When India’s merchandise exports touched a record $418 billion in FY22, the mood among the stakeholders was euphoric, given the quantum jump from $292 billion in FY21. Another reason for celebration was that after the pandemic lull that started in March 2020, India’s exports had moved to historic highs and were moving beyond the $300 billion-$350 billion range for a decade or so. This momentum has kept the graph moving upward this financial year as well, with April and May recording an impressive performance. Exports jumped 24.22% year-on-year to $38.19 billion in April and increased 15.46% year-on-year to $37.3 billion in May.
It is worth pointing out that the country surpassed the export target of $400 billion for FY22 despite global macroeconomic headwinds. The government is not taking its foot off the pedal. Earlier this year, Commerce and Industry Minister Piyush Goyal said India has the potential to reach a target of $1 trillion exports in goods and services each by 2030.
While the new target may fire up many stakeholders to up their game and take exports higher, a question some experts are focussing on is how this goal fits into the larger scheme of economic growth. Of course, exports can fuel an economy’s growth and make it a “superpower” in a relatively faster period. An exporting country can generate revenue from multiple economies and, theoretically, be shielded from a geopolitical crisis in one part of the world. It can also lead to a more robust development of knowledge and talent hubs and create jobs and stimulate the economy back home. Even Prime Minister Narendra Modi had said in January that the self-reliance path goes through “make in India, make for the world.” So, will the new target help India become an export-driven economy, one where products are made for the world?
The balancing act
Not everyone’s answer is in the affirmative. Atul Gupta, Partner, Deloitte India, says though a near 5% CAGR in exports would help the economy reach $1 trillion in 2030, it does not seem enough for India to be considered as an export-driven economy. He points out that India will be a $5-trillion economy by 2027. Even then, the country won’t achieve the 20% exports-to-GDP ratio. “Our trade deficit too would continue to grow, as imports are not likely to decline. Thus, sustained economic growth in India would still need to be primarily fuelled by high levels of domestic consumption and investment,” he says.
A look at economies such as Vietnam and Malaysia drives home this point further. India’s exports of goods and services as a percentage of GDP is 18.43%; while Vietnam’s is 106.80% and Malaysia’s is 65.22%, according to World Integrated Trade Solution (WITS). This means we still have a long way to go.
Not competitive enough
The growth rate has improved a lot, especially considering that it was a mere 3-3.5% at one point, but the question is whether we are getting more competitive in the international marketplace, Gupta says. “These absolute numbers belie that.”
The industry expert also cautions that India should grow at a rate where the trade deficit declines. Though our exports are soaring, imports are also rising. The trade deficit widened in May this year to $23.3 billion as opposed to $6.53 billion in May 2021. “It makes little sense that our trade deficit keeps increasing. That simply means that from an international trade competitive policy, we are still losing out. We can’t treat exports agnostic of our imports. Trade surplus needs to be ensured rather than increasing trade deficits,” Gupta says.
Other industry experts are of the view that while the export target is realistic, certain factors have to be in tandem for achieving sustainable export-led growth.
The Production Linked Incentive (PLI) scheme — for instance, which first came up in 2020 and has 15 sectors under its ambit — will play a significant role in enhancing manufacturing and boosting exports. The experts suggest that the scheme be bolstered with more supportive policies — directly and indirectly — covering a wider area of activity to make sure the output rises faster and more efficiently.
“We will need more support from PLI sectors,” says Ajay Sahai, DG & CEO, Federation of Indian Export Organisations (FIEO). “So far, we have seen good success in electronics. The incremental production, which is a part of the PLI scheme, must be channelised into exports.”
While the current challenges of soaring inflation and supply chain upheavals may cause some discomfort, he says it will even out in the long run. “Inflation also has a cycle. In the next 1-2 years, rates are expected to soften. The supply chain disruption is also not at the level that it was earlier; and had it not been for the Russia-Ukraine war, it would have been over by now. By 2024, we expect to come out of this disruption, which impacted everyone majorly during the pandemic,” adds Sahai.
The FTA factor
One way to grow India’s exports faster and cover more area is free trade agreements (FTAs). India is fast tracking negotiations for proposed FTAs with the UK, Canada and the EU. Union Minister of State for Commerce and Industry Anupriya Patel recently confirmed that at an event in the capital recently. “The FTA with the UAE has already been operationalised. We have been making such efforts in order to create better opportunities for businesses,” she added.
The Comprehensive Economic Partnership Agreement (CEPA) between India and the UAE, which came into effect from May 1, is expected to increase two-way trade to over $100 billion in five years from $60 billion now. In April, India and Australia had signed the Economic Cooperation and Trade Agreement (ECTA), which aims to increase the trade between the two sides to $45-50 billion over five years from the current $27 billion.
India is not new to FTAs. But experts point out that in earlier cases, the country was not a big beneficiary, because partner countries were competing with us for similar products.
“We are now focusing on complementary economies and not competing ones,” says Sahai. This change in the FTA strategy will help India get better trade deals. “It is a win-win situation as we are not competing with these countries — they are major markets for exports. Earlier, we would chase the same market for any product,” he explains.
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