Indian Economy And Trade In 2021-22: Exports And Production-Linked Incentive Scheme, Analysed

by Suraj S - Jan 23, 2022 03:27 PM +05:30 IST
Indian Economy And Trade In 2021-22: Exports And Production-Linked Incentive Scheme, AnalysedRepresentative image for exports
Snapshot
  • India’s exports have undergone a dramatic change in the past decade and a half.

    In 2021-22, Indian industrial capacity generated enough excess output to dramatically increase exports.

    With the PLI scheme, India’s exports are poised to rise significantly over the next few years.

India’s export performance in the year 2021 was strong, particularly accelerating from the start of the fiscal year 2021-22 in April. This applies to both merchandise (goods) and services (such as software).

Every single month between March and December saw merchandise exports in excess of $30 billion. This is unprecedented, as this simple table shows:

Indian Economy And Trade In 2021-22: Exports And Production-Linked Incentive Scheme, Analysed

Such performance is outstanding — including over $100 billion in exports in successive second-quarter (July to September) and third-quarter (October to December) periods.

The calendar-year quarters of 2021 saw exports of $89.9 billion, $95.4 billion, $102.2 billion, and $102.9 billion. They rank as the four best-ever quarters for merchandise exports in Indian economic history, in that ascending sequence.

The fiscal year 2021-22 is on track to cross $400 billion in merchandise exports, having reached $300.6 billion during the first three quarters (April to December). Service exports in the same period amounted to $173.6 billion.

Extrapolating the latest April-December data over the full year suggests an estimated $635 billion in total exports (merchandise and services) for the current fiscal year, as shown in the image below.

However, export performance has been improving. So if we assume the same performance in the fourth quarter as in the third, then the full-year estimate rises to $645 billion — very close to the $650 billion goal asserted by Piyush Goyal, the Union Minister of Commerce and Industry.

While Goyal’s goal is a challenging one to achieve, it is still fundamentally realistic. For the first nine months, the total exports was over $474 billion, with the third quarter alone registering over $164 billion. The final quarter is usually strong as exporters try to maximise data by the fiscal year-end. An estimated $170 billion in exports in the January-March 2022 period adds up to $644 billion, again very close to the target stated by the Minister of Commerce and Industry.

Indian Economy And Trade In 2021-22: Exports And Production-Linked Incentive Scheme, Analysed

As the graph shows, the performance in the current year is dramatically better than the trailing five-year trend. Achieving $650 billion would amount to an enormous $150 billion gain in exports year on year, on the back of an approximately 27 per cent gain in merchandise exports from the last pre-Covid fiscal (2019-20).

Some of the basic questions asked in this regard are: What’s driving this remarkable acceleration in export performance this year? Is it short-term? Has there been a structural change in exports? A commonly described reason is the rise in engineering goods exports. This is true, but still presents a superficial picture. What can we do to maintain this export growth?

Merchandise Exports: A Deep Dive

The Ministry of Commerce maintains an excellent foreign trade performance analysis (FTPA) database. It offers granular information about trade by country and commodity. I analyse in detail the merchandise export data for which a detailed breakdown is currently available up to November 2021.

One problem with the data is that the fiscal year 2020-21 is not a good basis for comparison due to Covid, so the best approach here is to compare it against the year before it.

Detailed data from the FTPA shows that total exports for April-November 2021 is $265.7 billion, up $54.6 billion (+26 per cent) from 2019-20, the last fiscal before Covid. The largest contributors to this export volume and increase are:

Indian Economy And Trade In 2021-22: Exports And Production-Linked Incentive Scheme, Analysed

The table reflects some positives and negatives. The positives during the eight-month period are:

  • Agriculture exports: strong growth driven by non-Basmati rice and sugar; total exports top $20 billion

  • Chemical and pharmaceutical exports: strong growth in pharma exports with the category now exceeding the traditional powerhouse gems/jewellery

  • Finished metal exports rose dramatically by $27 billion, driven by strong commodity price growth; the exports far exceed ore exports now, which is good

  • Over $1 billion growth in electronic item exports to $7.5 billion, driven by $3.5 billion in telecom exports

  • Broad-based growth in machinery exports to $20 billion

  • Strong growth in textile exports

  • Strong growth in refined crude exports

Now, the negatives:

  • The export of refined metals is problematic, as it is an intermediate good and not a finished product; however, this may be temporary — all metal producers want to make money during the commodity supercycle

