India’s Exports Reach US$ 400 billion: Reasons, Challenges and Way Ahead – Explained, pointwise

Introduction

The value of India’s goods exports in the FY2021-22 hit $400 billion in March 2022 which is the highest till date and is expected to reach US$ 410 billion by the end of the month. It adds another feather in the cap of the Indian Economy and shows its potential to serve the global market. Some experts have lauded this achievement while others have expressed caution that this growth is a result of an unmet demand that was accumulating during the pandemic. Nevertheless, crossing the threshold of US$ 400 billion is significant achievement.

What is the current status of India’s Exports?

According to data from the Reserve Bank of India, outbound merchandise trade had clocked US$ 303.5 billion in 2017-18, US$ 330.1 billion in 2018-19 before slipping to US$ 313.4 billion in 2019-20. The numbers in 2019-20 were slightly dented due to the harsh national lockdowns imposed in the last week of that financial year. The exports fell to US$ 292 billion in FY2020-21 due to the pandemic. However, a swift recovery was witnessed in FY2021-22, with exports crossing US$ 400 billion in March 2022.

Exports have registered a 37% increase compared to the previous fiscal and 21% over the previous record high of exports of US$ 330 billion set in FY2018-19. Engineering exports have jumped 46.5% to cross US$ 100 billion for the first time. Chemicals, cotton yarn, handloom products, and the apparel industry have also done well.

India had significantly boosted exports to key trading partners with outbound shipments to the UAE increasing by 65% during the fiscal and exports to the US increasing by 46%. 

Source: Indian Express

What are the reasons behind the surge in Exports?

Rise in Prices: Higher prices of commodities and oil helped drive up the value of exports, with petroleum products exports jumping over 141%.

Diversification in global economy: Many countries shifted their global procurement preferences to diversify their dependence on China following the outbreak of the COVID-19 virus e.g., Australia, which is in the midst of a shrill trade battle with China, has made way for India, taking India’s exports to Australia up 94% so far this year.

Unmet Global Demand: Another reason for such a huge rise could be the pent-up global demand that was unmet during major waves of the COVID-19 pandemic.

Monetary Policies of countries: Expansionary monetary policy by developed economies in response to the economic impact of the pandemic has also boosted demand for Indian exports.

What is the significance of rising exports?

Resilience Capabilities: India has managed to achieve its export target despite supply disruptions due to the pandemic, the challenging shortages of shipping containers and surging freight rates.

Huge Growth Potential: The rise in exports shows the huge magnitude of growth that India can generate with the right vision and inputs. The ~40% growth in FY2021-22 compared to 2020-21 would be India’s fastest export growth rate since 2009-10.

Source: Indian Express

Further, many goods like auto components, motor vehicles, cereal preparations, buffalo meat, rice etc. saw increases in overall export volumes despite stagnant or declining commodity prices.

Atmanirbhar Bharat: A surge in export shows India’s rising might in manufacturing of goods thereby moving closer to the vision of Atmanirbhar Bharat and achieving self reliance.

Attracting Foreign Investment: Rising exports signify the potential of a nation to serve the global market. This capability attracts a lot of foreign investment and helps in surging a nation’s foreign exchange reserves e.g., India’s export potential has played a pivotal role in creating the current corpus of US$ 620 billion dollar forex reserves.

Target Completion: The FY2021-22 reflects the first time in several years that the country has met its exports target. In the last few years, India was not able to achieve its intended target but this scenario has been altered in 2021-22. 

What steps have been taken to promote exports?

Foreign Trade Policy 2015-20: It provides a framework for increasing exports of goods and services as well as generation of employment and increasing value addition in the country, keeping in mind the vision of ‘Make in India’.

Remission of Duties and Taxes on Export Products (RoDTEP) Scheme: It is a new scheme that is applicable with effect from January 1st, 2021, formed to replace the existing MEIS (Merchandise Exports from India Scheme). The scheme will ensure that the exporters receive the refunds on the embedded taxes and duties previously non-recoverable. Mandi tax, VAT, Coal cess, Central Excise duty on fuel etc. will now be refunded under this particular scheme.

