India’s exports surpassing the pre-pandemic level of $331 billion in FY 2018-19 and reaching $418 billion in FY 2021-22 is certainly an achievement. Total exports, including services exports of approximately $240 billion, amount to over $650 billion. The recovery in exports provided relief at a time when key components of aggregate demand, such as consumption and investment, were slowing. Total merchandise trade, including imports of $610 billion, stands at $1.28 trillion for fiscal year 2021-22. These milestones on the trade front are a sign of a rising India which would certainly accelerate growth and the increase in imports is a good sign given the high import intensity of Indian exports. If we maintain momentum and capitalize on the potential of our exports, we will reach the targets of $1 trillion in merchandise exports by 2027-2028 and $1 trillion in services exports by 2027-2028. by 2030, which will help achieve the -$5 trillion economic target sooner.
The trade achievements are a sign of growing confidence in the Indian economy. The government’s proactive policy programs – such as the Commodity Export Program, Duty Exemption Program, Capital Goods Export Promotion, Transportation and Marketing Assistance Program – have helped the export sector. Schemes such as the RBI Gold Card Scheme and Interest Equalization Scheme and the Export Promotion Councils Market Access Initiative are also helpful.
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Although the trade achievements are commendable, India still has a lot of potential. For example, India’s annual export growth rate between 2011 and 2020 is just over 1%, compared to 3% and 4.2%, respectively, for China and Bangladesh. If we rely on India Trade Portal estimates, we see a huge difference between India’s export potential and actual exports in many sectors, especially pharmaceuticals, gemstones, jewelry and chemicals. Therefore, it is time to address sector-specific and market-specific issues in order to take full advantage of exports in all sectors. For example, India’s diamond and jewelry export potential is close to $58 billion, but the actual exports are $30 billion.
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PrimeTo achieve the export target, India needs to aggressively increase its participation in global value chains (GVCs). India’s best endowment for the next two decades is its working-age population and its strength lies in labor-intensive manufacturing. However, the space vacated by manufacturing giants such as Japan, Korea, Malaysia and China has been captured by Vietnam, Bangladesh, Mexico and Thailand. Many of these manufacturing giants are moving away from labour-intensive assembly of network products, which presents an opportunity for India. As the Economic Survey (2019-20) suggests, ‘assembling in India’, especially in network products, will increase India’s share of global exports to 6% and create 80 million jobs. It’s time to find out and research why multinationals are (re)locating to countries like Vietnam, Bangladesh and Mexico while India offers a big market and cheap labor. We have not yet capitalized on the “China+1 strategy”.
India also needs to work on trade-facilitating institutions, export and import processes and logistics that not only reduce trade and transaction costs but also ensure reliability and timely delivery. which is important to be part of GVCs. India’s ranking in the Logistics Performance Index is 44, while China’s is 26 and South Korea’s is 25. The unit cost of an export container is significantly higher for India than for China, South Korea and others, which reduces the price competitiveness of Indian exports.
Recently, the Niti Aayog in partnership with the Competitiveness Institute prepared the Export Readiness Index (EPI) 2021 for Indian states. There are wide variations in the EPI index, which is based on trade policy, trade ecosystem, export ecosystem, and performance. It’s time to focus on the top three of these entry pillars in states that score below the national average. State-level reforms aimed at reducing bureaucracy and complex laws, including taxation, will go a long way. One way to reduce the complexities of trade and business is to sign free trade agreements. These not only reduce tariffs and provide market access, but remove non-tariff barriers such as administrative costs, labeling requirements, anti-dumping duties and countervailing measures. It is a good sign that Delhi has recently concluded free trade agreements with the United Arab Emirates and Australia and is negotiating with the UK, the GCC and Canada. Although FTAs do not necessarily contribute to the trade balance in the immediate term, they do help to streamline policies.
Along with merchandise exports, India is expected to focus on service exports. According to the Ministry of Commerce (MoC), services exports are expected to reach the $1 trillion target before the 2030 deadline. ‘IES and it can accelerate service exports in other categories, including travel and tourism and business, commercial and financial services. However, the service sector needs government support.
Accelerating exports of goods and services could potentially turn India’s economy into a $5 trillion economy sooner, provided we are proactive in policies to capitalize on our export potential, explore new markets and curbing protectionism. There are also opportunities arising from geopolitical conflicts and the world’s intention to diversify its supply chain portfolio. India should capitalize on the “China+1” strategy. However, we must avoid protectionism and inverted tariff structures which may provide temporary relief to domestic industries but will affect India’s overall competitiveness.
(Sahoo is a professor and Mujtaba is a research analyst at the Institute of Economic Growth (IEG), Delhi)
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