  • Electronics exports are notable for what is missing — computers and consumer electronics; these are miniscule right now compared to the major contributors

  • Textile export growth is dominated by yarn and fabric, not readymade garments; to be fair, the readymade cotton garment header is the largest component of textile exports, but its growth is stagnant

  • Similarly, plastic exports are driven by plastic feed material

A Structural Shift In Export Composition

An overall view of the largest items being exported also shows something obvious. India mostly exports:

  • Refined crude

  • Chemicals and pharma

  • Intermediate metal products, not finished ones

  • Textiles

  • Gems and jewellery

  • Foodstuffs

The Indian export basket is, therefore, a speciality play. It has focused on some basics (unprocessed food, medicine), refined fuel (due to the presence of some of the world’s biggest oil refineries), premium items like gems and jewellery, and intermediate capital goods.

The glaring hole here is consumer goods, especially electronics. This is significant, as will be explained further in this article.

But, first, let us look at another facet of exports — the dramatic change in the composition of exports in the past 15 years.

The following classification divides exports into two groups — the traditional mainstay group and the new secondary/tertiary item group:

Indian Economy And Trade In 2021-22: Exports And Production-Linked Incentive Scheme, Analysed

Fundamental to the difference between these groups is their industrial input intensity. The traditional group comprises pre-industrial products. This might, in fact, have been the Indian export basket in colonial and pre-colonial times too — when the British extracted ore, textile raw material, and other primary goods and dispatched finished goods.

For example, footwear is mostly traditional handicraft, not high-end Nike or Italian patent leather goods costing hundreds of dollars or more.

The secondary/tertiary group comprises industrial items — most of them, in fact, heavily capital-intensive and not labour-intensive. They are well-documented by the Commerce Ministry on the engineering goods data site, but only have data up to the previous fiscal.

This graph shows how export composition has changed between these two groups in the past 15 years:

Indian Economy And Trade In 2021-22: Exports And Production-Linked Incentive Scheme, Analysed

In other words, the composition was approximately 60 per cent in traditional mainstays in 2006, but now comprises 60 per cent in the new secondary/tertiary group.

What’s more, Indian exports are not finished items in several of the traditional categories. Textile exports, for example, are dominated by yarn and not finished readymade garments.

Until the late 2000s, India was essentially a pre-industrial trading entity. Its export basket resembled what it used to export in pre-industrial times, even though export growth in the 2000s was strong — a lot of that was items like yarn and iron ore. India imported finished goods in turn.

One can see the problem here. We were exporting low-value-add and primary goods and importing finished goods. This imbalance remains the primary reason for India’s trade deficit, to be analysed in detail further.

This is, in fact, how we were impoverished under British rule. A refrain about their rule over India is that they ‘gave us automobiles, trains, and industrial items’. That is true, literally. Over 99 per cent of the locomotives and almost every car in India before the mid 1940s was imported. They extracted raw material, which is cheap, added value industrially, and made us buy the finished goods, which we paid for using taxes on primary goods in a pre-industrial society.

The British didn’t literally haul bags of gold away, like the Spanish in the Americas. They ran an extended trade inversion, making a pre-industrial society export raw material cheaply and importing high-value finished goods paid for with taxes on extremely limited value-add within a pre-industrial, agriculture-based economy.

Ironically, the primary product groups that had ensured India’s exports till the end of the 2000s had a significant industrial composition were refined petroleum and iron/steel — products central to conglomerates owned by the targets of populist criticism — ‘Ambani and Adani’.

However, since the mid-2010s, there’s been a dramatic shift. The new secondary/tertiary group increased from just around 50 per cent to almost 60 per cent in five years. A more fine-grained picture of this transition is seen in the graph below:

Indian Economy And Trade In 2021-22: Exports And Production-Linked Incentive Scheme, Analysed

The only traditional item that has retained its proportion is, paradoxically enough, agriculture products. Textiles and gems/jewellery have both dropped significantly as a proportion. This suggests robust agricultural productivity, even as the nation turns more industrialised and generates greater secondary and tertiary industrialised production.

Comparison With Export Powerhouses

Previously in this article, it was shown how much India’s export basket currently lacks in the domain of consumer and tertiary products, especially electronics. India’s export basket is now heavily secondary (example: iron and steel, refined petroleum, organic chemicals), but lacks in tertiary consumer products.

Now, let us look at the export powerhouses of East and South-east Asia. The following graph shows India’s exports sectorally broken down into popular sub-groups as compared to China, Japan, South Korea, Taiwan, Vietnam, Malaysia, and Thailand.

