Growth in exports needs consistency
Alandmark has been reached with the country having crossed $400 billion worth of merchandise exports for the first time in the 2021-22 fiscal. Surely a time for jubilation but also a time to reflect over the reasons for this spurt in trade flows and whether it can be sustained in the medium and long term. India has been struggling for decades to increase its presence in world markets and it looks as if it is now poised to make a mark as an exporting nation. It could soon break into the top 15 global exporters, though it should have been on this list much earlier, given the size of its economy.
In recent years, it was beginning to be felt that there was little hope of India becoming a major merchandise trade exporter and the focus should instead shift to the burgeoning segment of services exports. These have been growing steadily over the years and are now likely to touch $250 billion in the current fiscal. The surge in merchandise trade has taken place during what has been viewed as a rather dismal phase of the economy. The uneven revival of 2021-22, following the unprecedented contraction in the pandemic year, did not seem to augur well but it has been precisely during this period that exports have taken off in a big way.
One of the reasons is the revival of pent-up global demand following the pandemic. Combined with logistical difficulties in getting supplies from usual sources, including China, the situation proved beneficial for Indian exporters who could fill the gaps in many areas. Growth has not been high merely compared to $290-billion exports recorded in the 2020-21 fiscal but also relative to $313 billion of the pre-pandemic fiscal of 2019-20. The rise has been both in value and volume terms over this period.
What is even more significant is that manufactured goods have contributed in a big way to the rising trade outflows. Engineering products, including electronics, comprise the largest segment of the export basket, having grown by as much as 50 per cent. Petroleum products, which are among the top export commodities, are also value-added goods from the country’s oil refineries. Agricultural exports are another major segment which expanded vastly over the past few years. Rice and marine products have shown the biggest increases. The outlook for higher wheat and corn exports has also improved with the Ukraine conflict having the potential to curtail supplies from Russia. Gems and jewellery exports, which had dipped during the pandemic, have revived and become the third largest segment, along with chemicals and pharmaceuticals. Ready-made garments, where India has been facing stiff competition from its Asian neighbours, is also one of the biggest growth areas.
As for whether the rising graph of exports will persist, the outlook is bright right now. The reasons are multifarious. First, the resurgence in exports has not come about overnight. It is a culmination of policy initiatives taken over several years. One of these is the launch of production linked incentive (PLI) schemes in industries like electronics. This prompted the creation of an entire ecosystem of electronics manufacturers, including many who had set up assembly units or components units in countries like China. The domestic production of smart-phones as a result of the PLI scheme has ultimately reflected in much higher exports.
The second is the introduction of policies putting an emphasis on identifying export products even at the district level. This has led to a greater push towards setting up of agro-processing export-oriented industries. The introduction of incentives that are compatible with WTO guidelines has helped exporters as well. And finally, recent efforts to tie up several bilateral free trade agreements (FTAs) augurs well for the future. India stayed away from the Regional Comprehensive Economic Partnership (RCEP) on the grounds that the rules of origin were not stringent enough to prevent a flood of imports from China. Some had criticised this protective approach towards domestic industry but it was wise to take a cautious attitude towards merging with a trade grouping heavily dominated by China.
The current flurry of activity aimed at finalising bilateral FTAs is certainly in the right direction. The latest agreement concluded with the UAE is the first after over a decade with a major trading partner. The UAE is the second largest export destination and the pact should help to dispel the image of India as a protectionist economy. What is even more encouraging is that other bilateral FTAs are in the pipeline with the UK, Australia, Canada and the Gulf Cooperation Council, comprising six countries in that region. A dialogue on the long-pending trade agreement with the European Union has resumed but it is clear that the one with the UK will be moving more rapidly than others. Areas that have stalled the talks with EU including spirits and automobiles are not likely to bog down the discussions with the UK where both sides are keen to reach an early resolution.
In case India is able to tie up bilateral agreements with key trading partners over the next six months, export efforts will get a boost after a period of successive setbacks. These include the withdrawal of trade concessions worth $5.6 billion under the Generalised System of Preferences by the US in 2019. The inability of this country to become a member of any major regional trade grouping has also handicapped exporters who face a competitive disadvantage in many markets. With these agreements, the situation is set to look up especially as the UAE, the UK and Australia are leading export destinations.
It has to be cautioned, however, that there is still a long way to go before India becomes a major trading nation. Exports as a percentage of GDP are still only about 11 per cent, much lower than the peak of 18 per cent achieved about a decade ago. Rising world prices have also contributed to the steep increase in exports in value terms during 2021-22. At the same time, it is clear that the greater support being given to export industries has given an impetus to outward trade flows. If this is sustained along with the drive to finalise more trade pacts, it could ensure that India finally gets a place at the global high table of exporters.
