As recently as in November, the trade deficit was driven largely by higher commodity prices of oil and coal  and a sharp uptick in gold imports which shot up to a five-month high of $6.7 billion in August. In all, the gold import bill touched a decade-high level of $23.9 billion during the first half of the year because of the release of pent-up demand following the easing of lockdown restrictions and re-opening of retail outlets along with  the revival in consumer sentiments due to the steady progress in vaccination. 

Whether it is our lust for gold or rising commodity prices, India seems to be perpetually saddled with a trade deficit. This is in contrast to China, an exporting power, which posted a trade surplus of $71.72 billion in November despite its exports losing some steam.

No champion, yet!

Another worry is India’s failure to fully exploit its services exports which are projected to touch $150 billion this year, much less than the merchandise exports. Agreed that during the pandemic, sectors such as tourism, travel and hospitality took a hit. But there are predictions that the share of services in international trade will overtake merchandise trade by 2040. India itself has set an ambitious target of $1 trillion in services exports by 2030. So far, out of total services exports, a large chunk of exports comes from the IT and ITeS sector.

Now the focus of the government is to boost services export from some other crucial sectors like tourism, healthcare, education, etc. These are among the 11 champion sectors identified by the government.  While some work has already been done on those champion sectors, the government has a very long way to go.

Darpan Jain, Joint Secretary, Department of Commerce & Industry, refers to tourism and education sectors, which have been identified as the champion sectors. “Worldwide we have over 1 billion people travelling but we have a very small share in that, even smaller than Thailand and Malaysia. Take education sector, we have 5 million students travelling to get admissions and for higher studies, but here in India we get 50,000 students.”

A blip and some worries

The government appears unfazed by the latest blip, which happened when merchandise exports fell to the lowest level in nine months in November. As supply bottlenecks and rising  Covid-19 cases in Europe cast a shadow on India’s outbound shipments, growth in merchandise exports slowed down to  $29.88 billion with items such as gems & jewellery and pharmaceuticals registering a decline.

Simultaneously, imports rose to $53.15 billion in November from $33.81 billion last year and India posted a record monthly merchandise trade deficit of $23.27 billion compared with $10.19 billion a year ago. 

One explanation being given officially for the dip in exports is that the pent-up demand in goods like gems & jewellery abroad had peaked. Aditi Nayar, chief economist at ICRA Ratings, says festive season holidays had substantially dented the momentum in merchandise exports in November, bringing them down to the lowest level of FY22. “We are cautiously optimistic that the exports momentum will revive, though the uncertainty engendered by the Omicron variant poses a concern regarding the immediate outlook,” she said. 

Macro-economic stabiliser

Before the November trade numbers came in, the government and even certain economists were beginning to see exports as a macro-economic stabiliser and growth booster, making up for the absence of fiscal capacity. 

Indeed, from a macroeconomic perspective, rising exports are a positive sign for the economy as it recovers from the economic shock induced by the second wave of the Covid pandemic, which has differentially blunted three out of the four engines of GDP growth – private consumption, investments and government consumption. Like agriculture, exports were seen as a silver lining in our economy.

But is that so? From the second quarter (Q2) of FY22 number of GDP growth at 8.4 per cent, a deceleration from the 20.1 per cent growth seen in Q1, it is clear that trade alone wouldn’t bail us out (yet).

Compared with Q2 FY20, the pre-Covid marker, the print for Q2 GDP in FY22 was flat (0.2 per cent CAGR) and the first half FY22 cumulative GDP  was still 2.2 per cent lower compared with  the first half FY21 on an annualised basis. This means that the aftereffects of the first and second wave of the pandemic are still lingering. This is evident from the fact that private consumption and fixed investment remain on a rather modest recovery path. On top of that is the renewed threat of the new virus variant of concern, Omicron.

While the Modi government claims to have made some fast moves to check the spread of the variant, it will have to be constantly on guard in the coming months, recalibrating its vaccination strategy and ensuring that the states enforce adherence to Covid protocol, so that Omicron does not derail the economy like Delta did. Besides, while it can monitor the domestic outbreaks, it has no control over the global situation.

 Trade and GDP

 But here’s the thing which appears to have fired up the government. Cutting through the clutter, whatever semblance of respectability we are seeing in the Q2 numbers came from a robust performance in exports and imports of goods and services, which grew 19.6 per cent and 40 per cent, respectively. Trade now accounts for 46 per cent of our GDP, the highest since 2014. The Indian economy has so far been regarded as consumption-driven. Are we then seeing an attempted transition to an export-driven economy? 

It is too early to draw sweeping conclusions because we have just come out of an extraordinary situation and the post-Covid growth recovery in India has hinged considerably on the revival in global trade. After the Covid-induced fall of last fiscal, exports this fiscal were supported by improved order flow from advanced markets following an economic resurgence there and rise in global commodity prices. 