Trans-shipment-focused nodes (Singapore and Hong Kong) have been excluded due to a lack of relevance to broad Indian concerns. All data are 2020-21 figures. It is important to note that these are just the top export items and not the cumulative totals of all items.

Indian Economy And Trade In 2021-22: Exports And Production-Linked Incentive Scheme, Analysed

It is clear what dominates China’s exports here — around $1.2 trillion of exports entirely in electronics and electrical and computer equipment. These two headers account for only $50 billion of exports for India. In order to have a better view of the graph, here’s a look at the same data without China:

Indian Economy And Trade In 2021-22: Exports And Production-Linked Incentive Scheme, Analysed

All of them depend on consumer electronics, computers, and electrical goods. Each of them exports at least twice India’s volume in just these two headers. It’s clear why this offers the largest total addressable export market and why India focuses upon these areas.

There are industrial areas where India is a powerhouse relative to these countries, such as in refined petroleum and chemicals. However, as mentioned earlier, both these are secondary goods and not tertiary consumer items.

Production-linked Incentive (PLI) Scheme

The PLI scheme for export promotion is now well-known. Ingeniously conceptualised, it is probably the most focused scheme for export promotion ever conceived in India. There’s been no shortage of export promotion schemes in the past, but none of them made a significant impact.

Perhaps, the most consequent recent initiative was the Special Economic Zone (SEZ) Act. Since the passage of the SEZ Act in 2005-06, exports from SEZs have risen to $110 billion in 2019-20, and are on track to account for about 30 per cent of exports this year.

While a reasonably successful initiative, it’s clear that SEZs themselves are not sufficient to promote exports. A focused effort to encourage manufacturers to move to India is necessary. That is the job of the PLI scheme. While a detailed analysis of the PLI scheme is beyond the scope of this article, some focus areas of interest are:

Electrical, Electronics, and Computer Machinery

The situation is simple: there’s a vast total addressable market for exports totalling over $2 trillion a year. India accounts for only $50 billion or 2.5 per cent of it. A 10 per cent share would correspond to $200 billion of exports just from this header.

Further, the sector has vast employment generation potential. In addition, growth in this industry places a premium on labour education, technological capability enhancement, and the expansion of the local ancillary parts and component industries.

On the other hand, none of these are really unknown. The problem has always been how to implement effective policy that pushes global electronics and computer supply chain participants to produce in India. This has spawned detailed analysis beyond the scope of this article, such as, for example, 'How Intermediate Research Institutions Can Bolster Semiconductor Manufacturing In India' (Swarajya).

With the large-scale electronics manufacturing PLI scheme showing great promise so far, and the Minister of Electronics and Information Technology himself being a former technology industry insider, there is great hope of success in the field. It is imperative that policy making works concertedly with the industry as a long-term project on this front.

Auto, Auto Parts, and Electric Vehicles

Automobile-related exports accounted for almost $12 billion in just the first eight months of the fiscal year. While vehicle exports are down, component exports are up sharply. Further, investment in electric vehicle (EV) battery production scale is critical to national competitiveness. Both these are addressed by PLIs — Rs 57,000 crore in auto components and EV batteries.

Textiles and Footwear

The current structure of textiles and footwear exports is very inefficient. These are the broad factors at play:

  • Textile exports are dominated by yarn and fabric rather than readymade garments. This is unfortunate. Readymade garments should dominate exports in order to maximise value-added gains. Instead, we’re primarily exporting the inputs that enable others to create readymade garments.

  • Handloom/handicraft goods that are low-volume and low-value-add. These aren’t fundamentally cheap, but they dramatically undervalue the craftsmanship of the workers. Custom Italian footwear or Cuban chain-link jewellery, for example, command enormous premium multiples due to effective marketing of craftsmanship. India needs premium brands that leverage traditional craftsmanship — even that of something like Kolhapuri sandals. Our craftsmanship is celebrated, but grossly undervalued.

  • There is a lack of focus on modern footwear. For example, Vietnam exports $25 billion just in footwear, on account of the large presence of high- and medium-end formal and athletic footwear brand manufacturing there.

The composition of Indian exports indicates that the economy generates excess secondary industrial output that it doesn’t yet consume for tertiary/consumer goods production and, therefore, exports it. The PLI scheme intends to incentivise incremental capacity addition and also defines value-add requirements.

