Clipped from: https://www.thehindubusinessline.com/todays-paper/tp-opinion/can-india-sustain-its-export-growth/article65294535.ece
Choppy waters Exports have been growing recently but the outlook remains uncertain RAJESH N RAJESH N
Choppy waters Exports have been growing recently but the outlook remains uncertain RAJESH N RAJESH N
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Global factors play a key role. Meanwhile, SMEs should reorient themselves, even as ESG rules come into play
The crossing of the $400-billion mark is being seen as a sign of exports bouncing back strongly. But how significant is this landmark?
Logically, the $400-billion mark would have been crossed at some point of time, just like the much-spoken-about $5-trillion economy where GDP in nominal terms will cross the Rs. 375-lakh-crore number in the next 4-5 years. Therefore, achieving this target is not such a landmark; in the past export growth turned negative after touching a high, before ascending again. Export growth turned negative in five of the last 10 years, reflecting a high degree of volatility.
This is quite unlike GDP growth, which progressively increases and rarely falls into negative zone (the pandemic year being an exception). The reason for this difference is that exports tend to be mainly demand driven and hence any slump in the global economy gets hits their growth.
Exports over the years
The export growth story is interesting as trends vary over various periods. In 1990-91, when economic reforms were implemented, exports were at around $18 billion. From FY92 to the end of the century the CAGR was 8.2 per cent while exports in absolute terms just about doubled.
However, in the next six years, the CAGR was 18.7 per cent as exports touched the $100-billion mark. In the next five years ending FY11, exports crossed the $200-billion mark jumping to $251 billion with a CAGR of 19.5 per cent. FY11 saw the highest growth of 40 per cent from $178 billion to $251 billion. The bull run in exports continued in FY12 with a growth of 21.8 per cent, touching the $300-billion mark.
However, the climb from $300 billion to $400 billion has been arduous. It has taken a decade to traverse this route with a CAGR of just 3 per cent. This was the period where there were five declines in absolute level of exports. Therefore, sustainability of growth in exports is a question that will nag policy-makers. The fact that FY23 has started against a backdrop of the Ukraine crisis means that global growth will see a setback, which will hurt exports.
The high base of $400-billion-plus in FY22 will provide an unfavourable base effect for growth. Therefore, while it is possible to conjecture growth in GDP and take a call on when the $5-trillion mark will be attained, it is unlikely that exports would hit the $1-trillion mark.
Merchandise exports are dominated by manufacturing, whose average annual growth has been satisfactory at 5.9 per cent in the last decade. This implies that exports growth was affected mainly by global factors where demand conditions were tepid. The global environment continues to be rather tenuous post the Lehman crisis, even as Central banks have provided extraordinary support to growth since then. The rolling back of liquidity will affect global growth prospects and particularly foreign trade.
The other interesting aspect of foreign trade is that exports and imports tend to move in the same direction. In fact, when exports grow at a high double digit rate, imports tend to grow at a faster rate. In this context it is useful to track the imports-to-exports ratio. This ratio has shown an increase in the last couple of decades.
In the 1980s it averaged 1.33 and then declined to 1.19 in the nineties which was the first decade of reforms. It rose to 1.37 in the first decade of this century ending 2009-10 and since then has gone up to average 1.49. Clearly the dependence on imports has risen quite sharply over the years which is a natural corollary of globalisation, as companies source their raw materials and intermediary goods from nations which provide them at a better cost.
Export basket
The two main challenges for exports are competition and product composition. The two are interlinked. The composition of goods though changing is still tilted towards traditional goods like gems and jewellery, textiles, handicrafts, and leather products, which typically also face competition from other developing countries. This basket has a share of 25-27 per cent.
The price advantage enjoyed by other competing countries impacts domestic exports. Engineering and chemicals account for around 38 per cent of total exports. The domination of SMEs here implies that they need to work harder as a group, as quality issues as well as cost militate against rapid growth. The government has been providing a number of incentives starting from export processing zones to finance being facilitated by the RBI.
However, SMEs need to get better organised to push exports. There are around 60 million units of which half would be in manufacturing, concentrated in the micro and small sectors, which makes the task more challenging.
The future of exports will be more challenging as the ESG rules kick in and countries get more discerning in choosing their imports. The price and quality factors, which have been the dominant, will be replaced with compliance with ESG standards.
As the world moves in this direction, the entire export ecosystem will have to reorient its production processes. Developing countries so far have leveraged their cheap labour that has been highlighted often in discussion forums. Dynamics are changing and we need to keep this in mind as we move towards scaling up exports to $500 billion a year to begin with.
The writer is Chief Economist, Bank of Baroda. Views expressed are personal
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