SynopsisIndia’s exports were stuck in the $300-$350-billion range for almost a decade. FY22 seems to have changed that, with the $400-billion target being within reach. But meeting and staying there are two different things.
In November, Commerce and Industry Minister Piyush Goyal had expressed his elation at India being on track to achieve “historic highs” in exports. Addressing the India International Trade Fair in Delhi, he said the country was on course to achieve the government’s target of $400 billion in merchandise exports this financial year.
The export numbers have been uplifting. From April-October, merchandise exports have clocked $233 billion, making the target well within the reach for an economy that had struggled to move forward in the midst of a deadly pandemic. It also showed a growth of 55% over the corresponding period last year when exports were at $185 billion, according to Press Information Bureau data.
The “exports boom” has been sharp this financial year, with monthly figures reflecting a robust growth on the back of phased opening up of key global markets and a general improvement in sentiments. Several global markets have seen pent-up demand loosening the purse strings of customers, especially in the run-up to Christmas. However, the question that has to be answered at this point is if this boom has legs to make India an export hub, or is it a temporary phenomenon? The discovery of a new coronavirus variant in South Africa has made the scene murkier. In such a situation, it would be prudent to look at the various aspects related to this question to ensure that India does not slide back in exports when the situation changes. Making any plan based on a transient growth trajectory will hurt all the stakeholders — the government, exporters and businessmen.
In November, India’s merchandise exports rose 26.49 per cent to $29.88 billion, according to provisional data released by the government on December 1. However, sequentially, it declined by 16%.
It is important to know how sustainable this spurt is, says Atul Gupta, Senior Director, Deloitte India. “From April 2019-October 2021, the CAGR was 15%. Prior to 2019, our exports have had a CAGR of just 5% for a period of about 5 years. The moot question is, can we carry on 15% per annum exports growth rate for the next five years to reach the $1 trillion mark by 2026?” he asks.
Demand, inflation & supply chain
There are several reasons for this growth. Pent-up global demand meeting a global economy flush with funds is a big one, Gupta says. Inflationary pressure has helped. Soaring commodity prices of key inputs such as oil, cotton, chemicals and metals have played their part in pushing up the export numbers. Crude oil, for instance, has gone up to $85 per barrel, up from $43 per barrel in October last year. Cotton prices have increased by at least 50% this year.
But there is a risk here. “If commodity prices soften, we may see some moderation of exports,” points out Ajay Sahai, DG & CEO, Federation of Indian Export Organisations (FIEO). He hints at the perils of making a growth plan without taking the various possibilities into account. Supply side challenges will also need to be looked at closely to make a road map for a sustainable rise in exports, Sahai says. The spike in raw material and freight rates has led to increased costs for exporters. “Credit uptake has gone up by 25-30%. Support will be needed for enhanced credit. We have to address supply-side issues like container shortage and rising shipping costs,” he says.
Supply chain disruptions worsened during the pandemic. Increased demand, high freight and longer delivery times have been hurting trade. The country should have a shipping line of global repute, says Sahai. Prolonged supply chain disruption will have a bearing on the country’s exports — another problem that could derail the export-growth trajectory.
India’s trade prospects depend on the pace of global recovery, says Arun Singh, Global Chief Economist, Dun & Bradstreet. “If global supply chain disruptions persist and the pace of recovery for the global economy moderates, external demand for India’s goods could weaken.” He expects the global demand in the post-Covid-19 phase to stay strong unless the downside risks to growth and trade spin out of control. “The downside risks emanate from vaccine inequity, disruptions in global supply chain and spillovers from monetary policy tightening. The risk of the spread of an energy crisis in Europe and Asia to other sectors and regions can also potentially undermine economic growth,” he adds.
Email queries sent to the Ministry of Commerce and Industry and the Directorate General of Foreign Trade (DGFT) were not answered.
Diversify exports basket
Besides such disruptions, the composition of India’s exports basket can also derail the growth.
Some commodities that recorded a positive growth in exports in October were petroleum products, coffee, engineering goods, gems & jewellery, organic and inorganic chemicals. However, India cannot depend on these alone to keep pushing the numbers higher. We need to tap new and future-looking areas. As Harsha Bangari, MD, India Exim Bank, pointed out in an interview recently, India has to do more high-tech exports to achieve higher exports. Examples of high-technology exports include those in aerospace, scientific instruments, computers, pharmaceuticals and electrical machinery. “Primary and resource-based products currently dominate India’s exports. So, India is more of a commodity exporter. We need to diversify our export basket. We do little in high-tech exports. They comprise only around 10%,” Bangari had stated, explaining the risk.
In 2020, China ranked the highest in high-tech exports at $7,57,723.69 million, according to data from the UN, followed by the European Union and Hong Kong. India ranked 23rd at $21,662.01 million.
Deloitte’s Gupta laments that we are still not growing our export basket in manufactured products. “We are losing out on textiles as well. Bangladesh and Cambodia are buying cotton from us and manufacturing. To a great extent, we have missed the manufacturing bus,” he says.
Some experts say India has a great opportunity as countries are looking at destinations beyond China. This could help India cater to the demand for high and medium technology-intensive products in a better way. Trade and industry bodies point out that the export performance will depend on diversification across destinations, products and services.
Pradeep Multani, President of the PHD Chamber of Commerce and Industry, says a continuous rise in global demand for petroleum products is also playing an important role in India’s exports. “Petroleum products contribute a significant share in the export basket and will sustain for a longer period due to rising demand in the international market. India should develop a sector-wide strategy to accomplish sectoral growth. There is an opportunity for us as China’s market share is expected to decline further because of the higher cost of labour, ageing population and trade restrictions imposed by the US that is rapidly changing the industry structure,” he adds.
Riding the wave
This surge in exports is an indication of the underlying shift in global supply chains as companies try to de-risk their sourcing and procurement, claims Vijay Kalantri, Chairman, MVIRDC World Trade Center-Mumbai. “India’s engineering exports surged 38% in April-October 2021 from the corresponding period in 2019 as companies looked to India to source iron and steel products, mechanical appliances, auto-components, boilers and parts used in industrial operation,” he says.
iStockIndia needs to urgently diversify its export basket to increase the quantum of global trade.Electronic goods are an emerging category, Kalantri says, because of the Production Linked Incentive (PLI) schemes, which offer incentives to companies for enhanced production. But PLI alone would not be enough to keep the momentum and order books going.
FIEO’s Sahai highlights the role of research and development in adding immense value to products and services and in keeping pace with technological changes. “Globally, there have been incentives such as fiscal concessions that are given to companies to pursue R&D. We also need to offer such tax benefits. India has the worst share of R&D and GDP ratio at less than 1%. It is 4.1% in countries like South Korea — countries that do more high-tech exports are investing higher in R&D,” he says.
One way to give exports a massive boost is to focus on services. India exported $206 billion in services in 2020-21. A large share of services exports comes from the IT and ITeS services alone. Minister Goyal has said at the India International Trade Fair that services exports would bring in $150 billion by 2025 or 2026. But India can offer a lot more in services to fully leverage on the country’s strengths. Even creative aspects like Indian cuisine, spirituality and audiovisual services hold immense potential. There has to be a strategic long-term vision to realise the potential.
In November, Goyal said there was no reason why India cannot achieve $1 trillion in merchandise exports and an equal amount in services. For that to happen, India should take proactive steps to ride this global growth wave. However, policymakers should also remember that losing perspective while on a wave can cause a painful crash.
(Edited by Ram Mohan. Illustrations by Sadhana Saxena)
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