The trade landscape is changing structurally to India’s advantage

Source- The post is based on the article “The trade landscape is changing structurally to India’s advantage” published in the “mint” on 8th June 2023.

Syllabus: GS3- Indian economy

Relevance- Issues related to trade

News– The article explains the phenomena of increasing exports of India.

How rising exports in India reflects structural changes in the trade basket?

India added 628 new products to its export basket by 2022. The new products are highly concentrated in high-tech manufactured goods, chemicals, and electronics.

Between 1994 and 2022, India has carved out new markets for over 600 products. It has become the market leader in some of these new product categories. For instance, India is a large net exporter of certain turbojets and defence technology.

The growth of the new product basket outpaces the growth of legacy products. Productions such as helicopters, arms and ammunition, and electrical machinery registered some of the highest growth rates.

Exports of India’s top-three products, which include petroleum, diamonds, and medicaments, continue to grow. But the share of these products is declining.

How does a change in product basket impact sensitivity to exchange rate fluctuations?

Research shows that as the export baskets shift towards high-value goods, there is decline in the sensitivity of exports to real effective exchange rates.

While the exchange rate sensitivity was as high as 2.5 for 1994-2007, it shows a significant drop to 0.6 for 2008-2022.

There is rising integration with the global value chains (GVCs). It is also responsible for decline in sensitivity to exchange rate.

How beneficial is the PLI scheme beneficial for the Indian economy?

Most of India’s GVC participation has generally remained upstream. Upstream trade involves less value-addition and can be more prone to demand shocks.

In this context, policies such as the production-linked incentive scheme (PLI) can prove useful for developing downstream linkages. The PLI scheme can further integrate India into downstream GVCs by incentivising global manufacturers to set up shop in India.

PLI scheme is criticised for manufacturers using incentives to set up assembly units which are low in value instead of manufacturing plants.

The experience of countries like China and Vietnam shows that assembly in low value added, led to employment generation for a large number of low-skilled workers.

The assembly units also helped build backward linkages to domestic sectors in these countries, creating further value-addition.

As firms build their footprint, they will develop into producing more sophisticated components. It will lead to higher value creation.

How is India’s performance in the services exports?

Early 2000s was a period of BPOs mushrooming to provide cost-cutting back-end information technology (IT) services. India now looks beyond just cost-cutting.

Data from the Asian Development Bank shows that India went from providing back-end services in law, IT and management in 2010 to upstream, high-value-added services in these areas by 2020.

Our services exports have also shown a low degree of vulnerability to global income fluctuations. For instance, services exports to the US and Canada have shown a low degree of correlation with the GDP growth in these countries.

How India’s integration into manufacturing GVCs can also increase through exports of services?

Intangible services include pre- and post-production activities such as supply chain management know-how, brand management and design.

Firms specialising in pre- and post-production activities within a GVC make the largest value additions.