Niryat Bandhu Scheme: It was launched with an objective to reach out to the new and potential exporters including exporters from Micro, Small & Medium Enterprises (MSMEs). It aimed to mentor them through orientation programmes, counseling sessions, individual facilitation, etc., on various aspects of foreign trade.

Common Digital Platform for Certificate of Origin: It has been launched to facilitate trade and increase Free Trade Agreement (FTA) utilization by exporters.

Districts as Export Hubs: It aims at identifying products with export potential in each district, addressing bottlenecks for exporting these products and supporting local exporters/manufacturers to generate employment in the district.

What are some of the concerns that need to be addressed?

Competition from Neighbors: India hopes to consolidate the gains and establish its credentials as a credible alternative to China. However, it could face stiff competition in some sectors from Asian peers such as Vietnam and Bangladesh especially in the labor intensive sectors e.g., Bangladesh poses significant competition in the Jute Textile sector.

Russia-Ukraine Crisis: The prolongation of the crisis will keep on driving the oil prices that may enhance cost of production in India which would in turn enhance the price of exporters. This rise in export price may reduce demand for Indian products and make them uncompetitive. The crisis has also resulted in high shipping rates, container shortages and re-alignment of trade routes around the Black Sea that has enhanced the hardships of Indian Exporters.

Monetary Tightening: As the situation of Pandemic normalizes, the developed world would do monetary tightening by raising interest rates. This may suck out dollars from emerging markets and create a financial crunch for companies.

Inward Looking stance of Nations: The COVID-19 pandemic has induced an inward-looking shift in nations. They are now focusing on enhancing domestic production and reducing the reliance on imports. This would eventually hamper Indian exports.

Delays in Governance: The red tapism and unenthusiastic attitude of bureaucrats creates unnecessary delays which impacts exporting potential of India. e.g., a parliamentary committee has urged the government to include Special Economic Zones and sectors such as pharma, steel, and chemicals under the Remission of Duties and Taxes on Export Products (RoDTEP) Scheme. This finally kicked off last year after a significant delay.

Exports as share of GDP: While the exports have achieved a new high, their proportion as a share of GDP still has a scope of lot of improvement. In FY2021-22, exports are ~14% of the GDP, below the high achieved in 2012-13 at 17%. A 17% share of exports today would have meant exports worth US$ 485 billion. Exports have 19% share in the Chinese economy (China’s highest share was ~36% in 2006)

Source: Indian Express

What lies ahead?

First, many economists expect the rupee to weaken over 2022-23, which in turn could be a minor perk for exporters.

Second, India should grab on opportunities that are created by the Russia-Ukraine crisis e.g., experts believe that the crisis may create opportunities for Indian farm produce exports, especially for crops like wheat and maize.

Third, a swift conclusion of Free Trade Agreement pacts being negotiated with countries like the U.K., Australia and Canada could create easier market access in these large markets.

Fourth, there should be a timely review of India’s Foreign trade policy in order to provide a better environment for doing exports. Exporters await a long-overdue revision of the Foreign Trade Policy for 2015-20, which has now been extended into the first few months of 2022-23.

Fifth, apart from focusing on boosting exports, focus should also be on reducing imports in order to stabilize the rising trade deficit. India’s imports have shot up to record levels and could end up ~US$ 600 billion compared to 2020-21’s import figure of $393.6 billion. The trade deficit for the year could be around US$ 190 billion, sharply higher than the US$ 102 billion recorded in the pandemic year.

Conclusion

The achievement of US$ 400 billion of exports is a major milestone for the Indian economy. However, many experts have rightly opined to be cautious. According to UNCTAD estimates, the positive trend for international trade in 2021 (calendar year) was largely the result of increases in commodity prices, subsiding pandemic restrictions and a strong recovery in demand due to economic stimulus packages. As these trends are likely to abate, international trade trends are expected to normalize during 2022. It is during this time the true picture might emerge and analysts will be able to undertake better analysis.

Source: The Hindu, Indian Express, Indian Express, PIB