Emphasis on MSMEs and optimal use of trade agreement provisions will be critical to India’s export growth
Two years ago India’s export story looked strong and convincing. Merchandise exports grew at a healthy annual average growth rate of 22% in the five years preceding the Lehman crisis. After a small blip in FY10, exports smartly recovered and grew at 30% in the next two years post the crisis. Come FY13, India’s export growth stalled. Exports grew at a dismal pace of 1.2% in FY13 and FY14, and this trend has continued in FY15 with exports growing at an average rate of 2.2% year to date. Is India’s promising export performance a foregone story?
India’s exports have diversified both in terms of markets and products in the past two decades. There is no doubt that the export sector has moved up the value chain. The share of traditional exports like primary products, textiles, readymade garments, leather products and agriculture commodities has nearly halved from 56.5% in FY92 to 27.3% in FY14. Petroleum products and engineering goods like machinery and parts, transport equipment and electronic goods together now account for over 40% of exports, as compared to 14% in FY92. India’s engineering exports have fast moved from low-value items to better quality high-value products which has helped them grow alongside Chinese engineering exports. The increase in domestic refining capacities gave a boost to exports of petroleum products.
Indian exports have gradually found their way into new markets. The size of developed countries in India’s exports has declined and that of emerging economies has increased. India has historically exported pharmaceuticals, gems and jewellery, leather products, textiles and readymade garments to traditional markets like the US and Europe. Even though they still account for a sizeable portion of India’s exports, their share has declined significantly over the past decade. Asia and Africa together now account for 60% of India’s total exports, up from 37% two decades ago. What is worth noting is that exports to Africa have grown exponentially and the region’s share in total exports stands at 10%. This, however, doesn’t mean that India is losing its traditional markets. In fact, this trend reveals that it is fast integrating into the global and Asian value chain.
Manufacturing push a necessity
In the past, Indian exports have grown on the back of product and geographic diversification. For our exports to grow further, manufacturing (which accounts for 60% of the export basket) will have to become more competitive. UNIDO’s CIP (Competitiveness of Industrial Production) is a composite index that measures “the ability of countries to produce and export manufactured goods competitively”, with 1.0 being the best score. The CIP consists of eight sub-indicators grouped along three dimensions of industrial competitiveness—capacity to produce and export manufactures, technology deepening and upgrading, and world impact. India’s CIP score improved from 0.04 in 2000 to 0.07 in 2010. Compare this with
China, whose CIP score improved from 0.16 in 2000 to 0.33 in 2010. While India managed to increase its share in world manufacturing value added from 1.1% in 2000 to 2.0% in 2010, China more than doubled its share from 6.7% to 15.0% over the same period.
The technological backwardness of Indian manufacturing exports can be gauged by the share of medium and hi-tech activities. Their share in manufacturing exports improved from 18.7% in 2000 to 28.2% in 2010, but is still far behind that of China’s, 60.2% in 2010.
Even in terms of productivity and efficiency, India needs to improve. According to the APO Productivity Database 2014, average TFP growth in India rose from 2.0% in 2000-05 to 4.7% during 2005-10, but fell to 0.9% in the following two years. However, for China average TFP growth was 3.9% during 2000-05, rising to 4.2% during 2005-10, and falling to 2.1% over the next two years. During 2010-12, while TFP contributed 11% to GDP growth in India, its share in China’s GDP growth was 26%. Average TFP growth over the last four decades in India has been 1.4% as compared to 3.1% in China.
Trade pacts need a rejig
Trade agreements are a means to promote trade but India seems to have underutilised its trade pacts. The percentage of India’s international trade routed through the preferential route/FTAs is very low. According to the Asian Development Bank, the utilisation rate of India’s FTAs varies between 5% and 25%, which is one of the lowest in Asia. Moreover, exports to FTA partner countries and non-partner countries have grown at the same pace.
Complex rules of origin criteria, lack of information on FTAs, higher compliance costs and administrative delays dissuade exporters from using preferential routes. The compliance cost of availing benefits under these FTAs is so high that exporters prefer using the normal route. India has actively pursued FTAs with several major trading partners in the past. Though it is still early to draw definite conclusions about India’s FTAs with ASEAN, Japan and Korea, we can clearly see that the trade deficit with these countries has increased post FTAs. In this regard, a comprehensive review of trade agreements and their benefits in promoting India’s exports is imperative.
There is no denying that the only way forward to get back on a higher export growth trajectory is to improve manufacturing competitiveness. India now exports few price-sensitive items (textiles, leather, etc) and more income-sensitive items (chemicals, engineering goods and petroleum products), making our export basket more income-elastic. According to UNCTAD, “India’s exports to the world are much more responsive to income changes as compared to price changes.” They estimate that a 1% decline in global GDP growth leads to 1.88% decline in India’s growth of exports, while a 10% reduction in prices will lead to only a 5.4% increase in exports. In fact, exports have remained weak in the past two years, owing to weak growth in our export markets. This means that increasing exports will require much higher price competitiveness than ever before, if global growth remains muted. With the global trade landscape set to become more competitive with the emergence of mega trade pacts like the Trans-Pacific Partnership and the Regional Comprehensive Economic Partnership, increasing competitiveness will be key to export growth.
India’s export performance is crucially linked to the performance of its domestic manufacturing sector, and this time around it needs a Make-in-India push. It is clear that India has the potential to manufacture and export a wide variety of goods. From the world’s cheapest indigenous cars to the Mangalyaan, India has proved its mettle time and again. Still India’s share in global exports is a mere 1.7% and manufacturing output as a percentage of GDP is around 13%, much lower than its Asian peers. The Make-in-India campaign has the vision and the faith in India’s ability to achieve the goal of becoming a manufacturing export hub. However, this is just the beginning and more concrete steps need to be taken to achieve the desired objective. Emphasis on the manufacturing sector, especially MSMEs, will be critical to India’s export growth. MSMEs account for 40% of India’s manufacturing exports and 45% of manufacturing output, but lack of access to credit, poor technology and difficulties in hiring skilled labour are thwarting their growth. Upgrading the country’s infrastructure, simplifying the complex tax regime, reviewing archaic labour laws and removing barriers to interstate trade are the needs of the hour. Till then, investors are likely to wait and watch than to make in India.
The authors are corporate economists based in Mumbai. Views are personal