This is why the PLI scheme matters. It aims to fulfill specific policy goals suited to the present circumstances. It is not simply a coarse-grained scheme to promote exports — it defines fine-grained incentives aligned with the desired direction and parameters of activity for particular sectors, playing to existing strengths in secondary industrial capacity or the ability of the market to absorb the output.

Service Exports

We have primarily focused on merchandise exports. India’s strong record in information technology (IT) and business process outsourcing (BPO) services means that service exports as a fraction of merchandise exports resemble western nations more than its Eastern and South-east Asian peers, as shown in this graph:

Indian Economy And Trade In 2021-22: Exports And Production-Linked Incentive Scheme, Analysed

In service exports, India performs nearly on par with China and ranks one place behind them, at seventh place, in the world, vastly outperforming the rest of the developing world and ranking near the top of a list dominated by advanced western countries. The only developing Asian country with service exports so high as a fraction of merchandise exports is the Philippines, which also has a thriving, but much smaller, IT/BPO industry.

At the turn of the twenty-first century, the late Dewang Mehta, then the head of the National Association of Software and Service Companies (NASSCOM), asserted that one day Indian service exports will exceed Saudi Arabia’s oil exports.

This came true in 2020-21 for the first time ever — $134 billion Indian IT/BPO exports out of $210 billion total service exports, compared to $114 billion in Saudi oil exports, driven by the drop in oil prices during Covid. Given the volatile price of oil, this is a knife that cuts both ways, but the occasion is notable all the same.

As with merchandise exports, service exports, too, have started to sustain performance above a major threshold, exceeding $20 billion a month in each of the past four months; it has only previously exceeded $20 billion twice in history. This momentum points to the ability to sustain an annual run rate of $240-250 billion or higher.

Summary and Wishlist

India’s exports have undergone a dramatic change in the past decade and a half. As recently as a decade ago, our exports were that of a pre-industrial society. The primary industrial value-added goods were refined petroleum and iron/steel, neither of which are tertiary goods.

India’s export basket transitioned decisively towards industrial and feedstock goods from its traditional pre-industrial basket only in the 2010s. In that regard, India was 20-30 years behind China and South-east Asia, which aggressively focused on high labour input but low- to medium-value-add industrial-scale production from the 1980s and 1990s or earlier.

During the 2010s, there has been much criticism that Indian exports didn’t grow much. This is true, as traditional mainstays lost competitiveness even as new secondary/tertiary items only started to grow. As a result, export composition changed dramatically.

Before then, a significant part of India’s exports comprised items it had exported for centuries — textiles, gems/jewellery, traditional handcrafted ware, foods, and spices. However, it has decisively shifted to industrial goods since the mid 2010s.

In 2021-22, Indian industrial capacity generated enough excess output to dramatically increase exports. With a new investment cycle gaining momentum, this is poised to continue over the next several years, accelerated by enormous investments in infrastructure in recent years.

With the PLI scheme, India’s exports are poised to rise significantly due to the concerted focus on large volume and growth industries for consumer goods that can quickly accelerate India’s exports in the next few years. Moving just a few percentage of the export volume of these to India translates to several hundreds of billions in incremental exports.

While some of the pronouncements on export intent — for example, electronics exports of over $200 billion — sound outlandish, it is fundamentally a matter of few percentage points gain in share of the total market, and achievable with good policy execution. The top Asian export-oriented economies each do $200 billion or more in exports in this sector.

The fact that exports are now dominated by secondary goods and processed feedstock (chemicals, refined petroleum) is due to an economic structure that is building up secondary capacity, but lacks the manufacturing base to produce tertiary and consumer goods in volume. As a result, we export the excess secondary production instead of consuming it to produce finished goods. The PLI scheme focuses on addressing this aspect.

To conclude with a wish list for the government:

  • Push an explicit focus on moving to tertiary industrial and consumer goods exports

  • Maintain strong industry and research collaboration into the electronics/computer PLI schemes — it has the highest near-term impact potential due to the sheer size of the export industry

  • Consider expanding the EV battery PLI capacity requirement to more than 5 GWh minimum, or bias incentives towards greater capacity; newer EV battery plants are humongous, with the Tesla Gigafactory Arizona being 37 GWh

  • The PLI scheme in textiles should bias incentives towards fully finished items over fabric/yarn

  • Consider a PLI scheme tailored to large-scale modern footwear production

(In the next part, Indian imports and balance of trade will be analysed, as well as the impact of PLI on both exports and imports.)

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