This is driven by steep declines in component indices such as export orders, international air freight, automobile production and sales, electronic components, and agricultural raw materials.
The revival of private investment and exports is a must to achieve and sustain over 8% growth. The recent performance of India’s exports—which expanded 11% (year-on-year) in March 2019, taking the figure to $32.5 billion in the month of March, vis-à-vis 2.4% in the previous month—is good news. Various categories of intermediate exports—engineering goods, organic and inorganic chemicals, ready-made garments of all textiles, and drugs and pharmaceuticals—contributed to this revival. The question, however, is whether this recovery is sustainable or not?
India’s exports have been sluggish and had turned negative, particularly merchandise exports, between 2013 and 2016, which, along with private investment, dragged down the country’s growth. Merchandise exports affect manufacturing and, thus, jobs. Although there have been signs of exports recovery since the early 2017, the revival has not been robust and consistent. In fact, during 2018-19, merchandise exports and imports witnessed the same growth rate of around 9%, totalling $331 billion and $507 billion, respectively, resulting in 8.9% of merchandise trade deficit. The sector that contributed the maximum to exports is engineering, with a 25% share, followed by electronics and chemicals.
India is doing well in exports of chemicals, both organic and inorganic, due to better quality and also as a result of high scrutiny of China’s chemical exports on environment grounds. Exports of ready-made garments—among top exports—are experiencing weak growth for the last few years. India is losing market share in some of its traditional markets such as the Middle East, France, Sri Lanka, etc, due to rising competition from countries such as Bangladesh and Vietnam, and the domination of unorganised players at the low end of the value chain. India has been losing out on important exports sectors such as iron and steel, non-ferrous metals and products, leather and leather products, etc. Protectionist measures in the West and aggressive pricing strategies of China, along with developments in the domestic economy (for example, shutting down Sterlite affecting copper exports), don’t help the cause either.
There has been a shift in the exports basket towards value-added manufacturing and technology-driven products, but the country is losing out on important traditional sectors such as metals, textiles, leather, etc. India has the potential to do better in agricultural and primary products. Given growing demand for agricultural commodities, the policy focus on agriculture, plantations, horticulture, fisheries and meat will contribute. India is the largest producer of milk and the second largest of fruits and vegetables. Thus, the recently announced Agriculture Export Policy is expected boost exports of the primary sector.
The country needs to sustain this recovery momentum and accelerate exports growth, even though the outlook for the world trade does not look promising due to a rise in nationalism and protectionist measures. The US-China tariff war is still on, and developing countries including India have started imposing higher tariffs selectively to protect their domestic industries. Monetary tightening in developed countries, along with tariff wars, may lead to volatility in global financial markets, which would lower trade finance. Such developments do not augur well for trade agreements at the WTO and for globalisation. India’s is also on the priority “watch list” of the US for not giving adequate protection to American companies due to weak IPR regimes.
The WTO’s World Trade Outlook Indicator, released in February, gave a reading of 96.3%, below the baseline value of 100 in the index, indicating below-trend trade expansion for the first quarter of 2019. This is driven by steep declines in component indices such as export orders, international air freight, automobile production and sales, electronic components, and agricultural raw materials.
Even though the full-fledged and long tariff war between the US and China is not good for globalisation and even for India, it actually offers a short-term opportunity for India’s exports. As the UNCTAD 2019 report brings out, only about 6% of the $250 billion Chinese exports subject to US tariffs will be picked up by US firms, whereas only about 5% of the $85 billion US exports will be picked up by Chinese firms. Therefore, India may be able to gain some traction in textiles, garments, and gems and jewellery if the Chinese exports to the US slow down.
Indian exports are in a recovery stage and need support. As the Trade Promotion Council of India (TPCI) rightly puts, we need short-term support measures for exports such as exemption of GST for SME exporters, easing of credit to the industry, online refund of input credit and interest equalisation support to agricultural exporters. Also, measures facilitating Indian firms participating in global value chain/production network, internationalisation of Indian SMEs and trade facilitation would help Indian exports in the medium to long term. It’s time to work on the recommendations (Economic Survey 2017-18) on improving trade-related logistics that would reduce trade cost and improve exports competitiveness. At the same time, India has to negotiate on many trade issues at multilateral and bilateral level, such as India’s data protection rules, challenges faced by India’s export subsidies, e-commerce policy, import duties on Indian exports such as by the EU on electronics, and dropping India from the Generalized System of Preferences (GSP) regime. Apart from increasing India’s exports competitiveness, the country also needs to explore more markets in Africa and Latin America. It’s also time to incentivise labour-intensive sectors like leather and to address the issues faced by exporters.
India has been witnessing consistent merchandise trade deficit over last two decades, reflecting on out export competitiveness. Promoting exports eventually help boost the GDP of a country, create more jobs, boost the manufacturing sector and earn more foreign exchange. A growing and competitive economy should have increasing trade ratio, but in India’s case, the trade openness has gone done from 55% in 2012 to 40% in 2017.