The Economic Survey is an important policy document presented just one day prior to the budget. It provides a comprehensive assessment of the health of the economy and its challenges. Chapter 5 of the Survey applauds the country’s trade performance amid global economic uncertainty, global supply chain disruption(s) and geopolitical flux. It states that a number of policy interventions played a crucial role in boosting exports of specific product categories such as toys, defence, footwear and smartphones.
One needs to carefully weigh the policies implemented and look at further strategies to boost trade. We discuss these issues for the toy industry, which has a huge potential in both domestic and international markets.
Exports of the toy sector have witnessed a significant rise 2020 onwards. The total exports of the toy sector were $224.3 million in 2020 and reached $304.8 million in 2023. On the other hand, imports were $200.1 million in 2020 and reached $217.9 million in 2023 (Figure 1). However, imports experienced a sharp decline in 2021 and 2022.
The broad trends of toy exports and imports demonstrate that the country has turned into a net exporter of toys. In terms of export markets, India’s toy exports are mainly to developed economies. More than 70% of toy exports are to the United States, the UK, Germany, the Netherlands, Denmark and Australia (Table 1).
Several issues are worth studying in this context. First, the toy industry is highly fragmented and dominated by micro and small enterprises, representing 90% of the toy sector. They are also geographically dispersed in the country and produce low-quality toys only for the domestic market.
This means that exports of toys to developed markets are controlled by a handful of organised firms, who have production capabilities, the ability to adhere to international quality standards and a sound understanding of international markets.
Source: ITC Trade map, 2024. Chart by authors.
Consumers in developed economies are more quality-conscious and hence willing to pay premium prices. Moreover, standards for toys in developed economies are stringent, and only those firms that have the capability to comply with higher product and technical standards can export.
This essentially means that a large number of unorganised toy manufacturers in India cannot comply with the stringent quality standards and regulatory requirements of developed economies. Consequently, they may not succeed in the export business. The success story painted in the Economy Survey might thus be linked to a few firms.
This could lead to the development of oligopolies in the toy sector, which in turn make the sector much more capital intensive and jeopardise the potential opportunities for employment generation. The cartelisation of the toy sector will not only undermine competition, but can also exacerbate economic inefficiencies. Lack of competition will force consumers to buy products at higher prices and will negatively impact consumers’ welfare.
Table by authors.
Second, India’s success in shoring up exports in the toy sector is driven by trade policy intervention. India has increased import tariffs from 20% to 60% in almost all tariff lines of toy products. High-level import protection has provided protection from international competition, thereby supporting domestic manufacturers in scaling up domestic production and exports.
It is important to note that a high degree of import protection to the domestic toy industry has also contributed to an increase in the domestic prices of toys between 30% and 40%, which in turn promotes producers’ welfare at the expense of consumers’ well-being.
It needs to be noted that an initial increase in price fuelled by a tariff increase may not come down later (as domestic supply goes up) if the producers have greater market power due to limited competition.
Furthermore, the government introduced quality standards to regulate the import of low-quality toys in the Indian market. Quality standards act as double-edged swords, given the diversity and heterogeneity of firms in the toy sector. As the toy sector constitutes a bulk of MSMEs who are geographically located in small towns, the need to comply with quality standards poses a formidable challenge for them.
Large firms can comply with the quality standards, but small informal sector firms face significant challenges to adhere to these quality standards given their limited technical know-how and financial constraints. This naturally places them at a disadvantageous position vis-à-vis large firms, not only in the domestic market but also in their ability to capture the export market.
Hence, initiatives like the UNIDO National Programme for Development of Indian Toy Industry for technology transfer to toy manufacturers may be looked at. Common Facility Centers in identified clusters can be a cost-effective way to maintain standards for MSMEs.
Also read: Economic Survey Reads Like a Part Fantasy, Part Mythology Document
Third, the toy sector has been identified as one of the sectors for production-linked incentives (PLIs). Given the industrial configuration of this sector, the financial incentives under the PLI scheme require careful deliberation with a diverse range of stakeholders involved in toy supply chains.
The toy sector is highly complex owing to its heterogeneous structure. The requirements of different segments differ in terms of raw materials, production processes, technology and manpower. Understanding the value chain of the toy sector is important to provide financial incentives. A one-size-fits-all approach used in other, more homogenous sectors may not work here.
In addition, the toy sector is also dependent on Southeast Asian economies for imports of certain kinds of intermediate inputs and equipment, such as raw materials, testing and cutting instruments, moulding, and embroidery machines. This requires trade policy alignment with the PLI scheme.
Further, PLI benefits need to be given in such a manner that they not only augment domestic production capabilities, but also enhance the competitiveness of the sector vis-à-vis other countries.
In conclusion, it is heartening to note that India is a net exporter of toys. The benefit from increasing tariffs on imported toys and quality control have helped us achieve this feat. The global market for toys stood at a staggering $60.3 billion in 2022. If we want to increase our market share, which is dominated by China, the ecosystem of the sector must be boosted further.
Policies to incentivise the domestic production of critical inputs, encouraging FDI by global giants and using technical requirements to produce according to the buyers’ need, both at the international and national level, can benefit the sector.
Bibek Ray Chaudhuri is a professor at Indian Institute of Foreign Trade, Kolkata. Surendar Singh is an associate professor at FORE School of Management, New Delhi. Views are personal.