How sustainable is India’s exports boom?

Synopsis: The rise in exports has sparked hopes of a swift post-pandemic recovery, but there are reasons to be cautious.

Introduction

August was the fifth straight month when India’s goods exports exceeded $30 billion. In the last five years, other than this ongoing run, it crossed $30 billion in just one other month i.e. March 2019

The increase is also broad-based. As many as 24 categories have registered an increase in exports in dollar terms over the corresponding 2019 period.

Why India still needs to be cautious?

There are two reasons to be cautious.

The first point of caution is the nature of items driving the ongoing export growth. Primary commodities, essentially, goods available from cultivating raw materials without a manufacturing process, are behind the current boost.

The largest gainer in exports compared to last year is petroleum products, and some of the other commodities that have registered the biggest increases over 2019, are ores, metals, cotton, and sugar.

In this context, experts warn of the ‘bullwhip effect’, wherein the post-pandemic economic recovery globally causes a spike in demand for primary goods. But, a subsequent tapering of demand can harm the same exporters.

The second point of caution is related to the international transportation of goods, which happens mainly via ships. Due to the pandemic, the number of ships, and containers in circulation fell. Meanwhile, world trade is topping pre-pandemic levels. The shortage of containers is also creating congestion and increasing processing time at Indian ports.

So, how corporates in India navigate these two factors will have an impact on the sustainability of the current export upswing.

What needs to be done to make exports growth sustainable in the long run?

Firstly, modest export growth in manufactured products needs to be taken care of. The highest increase in exports was seen in iron ore (87%) and cotton (43%). However, growth has been relatively modest in select key sectors in India’s export basket, especially in manufactured products. Notable among them are drugs and pharmaceuticals. Exports of ready-made garments have fallen by 11%.

Secondly, measures should be taken to mitigate the global shipping crisis. A 200% increase in the Baltic Dry Index notwithstanding, freight rates are expected to rise further in the coming months, as demand for shipping peaks in India around the festive season in October and November.

The rise in freight charges has particularly affected exporters from small and medium enterprises.

Thirdly, exports need to be incentivized by the government. In 2019-20, exports comprised 19.3% of India’s gross domestic product (GDP). Thus, a rise or fall in exports can have a significant bearing on economic growth. For India to succeed in export-led development, the focus should be on enabling manufacturing and global competitiveness.

One way to increase the competitiveness of Indian exporters is through government incentives. However, incentivizing Exports without offending WTO rules is a challenge. For instance,

The erstwhile Merchandise Exports from India Scheme (MEIS), which provided an incentive of 2-7% on the shipping value of eligible exports, was deemed illegal under WTO norms after India’s per capita GDP crossed $1,000 in 2017.

To replace the MEIS, and comply with WTO norms, the government instituted the ₹12,454-crore Remission of Duties and Taxes on Exported Products (RoDTEP) incentive scheme. This provides rebates to eligible exporters with remission rates ranging from 0.3-4.3%. Exporters can use this to pay specified taxes.

Fourthly, according to trade economists, beyond primary goods, India has a comparative advantage in lower-skilled, labor-intensive manufacturing such as textiles, which also has the potential to create large-scale employment. Another sector where India has a cost advantage is pharmaceuticals. India needs to support and incentivize such sectors.

Finally, innovative policy support. The production-linked incentive (PLI) scheme is one example of policy support paying dividends for smartphones, where India has become a net exporter, though with low-value addition. Such sector-specific policies need to be identified for other sectors also.

Source: This post is based on the article “HOW SUSTAINABLE IS INDIA’S EXPORTS BOOM?” published in Livemint on 21st Sep 2021.