowners to strongly resist any development that reduces the value of their houses.

In addition to reducing affordability and promoting stagnation, Gray points out the significant opportunity cost of not being able to live in the most productive cities in the United States because of them being unaffordable. As a result, most of the wealthiest cities in the United States are showing significantly lower population growth rates than those close to or at the median-income level.

Gray unravels the negative impact of zoning on multiple fronts—the economy, race relations, and the environment—while highlighting significant exceptions that can serve as examples for reform. He takes the example of Houston, which had land use regulations and environmental and nuisance-related regulations but no zoning regulations.

As Gray explains, the residents of Houston have repeatedly resisted demands for zoning from the wealthy elites of the city. Proposals to zone narrowly but decisively have been defeated through repeated referendums. Gray outlines that this success is a result of allowing the residents of wealthy neighborhoods to regulate their communities through the use of private zoning mechanisms called restrictive covenants, which the city has agreed to enforce using public funds. This political bargain has enabled the rest of the city to remain free of zoning restrictions. And this absence of zoning has, in turn, led to rapid growth:

Houston builds housing at nearly three times the per capita rate of cities like New York City and San Jose…It isn’t all just sprawl either: in 2019, Houston built roughly the same number of apartments as Los Angeles, despite the latter being nearly twice as large.

To conclude, Gray provides articulate and concise arguments against zoning and its preeminent use to protect incumbent homeowner interests at the cost of the larger city and the country and highlights the problems inherent in using a high modernist planning tool to impose order on cities.

—By Anirudh Burman