India Is Set To Reach $400 Billion In Merchandise Exports, But Is It Sustainable?

by Sourav Datta - Nov 17, 2021 04:04 PM +05:30 IST
India Is Set To Reach $400 Billion In Merchandise Exports, But Is It Sustainable? The export sector is awaiting the new Foreign Trade Policy that is expected to be WTO compliant, and would offer better a roadmap for higher export growth.
  • While India’s domestic demand remains the largest contributor to Gross Domestic Product (GDP) at 60 per cent, a Niti Aayog report has argued that solely focusing on domestic demand could end up strengthening imports faster than exports.

After remaining stagnant for the past few years, India’s merchandise exports are on their way to touch the $ 400 billion target set by Prime Minster Narendra Modi.

At $ 197 billion, India clocked a half-yearly merchandise export growth of 24 per cent over the pre-pandemic period of fiscal 2020. The half-yearly exports have grown 57 per cent from the same period in fiscal 2021 with the pandemic-induced low base.

India Merchandise Exports
India Merchandise Exports

The export growth has been led by sectors such as Petroleum Products, Jewellery, Engineering Goods, Electronics, Chemicals, and other products.

The rise in export values is partly a function of the steep increase in commodity prices across sectors. As input commodity prices rise, finished goods prices have risen in tandem as well. However, this time, the exports could potentially sustain and continue growing rather than being completely correlated with commodity prices.

While India’s domestic demand remains the largest contributor to Gross Domestic Product (GDP) at 60 per cent, a Niti Aayog report has argued that solely focusing on domestic demand could end up strengthening imports faster than exports.

In addition, a focus on exports can help bring down the current account deficit, attract manufacturers, create jobs, and offer several other benefits to the country. Several Asian countries like China, Japan, Vietnam, and Bangladesh have managed to use exports to drive their economies.

Here are the government-taken steps to bolster India’s exports.

Focus on Free Trade Agreements

The government has initiated talks with different countries to revive the formation of free trade agreements. Earlier, it had withdrawn from the Regional Comprehensive Economic Partnership, but is now looking to reignite FTA discussions with several countries.

However, so far, the existing FTAs have been unbalanced, allowing other countries to grow their exports, while India did not benefit from the FTAs. Out of the 15 countries that are a part of RCEP, 11 already have trade surpluses with India. The existence of surpluses implies that India imports more goods and services from these countries than exporting to them.

The new agreements could allow India and its trading partners to bring down trade barriers, and exploit their inherent comparative advantages. Though FTAs come with their own set of potential problems, it is expected that striking trade deals with riche and larger trading partners such as the European Union, United States, United Kingdom, Canada, and other nations that do not have strong manufacturing economics, could help India benefit.

In addition, FTAs allow India to narrowly focus on selling and buying a few set of goods with its trading partners, where both countries benefit. In contrast, a WTO Goods Schedule can be quite broad, covering a large number of goods. A customised FTA would allow India to have greater control over its international exports.

While there is a positive correlation between FTAs and red-tape/bureaucracy, India’s global trade has not greatly benefited under WTO regulations so far, resulting in the current focus on building more favourable trade relations with select countries.

China Plus-One Strategy

Since the pandemic began, companies across the world have been looking to reduce their excessive dependence on Chinese manufacturing. Hence, as a part of the diversification strategy, these companies have begun sourcing goods from other low-cost manufacturing nations like India. In addition, the shift could attract exported-oriented foreign direct investment in India as companies look for manufacturing bases with low costs.

Further, the strict Chinese crackdown on several industries due to the reluctance to follow pollution norms has benefited Indian companies operating in sectors like speciality chemicals and pharmaceuticals. Chinese labour costs have been gradually increasing as well, reducing the competitiveness of Chinese goods on the global markets.

However, India does face a challenge from its neighbours like Vietnam or Bangladesh that have smartly stepped into several export-oriented sectors.

These countries dominate sectors such as textiles on account of low-cost labour, and a labour law ecosystem that is skewed to benefit manufacturers. Therefore, competing with these countries for investment capital could be tough in certain sectors.

According to an expert, rather than going into either high-technology industries or low-technology labour-intensive industries, India should take a middle path, where it can build an advantage. In addition, even in highly competitive sectors, India can focus on small gains of the global market share.

Incentive Systems

The government has introduced performance linked incentives (PLI) to grow the country’s manufacturing sector. Several large industrial conglomerates have shown interest in enhancing their manufacturing base under the incentive scheme. A strong manufacturing base can reduce a dependence on imports, while helping drive exports especially in light of the China plus One strategy.

According to the expert, focusing on a few high-potential sectors would be more beneficial rather than spreading out these benefits across a large number of sectors. The Indian government seems to have recognised this fact, and has introduced PLI schemes focusing on thirteen sectors.

India’s export growth could potentially be propelled by a few specific sectors such as textiles, agricultural products, consumer electronics, chemicals, pharmaceuticals, and engineering goods. The consumer electronics space appears to be poised for growth as both domestic and export demand grow, boosted by the PLI benefits provided by the government.

For instance, smartphone exports have benefited from the PLI scheme introduced for the sector, showing a 250 per cent jump in the first quarter of the current fiscal. The PLI schemes could boost India’s exports beyond primary goods and low value-addition goods, to goods with higher-value addition.

India has export subsidies, special economic zone benefits, and other incentives in place for boosting merchandise exports. However, in 2019, the United States appealed against some of these benefits at the World Trade Organisation, namely — Merchandise Export from India Scheme (MEIS), Export Oriented Units (EOU), Electronics Hardware Technology Parks (EHTP), Special Economic Zone (SEZ) and Export Promotion Capital Goods (EPCG).

According to the US, these incentives were unfair to its industries, and allowed Indian companies to export goods at much lower rates. Currently, companies that earn foreign exchange on a net-basis receive several exemptions from taxes, and even exemptions from payment of income taxes on export earnings.

As WTO has ruled in USA’s favour, India has been focusing on building incentive structures that are compliant with WTO guidelines, while allowing Indian export companies to continue availing benefits. For instance, the MEIS scheme was replaced by the Remission of Duties and Taxes on Exported Products (RoDTEP).

Some experts have suggested introducing “smart” incentives that cannot be easily established as unfair. These include incentives based on investments in research and development, skill development, and employment generation. These incentives are not directly contingent on meeting export targets.

Country-wise Merchandise Export Comparison
Country-wise Merchandise Export Comparison

Unfair Demands?

On several occasions, India’s actions are often portrayed as protectionist by if its decisions adversely affect the vested interests of powerful countries. Though these countries offer several similar (and much larger) incentives to their country’s industries, they often accuse India of indulging in unfair practices.

For instance, several rich countries like the US, Canada, Japan, and the European Union have the rights to pay their farmers more than the de minimis domestic support allowed under WTO’s Agreement on Agriculture.

On average, the total support extended per domestic farmer stood at more than $ 61,000 for the United States, $ 13,000 for Canada, $ 11,437 for Japan, and $ 8588 for the European Union. In contrast, the same figure for India stood at a meagre $ 282 per farmer.

Yet, several developed countries like Canada, US, Australia and others have called for a cut in India’s farmer support subsidies. Such demands are often unfair, and interfere with India’s policymaking.

The export sector is awaiting the new Foreign Trade Policy that is expected to be WTO compliant, and would offer better a roadmap for higher export growth. The current trade policy had been brought into effect since 2015, and has been extended till March 2022. Bringing in the right policies can attract more investment in the export-oriented manufacturing sector. Overall, India appears to have the right factors in place for a sustainable export growth.

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