Both exports and imports of goods and services are now 7 per cent higher than pre-Covid trends. As the government firms up its strategy, it is bound to face a dilemma: whether to prop up exports or let consumption take its preeminent position. So far, India’s growth story has been consumption-led. Attempts to make it investment-led have not taken off yet.

The standard trick to turn around a slowdown-affected economy is to boost consumer demand, mainly by the organised sectors in urban areas through improvements in compensation and leveraged spending. As it happened, the government’s expenditure in Q2 was quite low. In fact, the government’s quarterly spending was the lowest in any Q2 of the past five years – the spending in the first half has been just 1 per cent higher than what it was in the first half of the pandemic year of FY21, and was 5.3 per cent lower than what it was in the corresponding period of FY20. The Union and state governments would need to step up, if they are serious about growth and boosting investment in the private sector in the conventional manner. 

On the other hand, some experts even believe that with rising global demand, India should strive to compete in some segments vis-a-vis China. “Currently, China is facing supply-side as well as demand-side issues owing to several internal challenges (energy, debt crisis). Therefore, India is in a good position to increase its exports, and can become a substitute for China across various product categories or sectors,” says DK Srivastava, chief policy advisor, EY India. It is possible that the non-economists in the government also believe that this can happen.

The apparel story

While India’s cumulative merchandise shipments have been helped by a spike in petroleum exports, the textile and garments sector has been a major product category recording a surge in value terms, alongside the gems and jewellery sector, engineering goods and cereals. Demand from key external markets like the United States and the European Union in product categories such as textiles and garments have helped boost exports in this segment. Textile and apparel exports to the US, our single largest market, were up 55 per cent in the first seven months of 2021. This is the fastest pace of growth among the top five countries exporting textile and garments to the US. 

In the high-margin global export market for clothing and apparel, India had been edged out by competitors such as Vietnam, Indonesia and Bangladesh consistently over the last 10 years, which have been growing much faster in supplies to key markets such as the US and the EU. The trend so far in 2021 marks a reversal of this trend – India’s exports to the US surged 55 per cent during January-July 2021, higher than Vietnam’s 18 per cent, Bangladesh’s 29 per cent, China’s 28 per cent and Mexico’s 31 per cent.

One of the reasons cited by trade analysts is the higher export order books being reported by Indian garment exporters, alongside buoyant orders in the home textile segment where India has traditionally been a strong player. Here were less severe lockdown restrictions in the country’s export hubs, especially in southern states such as Tamil Nadu and Karnataka, during the second wave. This ensured continuation of operations of units. Products also get diverted from the sluggish domestic market to exports.

Wheat boom

Global shortages have also helped India. For instance, wheat exports from India have increased sharply and are bound to do well this fiscal as global supplies have been affected by lower production in the US, Russia and Canada. “Exports could be anywhere between 2.5 million tonnes (mt) and three mt this fiscal as there is good demand for Indian wheat, So far, 1.5 mt of wheat have been exported,” said Nitin Gupta, Vice-President, Olam Agro India Ltd.

Apart from the improved order flow, what else was contributing to the rising exports? Liquidity measures announced for MSMEs, which contribute over 40 per cent of exports, have helped them deal with working capital bottlenecks. While the exports in the latter half of 2020-21 were driven by iron ore, pharma and agri-commodities, petroleum (which contributes 15 per cent of total exports), engineering goods (28 per cent), textiles and clothing (8 per cent) and gems and jewellery (10 per cent) have contributed to the kitty since April this year. 

States chip in

The role of states too needs to be highlighted.  To offset the crimped domestic consumption, states are aggressively competing against each other to grab a share of the export basket. In the past, export promotion was dealt by only the Centre, without any active mechanism involving the states or districts into the decision making process of promoting goods and services produced at the grassroots level.  But now the Union government is working on 'developing districts as export hubs' to decentralise export promotion activity. 

“The idea is to create an institutional framework in every state, going down to every district and use that framework to assess every district in terms of ongoing export activities, in terms of capacities for enhancing those activities, and making time-bound action plans to take those initiatives forward. Every district is being mobilised, so every district realises its potential as an export hub,” says Anup Wadhawan, former secretary, commerce.

Gujarat, Maharashtra, Tamil Nadu, Andhra Pradesh and Karnataka are top exporting states. Recently, TN released its export promotion strategy. The state’s   export basket is already highly diversified with the top ten products contributing 70 per cent of the export share. The state, according to studies, has an estimated untapped export potential of Rs1.6 lakh crore. M.K. Stalin, chief minister, says, “We have set up a target of $1 trillion economy for Tamil Nadu by 2030. To achieve this, the state’s exports should be increased to $100 billion from the present $26 billion.”

