India has never had it this good when it comes to outbound trade. Its merchandise exports at $418 billion is highest ever and after 14 long years, the target set by the government has been exceeded. Services export too is at a historic high of $250 billion. In select sectors, the China+1 procurement strategy by global players is beginning to translate into orders for Indian manufacturers.
The Modi government, after a gap of many years, has started signing free trade agreements (FTAs), first with UAE and then with Australia. Capacities under the Productivity-Linked Incentive (PLI) Schemes are getting grounded and if they are administered properly, they can give a strong fillip to exports.
All these developments have emboldened the government to dream big. The Union Industry and Commerce Minister Piyush Goyal has called for exports to touch $2 trillion by 2027 ($1 trillion each for merchandise and services exports). To facilitate this, he has announced revamping of the Department of Commerce, apart from strengthening of trade and investment promotion bodies.
But to achieve this target, export of goods should more than double while that of services should quadruple in the next five years. If India’s past performance is of any indication, achieving this looks far-fetched unless significant corrective actions are taken. While FY22 has been good, extrapolating it is unlikely to work for many reasons.
Take export of goods. Last fiscal it grew by a strong 43 per cent for two reasons. One, low base effect (FY21 exports took a beating due to the pandemic) and two, developed economies pushed through massive stimulus to its citizens to keep the economy moving. This translated into strong global demand (including a lot of pent-up buying).
Hurdles ahead
However, things have significantly changed on the ground since. The stimulus and supply-chain disruptions due to the pandemic started pushing the inflation up which has been further accentuated by the Russian invasion of Ukraine. Most economies are tightening their monetary policy and raising interest rates in a bid to tame the run-away prices. These developments are slowing the global trade and economic growth.
The World Trade Organisation (WTO) has said that global trade in 2022 will grow by just 3 per cent as against 4.7 per cent it had projected earlier. It has also pegged world GDP growth at 2.8 per cent in 2022. In the previous year the world economy grew by a robust 5.7 per cent (this fuelled India’s exports in FY22). WTO economists have blamed the Ukraine crisis and Covid-related lockdown in China for their downward revision of estimates. Under these circumstances, India must do exceedingly well to even maintain its merchandise exports at FY22 level.
World growth apart, there are other factors that can come in the way of sustaining this export momentum. Commodity price inflation has contributed its bit to the jump in India’s export of goods in FY22. Take petroleum products. Its exports value has gone up 152 per cent which is far sharper than the volume growth. Same with engineering products (iron, steel and copper prices have shot up too). In fact, it is a global phenomenon.
According to WTO data, volume of merchandise exports rose by 9.8 per cent across the world in 2022 but in terms of value, it was much higher at 26 per cent. Once the commodity prices cool, export value too will reduce.
Signing of two FTAs in matter of weeks is a welcome move. But India, to really boost its exports, must have these arrangements with its leading trade partners such as the US, UK or EU. FTAs with UAE and Australia should hopefully set the stage for more to come.
Protectionist clouds
The bigger challenge is the protectionism that is taking hold in India and rest of the world. It is said that since 2014 India has raised tariff on 3,200 items. Though the average tariff has dropped to 15 per cent in 2020 from 17.9 per cent in 2019, it is still considered to be amongst the highest in the world. Higher tariff while protecting the domestic industry will also make exports uncompetitive where the product has a good share of imported components. Take the case of mobile handset manufacturing.
A study by India Cellular and Electronics Association (ICEA) on electronic components across 120 tariff lines and four major competing nations — China, Thailand, Mexico and Vietnam, revealed that India’s import duties make exporting handsets uncompetitive. India has just 32 components on zero duty compared to China (53) and Mexico (74).
In the case non-zero tariff lines, India’s tariffs are higher than Thailand and Vietnam for 85 per cent of the items. It is 95 per cent in the case of China. With 80 per cent of the components for a handset being imported, such tariffs make a huge difference.
While the PLI scheme on mobile will help India meet its domestic needs, high tariffs will prevent them from being exported to rest of the world. This could turn into a huge missed opportunity. While Indian handset market is expected to grow to $55 billion by FY28, the global market will be as big as $625 billion by then. If no remedial measures are taken, the Modi government’s ‘Make in India for the world’ clarion call will remain on paper. As economist Arvind Panagariya says India cannot be an export power house without being open on the import side.
As regards services exports, India has the potential to grow it many times. What is needed is a clear vision to leverage India’s IT capabilities in areas such as consultancy, accountancy, legal and healthcare. Also, there is a need to tighten regulations when it comes to privacy and data security. Being a democracy, India has a natural advantage over China or other autocratic nations in knowledge economy-based service exports as long as it is seen as respecting the rule of law.
To effectively break away from marginal rate of growth in exports, which is a pre-requisite to achieve $2 trillion exports by 2027, there is a need to get on a mission mode and remove all impediments without falling prey to various domestic interest groups. If that happens, India’s exports will continue to thrive and it will finally enter a sustained high economic growth phase.