View: Why India must grab a bigger share of the global trade pie – The Economic Times

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To assess the sustainability of this export boom, and certainly before concluding that this is the dawn of a new regime, a couple of questions need to be answered. Perhaps the most critical one relates to the two key drivers of exports — the income and the substitution effect.

Abheek Baruah

Abheek Baruah

Chief economist, HDFC BankSakshi Gupta

Sakshi Gupta

Senior economist, HDFC BankIndia’s consumption growth looks iffy and an investment revival looks some way off. India’s growth bet over this year, and certainly some of 2022, is almost entirely on its export engine. That has certainly revved up, rising by 45%, on average, in the last three months. At the current pace, exports could rise to a total of $380 million this year, which is close to 1.5 times the pre-pandemic export levels in 2019.

Are we, then, transitioning to a new regime where we are shedding our avatar of a consumption-led economy to an export ‘play’ like our East Asian peers? Have we arrived as the ‘plus one’ in the ‘China-plus one’ diversification strategy in global supply chains?

Some quick fact checks. The export boom is not just in things like in gems and jewellery and petroleum products, the bulwark of India’s exports that push the headline number up, but are low on value addition. The good news is that almost half of the export rise is being driven by sectors like engineering goods, textiles, pharma and organic chemicals that are higher up in the value chain.

That said, engineering goods exports is not just auto parts and machinery. Metal and metal products that suffer the same problem of low value addition also get lumped into this category.

To assess the sustainability of this export boom, and certainly before concluding that this is the dawn of a new regime, a couple of questions need to be answered. Perhaps the most critical one relates to the two key drivers of exports — the income and the substitution effect.

The income effect constitutes a rise in export demand for exports driven by a rebound in major buyer countries like the US and Europe, while a substitution effect implies a gain in market share by one country at the expense of others. A strong substitution effect would signal that we have ‘arrived’ on the export scene.

A comparison with our Asian peers shows that the ‘income effect’ has been the primary driver of this export pickup with lack of enough evidence of a ‘substitution effect’ in favour of India. Post-Covid, rebound in the US and the EU has propelled higher demand for exports in general, and India has been a beneficiary. The income rebound in the West has lifted all boats.

Opportunity Knocking
Export growth has risen in double digits for almost all our Asian peers, including Thailand (by 33% year-on-year), Malaysia (52%) and Indonesia (56%) during Q2 2021. This suggests that the substitution effect — in terms of gaining market share vis-à-vis our peers — is not the dominant driver.

However, there might be a window of opportunity to gain market share and sustain these gains. The rise in Delta cases in several Asian economies, coupled with a low-tolerance containment policy, is leading to supply and production disruptions that can work in India’s favour. Early indicators of trade flows show that exports are likely to have slowed down in a number of our Asian neighbours in August.

For instance, the Institute for the World Economy’s Kiel Trade Indicator — that translates real-time container ship movements into a proxy for export growth — showed a contraction of 5% month-on-month in Thailand, 1% in both Vietnam and Malaysia, while, at the same, India recorded a rise of 11% in August. The disruptions to manufacturing and logistics supply chain due to containment measures in these Asian economies could open a door for India. However, we need to stay in and grab as much space as we can.

This warrants quick and aggressive policy action. The immediate steps that can be taken include freeing up idle shipping containers (currently under disputes with customs or other departments) to help exporters deal with a global shortage of containers and soaring freight charges. The Federation of Indian Export Organisations (FIEO) reports that freight rates are up by 2-3 times of pre-Covid levels as of July-end.

The more substantive part of the policy response must include addressing structural supply-chain inefficiencies. Schemes like the Production-Linked Incentive (PLI) are financial stimulants that help to a degree in compensating for the relatively higher cost of production that Indian exports have. This, however, is not a cure for the ills on the supply side, particularly logistics.

As per the World Bank’s global Logistics Performance Index (LPI), India ranks lower than its peers — 44th out of 166 countries in 2018, compared to China at 26th, Thailand at 32nd and Vietnam at 39th.

A Passport to Sell
The difference becomes stark when we look at the sub-indicator rankings for quality of trade and transport infrastructure (India ranked 52nd compared to China’s 20th), ease of arranging competitively priced shipments (India at 44 against China at 18), and timeliness of shipments reaching destinations (India at 52, China at 27), among other indicators.

The income effect is unlikely to last forever, and as developed market central banks start to withdraw the current ultra-loose monetary stimulus, the post-Covid growth rebound is likely to moderate. The International Monetary Fund (IMF) expects US growth to moderate to 4.9% in 2022 from 7% this year. Therefore, to sustain its export performance, India must grab a bigger share of the trade pie. For doing this, we need to start thinking beyond ‘ease of doing business’. How about targeting ‘ease of shipping’ from India as well?

Barua is chief economist, & Gupta is senior economist, HDFC Bank
(Disclaimer: The opinions expressed in this column are that of the writer. The facts and opinions expressed here do not reflect the views of

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