Recently, the Commerce Ministry released the latest data on India’s exports. For the first time, exports have surpassed $400 billion, a record that, if sustained, can position India as Asia’s next industrial giant. This surge in exports coincides with the worst pandemic, demonstrating the resilience of the Indian economy, vibrancy of India’s MSMEs, robustness of domestic supply chains, and the successful efforts by our policymakers.

India’s exports have grown from $291.8 billion in FY21 to over $400 billion in FY22, a healthy growth of 37.1 per cent Y-o-Y. However, according to UNCTAD, the global trade growth rate is estimated to be around 25 per cent during the same calendar year. This puts India’s performance much above the world average and will increase India’s global trade share.

Unsurprisingly, this success is the result of a philosophical shift in the country’s economic policymaking that began in the last few years. Four major building blocks make up a country’s economy: consumption, investments, government purchases and exports-imports. Given India’s colossal domestic market (consumption) is the bedrock of its economic growth, policymakers felt that stimulating demand would be the best way to ensure economic growth.

While this did generate short-term economic growth, it failed to lay the foundation for a strong manufacturing sector in the country. This is because increased imports always accompanied local demand generated through demand stimulus.

Supply thrust

Hence, in the last few years, the government decided to crank the supply levers of the economy first before relying purely on demand stimulus, as argued by most economists. Enhanced infrastructure spending, the launch of the flagship Production Linked Incentive (PLI) scheme for 14 sectors, extending working capital credit to MSMEs, addressing India’s legacy, land and labour issues, addressing a myriad of regulatory issues under the aegis the ease of doing business initiative, and liberalising FDI are cases in point.

A closer look at the data provides evidence for the success of the government’s initiatives. Between FY21 and FY22, in value terms, India’s exports have grown by approximately $110 billion. Out of the 168 principal commodities, the top 21 products have recorded value growth of over $1 billion.

Most importantly, each of the principal commodities/sectors covered under the flagship PLI scheme has recorded staggering average value growth of around $3.53 billion and percentage growth of 55.7 per cent Y-o-Y. As a result, the PLI sectors have contributed $28.26 billion to total exports Y-o-Y.

Having laid the foundation, now the mantle needs to be carried forward. The momentum generated should be maintained, and this is where the role of the State governments becomes paramount.

Unlike our East Asian economic powerhouses, which have a unitary governance structure, India has a more diversified and Federal governance structure. Several lists are laid out by the Seventh Schedule list Article 256 of the Constitution: Union List, (41); all trade and commerce related activities (exports, imports and customs), list (83); duties of customs, including export duties, (61); industrial disputes concerning union employees, (51); establishment of standards of quality for goods to be exported out of India or transported from one State to another, (53); regulation and development of oilfields, (54); regulation of mines and mineral development are all governed by the Union government.

However, factors of production, list (17), water, (18), land, (24), industries not controlled by the Union Government, (26), trade and commerce within the State, (53), taxes on the consumption or sale of electricity, (1) public order, (2) police, are governed by the State governments.

Moreover, other important factors that determine the economic success such as Concurrent list (6), transfer of property, (7) contracts, (21), trade unions; industrial and labour disputes, (31), ports other than those declared by or under law made by Parliament or existing law to be major ports, (36), factories, (37), boilers, (38), and electricity are all under the combined jurisdiction of both Union and States. This means, both the Union and the State can regulate these sectors.

Hence, while the Central government can create schemes and incentives, ultimate implementation and production are controlled by the respective State governments. This gets aptly captured when we look at States’ share of merchandise exports.

Top States

The top six States — Gujarat, Maharashtra, Tamil Nadu, Karnataka, Andhra Pradesh, and Uttar Pradesh — contribute nearly 70 per cent of India’s overall exports. Therefore, while the achievements of these six States are commendable, it is also essential for other States to prioritise exports.

Identifying and incentivising products for manufacturing according to their strengths, addressing infrastructural issues in districts that contribute to their exports, easing up regulatory issues regarding land, labour, water, and electricity, and maintaining peace and harmony within their States will help them achieve higher exports.

NITI Aayog released its second edition of Export Preparedness Index, which has been playing a role in promoting competition between the States, resulting in overall improvement in preparedness scores compared to the previous edition.

India is placed in an historical sweet spot. The geopolitical headwinds and structural advantages which played a huge role in the success of China in the early 1990s are reappearing in the global horizon. Indian policymakers have laid down the necessary building blocks for the long-term growth of India’s manufacturing and export sectors.

However, ensuring economic growth in India is not a solo act of a musician, but a combined effort of an opera. Hence, all the States must provide a major thrust towards their export sector and help in continuing the momentum of historical export surge of the country.

Gopalakrishnan is Lead (Adviser) and Head, Trade and Commerce, and Kannan is a Consultant, Trade and Commerce, NITI Aayog