Increasing exports in India and the challenges ahead – Explained, pointwise

Introduction

India’s goods exports have reached a record-high of US$393 billion, after having stagnated in the range of US$250-330 billion (annual) for a decade. Along with this, India’s global share of exports has also risen to an all-time high, and has likely crossed 2% in the last quarter. According to statistics released by the WTO, India’s share in total world merchandise exports was 1.68% in 2017. The significant feature of India’s increasing exports is its sustainability.

However, despite the positive signs, India’s manufacturing competitiveness is a matter of worry e.g., the share of manufacturing in GDP fell from 16% in 2012 to just 13% last year. A surge in manufacturing exports, as well as import substitution, can help reverse the worrying trends. While higher commodity prices contributed to the recent increase in exports, which could reverse too; trends across several large sectors seem sustainable.

What are the significant things to consider with India’s increasing exports?

Electronics: Electronics is the largest sector by value in the global goods trade, where India has been noticeably absent so far. But in 2021, India exported $16 billion, a fraction of a percent of global trade but double the level of 2018.

Many global firms are now assembling handsets in India: 10 of them benefit from production-linked incentive (PLI) schemes, implying handset assembly is now competitive in India. Other electronics assembly and component firms are also setting up factories in India. This would enhance the domestic value-add in these exports.

Speciality chemicals: Pharmaceutical exports continue to grow, and after two decades of steady compounding, growth in the speciality chemicals industry is now beginning to increase. Over the past advantages in bulk chemicals, India’s global share has doubled to 3% in fine chemicals (including pharma process engineering skills and a complex ecosystem).

Textiles and apparel exports: These exports hit a record-high $38 billion in 2021, after being stagnant in the $32-33 billion annual range since 2013. So far, yarns and fabrics, which are benefiting from price increases. Some garment manufacturers have customers asking for a 50% rise in output on top of record output last year.

Engineered goods: The Engineering Goods sector comprises metal products, industrial machinery and equipment, automobiles and their components, transport equipment, bicycles, medical devices and renewable equipment. The Engineering Goods exports have registered a growth of 54% during April-December 2021 as compared to the same period in the previous year (2020).

What are the reasons contributing to India’s increasing exports?

Manufacturing in several sectors moving out of China:  A shrinking industrial workforce is pushing labour-intensive work out of China. This can continue for at least the next decade, and India is emerging as one of the alternatives for labour intensive-sectors.

Benefit of Government policies: Union and State Governments have been taking steps to ease the processes and creating incentives to facilitate capex (Capital expenditure) subsidy, provision of land, speedy permissions, electricity and skilling reimbursement and tax deferrals. Further, the 13 production-linked incentive (PLI) schemes, with proposed incentives of almost  INR 2 lakh crore over five years. Most of the PLI Schemes are in the execution phase now. As these schemes ramp up, they can add substantially to exports going forward.

As an illustration production scale-up of electric two-wheeler manufacturing by a firm that is new to the business, occurred at a very fast pace because of quick allocation of land and approvals related to construction.

Access to cheaper capital: This allows firms to target larger products, investing in R&D, capacity and further global expansion.

Growth of specific sectors: There has been growth of speciality chemicals industry. There were just six such industries in 2015, but now there are 18 firms in the sector with over a billion dollars in market capitalisation. This is due to the high price of chemicals. Similarly, the US ban on Xinjiang cotton is likely helping the Indian cotton value chain.

What are the challenges in increasing exports further in India?

Slow Progress on some PLI schemes has been slower than expected, like in autos and apparel, mainly due to the need to recalibrate and refocus incentives.

Challenges in job creation: Goods exports can add nearly 2.5% to GDP over the next five years. This is also important for job creation. Gains must continue for 15 years or more for India’s export share to be at a similar level as its share of the global workforce. For that to occur, growth must pick up in other sectors as well, like autos, capital goods and defence.

Low participation in Global Value Chains (GVCs): Compared to the major exporting nations in the East and Southeast Asia, India’s participation in the GVCs has been low. This has also resulted in low Market Penetration in High-Income Countries e.g., India slipped to the eighth position in 2020 in terms of its share of merchandise exports among developing economies, according to a WTO report.

High diversification of Indian exports: Instead of specialization, Indian exports are characterised by high diversification. Hence, Indian exports are spread over many products and partners, leading to its lacklustre performance.

What can be done to increase India’s increasing exports further?

Implement the recommendations of SCALE Committee: The Steering Committee for Advancing Local Value-Add and Exports (SCALE committee), comprising top Indian CEOs; has worked out action plans for 24 priority sectors. These include electronics, auto components, textiles, steel, aluminium, marine products, etc. The committee suggested the following,

1) India needs a sustained effort to reduce problems in the areas such as cost and ease of doing business, Market access via trade treaties, Technology and quality issues, Supporting Brand India for manufacturing, 2) Addressing cost issues: The government needs to urgently address cost issues related to land, power and capital, apart from addressing scale, which lowers cost disabilities, 3) Making companies more competitive: Addressing concerns around infrastructure and logistics, labour flexibility and strengthening MSMEs could also help in lowering costs for companies and make them more competitive in global markets, 4) India need to push the “China plus one strategy” to attract investment from multinationals while positioning India as an export hub.

Apart from that, India should

Utilise the opportunity: Technology and geopolitics are expected to reshape global value chains over the next decade and new opportunities will emerge e.g., the disruptions in the automobile sector, with several new entrants (like Apple and Sony), an accelerating transition towards electric vehicles, changes in mobility, and the emergence of new manufacturing models (like custom assembly), could provide new opportunities for Indian firms. Indian firms must utilise these opportunities without any delay.

Skill development is necessary not just for workers and entrepreneurs, but also for regulators and administrators to regulate the advancements.

Continued investments in infrastructure may be necessary to remove bottlenecks for export growth to sustain.

Strategic policies to improve India’s contribution in GVCs: Export growth of capital intensive products from China are mainly due to its participation in the GVCs. For achieving this, China integrated its domestic industries within the GVCs. India should sign Free Trade Agreements, integrate domestic industries with GVCs and improve India’s market penetration into High-Income Countries.

In conclusion, India’s share of exports can be improved to a greater level if certain bottlenecks are resolved. The Prime Minister has set a clear target of doubling India’s share of world exports to 3.4%. For that, India should specialize more in the areas of its comparative advantage and achieve significant quantity expansion.

Source: The Times of India