The proximate cause of the current declining trend in India’s merchandise exports is the global demand slump that has taken a toll on shipments by most countries, including China. But in India’s case, the global headwinds also serve to mask many underlying weaknesses that have made it difficult for the country to shake off the tag of a perennial underachiever in global trade. In FY23, goods exports by India grew 6%, but excluding the low-value, net-negative petroleum segment, the expansion was nearly flat. By a happy coincidence, the country’s services exports grew a robust 27% in the year to $322 billion, which was as much as 72% of the shipments of goods in value terms. The strong sequential growth in export of services through the year helped reverse the trend of net exports being a drag on the economy by the fourth quarter. The gross value added (GVA) got a boost from positive net balance of foreign trade in the March quarter—the resultant benefit to the higher-than-expected GDP growth of 6.1% in the period was a considerable 1.4 percentage points.
However, that momentum in services exports too appears to have ebbed rather suddenly, with year-on-year growth sliding to 5% in April-June quarter of the current financial year. Almost a third into FY24, it is clear that the vaulting ambition of $400-billion of services exports in the year would be missed by a wide margin. This has compounded the worries about the shrinking exports of goods, and the prospects of a year-on-year decline in goods shipment value for FY24. October-November is now the most optimistic date for a turnaround in merchandise exports. The year will therefore be marked for an even greater reliance on the domestic demand.
The timely boom in India’s services exports in the last couple of years appears to have been enabled largely by the post-pandemic surge in remote working, and an acceleration of overseas trade in “business services.” At the same time, software services, with a stubborn share of 45% in total services exports, appear to be approaching growth saturation, being largely driven by a tenuous wage-arbitration model, and slow in moving on to the higher ends of the value chain. AI-powered technologies like ChatGPT while expanding new vistas also pose an immediate risk to low-end software exports, as these might reduce remote-sourcing needs of the advanced economies. True, unlike for goods, India’s current share in global services trade (4.5%), is comparable to China’s (7%). However, while a much smaller economy like Vietnam has neatly overtaken India in conventional (labour-intensive) exports, countries like the UAE and Saudi Arabia grow cross-border services transactions at much faster clip than India’s. Tiny Singapore being still a key financial services centre for the world has services exports close to India’s, while New Delhi’s fledgling models like the GIFT City may take years for fruition.
The two factors that undermine India’s services trade are high concentration in a few markets (US and EU account for 80%) and not diversifying away from IT and IT-enabled sectors fast enough. While the 2018 scheme that identified 12 “Champion Services Sectors” was a step in the right direction, it hasn’t made much headway. The key is to revamp the cost structure of services industries, and accomplish higher educational standards, so that trade via all modes, including the ones where consumers and supplies cross borders, could flourish.