Making India an Export hub: Opportunities and Concerns for India

Summary

The aim to make India an export hub has gained further attention with the changing global trade scenario and the Covid-19 pandemic. Countries from across the globe are looking for alternatives away from China. Given this, we analyze the changing trends in the Indian export sector and the prospective areas of growth in exports. India’s share of export in GDP has risen fast since the early 1990s, reaching a peak of 25.4% in 2013. While India has performed well in exporting services, exports of goods have lagged in the last decade. It has also diversified its exports since the 1990s, both geographically and commodity-wise. The share of technology-intensive goods, including engineering and petroleum products, has risen over the years. India has also gradually found its way into new emerging markets with its share of export to developing nations surpassing that of advanced economies. Despite things improving, India continues to have a lower percentage contribution in total world export, which is only 2%. The country ranks 21st among exporting nations, a position not aligned to its 5th rank in GDP.

Globally countries are out on a look for alternate supply chains

The US-China trade war and COVID-19 pandemic has exposed the vulnerabilities in having a China-centric global supply chain. As a result, businesses engaged in international trade and foreign direct investment are evaluating countries other than China as an alternative source. This trend further seems to have intensified into Anti-China sentiments after allegations over China’s failure to manage the deadly virus outbreak. Countries such as the US, Japan, and South Korea, which are the largest trading partners of China are now considering relocating production units or setting up alternate units outside China. For Instance, Japan has announced USD 2 billion financial assistance for its companies to shift production out of China to its own country or other ASEAN countries.

All this has inspired talk for India to cash in on this wave of global supply chain re-construction, and India is seemingly right at the centre of reckoning. However, the anti-China sentiment doesn’t necessarily imply a pro-India sentiment, given other viable alternatives such as Indonesia, Malaysia, Vietnam, Philippines, and Thailand are possibilities.

A substantial rise in share of exports to GDP after liberalisation in 1991

Prior to full-fledged globalisation, India’s share of exports in GDP remained below 10%. With liberalisation, India’s share of exports in GDP consistently rose from 8.6% in 1991 to an all-time peak of 25.4% in 2013. However, since then, its share in GDP has been on a decline reaching 18.4% in FY2019-20. Also, India continues to have a lower percentage contribution in total world export which is only 2% and ranks 21st in total world exports. (WITS statistics, 2018)

While merchandise exports trailed behind, services exports forged ahead

As an annual percentage change, India’s merchandise export reported a better performance in the first and second decades. In particular, India merchandise export growth stands out in the second decade, with CAGR of 19.1%. However, the merchandise export has been hovering around USD 300 billion since 2011, recording a CAGR of just 0.3% during 2011-2019. While exports of goods have lagged behind, India has performed very well in exporting IT services. The growth in services export has seen notable development recording a CAGR of 5.4% during the same period.

Impact of COVID-19 on India’s merchandise exports

With a nationwide lockdown in place to contain the spread of the COVID-19, India’s position in global trade, has further been hit. India’s merchandise exports have contracted to a record low of 60.3 % YoY in April and 36.5% YoY in May due to current disruption in maritime trade. Even before the Covid-19 outbreak, India’s export was on a free fall. It contracted by 4.8% YoY in FY2019-20.

On a brighter note, India’s goods trade deficit narrowed down, resulting in an overall trade surplus in April and May 2020.  The downside is that this surplus is driven by import contraction due to a fall in oil import bills rather than a rise in exports of goods and services.

Limited role of Manufacturing in India's export performance

In a globally competitive scenario there is shift from exports of primary products to exports of medium and high-intensive technology products in the development process. However, India's export statistics depict a mixed result with the share of both agriculture and manufacturing goods declining over the years.

Globally manufacturing exports constitutes the lion’s share in merchandise exports, even in the case of India. Though the manufacturing sector's share increased during 1991 and 2002, it has experienced a declining trend since then. From being around 73.5% in 1991-92, and rising steadily to 76.1% in 2001-02, its share declined to 65% in 2018-19.

While manufacturing has been less robust, the Indian export sector has moved up the value chain with a higher share of petroleum products in the last two decades.

Source: Handbook of statistics on Indian Economy, Reserve Bank of India.

One of the reasons for the declining share of manufacturing exports is the slow growth of manufacturing production. Manufacturing share in India’s GDP has stayed around 17-18% since the “Make in India” scheme was launched in 2014-15 with a target to reach 25% by 2022. This stagnation in the last five years shows how much faster the manufacturing sector needs to grow if India has to improve its export position in the international arena. In fact, the contribution of manufacturing to GDP in 2019 for other emerging economies like Thailand (25.3%), Malaysia (21.5%), and Indonesia (19.7%) is higher than India. (Source)

India’s manufactured exports- Engineering goods lead the way

In terms of product mix within manufacturing, there has been a gradual shift from those based on labor-intensive manufacturing (textile, gems & jewelry and leather products) to those dominated by technology-intensive exports (engineering goods). In the above table, the share of engineering goods increased to 25.3% in 2018-19 from 15.8% in 2001-02. Though improvement was marked for medium-high technology-intensive exports from a share of 18% in manufactured exports in 1990 to 33.8% in 2017 (source), the dominance of low-technology exports still persists.

Shift in India’s direction of Exports

India’s export has also diversified in terms of the market with gradually finding its way into new markets. The size of India’s exports to advanced economies has declined, whereas it has increased to developing economies. India now exports over 40% of its export to developing economies, surpassing advanced economies' share. The combined share of the European Union (EU) and USA now stands at 33% of India’s total exports compared to over 40% in 1991-92. OPEC countries also showed a notable increase to about 15% from 9% during the same period.

Source: Handbook of statistics on Indian Economy, Reserve Bank of India.

Conclusion

The above discussion depicts that India’s trade prospects are relatively positive, with a rising share of IT services and engineering goods in exports along with its rising share in exports to fast-emerging economies. There is still a definite room for improvement to strengthen its position in the global economy further. India’s exports share in the world exports is still insignificant at 2%. While services exports have seen a notable growth, merchandise exports need to pick up in particular manufacturing exports. Although India is moving towards technology-intensive exports, the exports in the high-end segment are still limited.

From reforming land and labour regulations to addressing infrastructure bottlenecks, India has a long road ahead. India presently needs to cherry-pick promising industries and products with the highest demand in top importing nations and frame effective export policies to facilitate growth in the same.

Written By:- 

Hema Kumari ([email protected])

Rijutha B Raj ([email protected] )