UP steps up

Even a traditional laggard like Uttar Pradesh has caught up. The annual average growth rate of merchandise export from UP in the past four years  has been 6 per cent, which is much above the national average of 2.4 per cent, according to  the latest report of Exim Bank. The report ranks UP fifth among all states by value of exports in 2020-21. The state’s exports amounted to $16.4 billion in the financial year.

The report attributes the achievement to a conducive policy environment for manufacturing and exports. Even during the pandemic, leather, textile and glassware products were exported and there was huge demand for a wide range of products from the state in the overseas market. The report also highlights UP’s potential to achieve exports of $30 billion in the short to medium term.

To further promote exports, the state government has decided to set up Overseas Trade Promotion and Facilitation Centres in all 75 districts of the state. The MSMEs department plans to set up a centralised facilitation centre for better coordination among these centres which will increase the worth of exports, apart from proving employment to people.

As the push to exports has come from the highest political authority of the land, all ministries and agencies are putting their best foot forward.  Modi has linked his flagship programme of Atmanirbhar Bharat to the export-promotion drive to increase the share of India’s export in the Global Value Chains.

The idea still needs to be fleshed out, as one is not sure where this will leave small firms making products with local inputs. They face competition from large global firms having an advantage of scale, technology and finances. Quality is also an issue. To provide comfort to this category, will the government continue to engage in protectionism by erecting tariff barriers? That will go against the philosophy of free trade.

Role of MSMEs?

The government will have to clearly delineate the role of MSMEs, which provide the basic impulses to our economy, in the evolving export strategy. Various studies have shown that MSMEs have been severely impacted by Covid-19. Srikar K Reddy, joint secretary, department of commerce, claims that the government is keen to provide more market access to Indian companies, specially MSMEs as this segment is extremely critical to boost employment. But with over 90 per cent of them facing challenges pertaining to liquidity, labour, raw material and logistics, a comprehensive solution is not in sight.

Two baskets

Trade economists tend to divide the product profile of our exports into two baskets. Basket A contains products traded in large values globally but in which India has a small share – examples: machinery, electronics and transport products account for 37 per cent of global goods export basket. But the share of our export in global exports of each of these is low. Machinery 0.9 per cent, electronics 0.4 per cent and transport goods 0.9 per cent.

More examples of our low share in important products include integrated circuits (0.03 per cent), computers (0.04 per cent), solar-cells (0.3 per cent), LED TV (0.02 per cent) and mobile phones (0.9 per cent). India’s ranked 42 in 2000 and 43 in 2019 Export Complexity Index, a measure of diversity and technological sophistication of goods exported by 130 countries. This was mainly because of weak presence in Basket A products.

China’s rank improved from 39 to 16 during this period due to expansion in Basket A products. A major thrust should be to focus on expanding presence in such products.

As for Basket B products, India has a large share in global exports, but the value of world trade in these products is small. For example, India's share in global textiles exports is 5.9 per cent. But textile is a small category counting for just 1.3 per cent of the global export basket. In marine products, India has a high share of 5.4 per cent. But marine products count for just 0.6 per cent of the global export basket.

Other examples where global export value is small, but India has a large share are: cut and polished diamonds (28.8 per cent), jewellery (13.5 per cent), rice (35 per cent), shrimps (25.4 per cent), and sugar (12.4 per cent). The small size of the Basket B sets the limit on the growth. Being labour-intensive and low technology, such products face competition from low-cost countries.

The general prescription for growth of export of products in both the baskets has several components like lower import duties on inputs, increased access to formal finance, simplified process of exporting for small value consignments, getting large anchor firms in critical products to set up operations in India and ensure fast entry/exit of containers through ports and customs (See Box: 5-point mantra).

FTAs in making

Then there are bigger policy issues at stake. A slew of well-oiled free trade agreements (FTAs) can make the targets easier. After rubbishing the FTAs signed by its predecessor government, the Modi dispensation has now set aside its RCEP experience and is fast-tracking  trade pacts with  the UAE, the UK, Israel, the European Union, Australia and Canada. The government is acting on the premise that well-designed  FTAs  can be an important cog in the Make in India wheel. More than that, the government will have to ensure a bigger play for our services exports in these FTAs.

Considerable importance is being given to the recently-launched negotiations between India and United Arab Emirates (UAE) for a Comprehensive Economic Partnership Agreement (CEPA) with an early harvest to be concluded by December-end. The success of negotiations could set the pace for other FTAs that are being contemplated.

The UAE is currently India’s third-largest trading partner with bilateral trade in FY20 valued at $59 billion. It is also India’s second-largest export destination after the US, with exports valued at approximately $29 billion in FY20. India was the UAE’s second-largest trading partner in 2019, with bilateral non-oil trade valued at $41 billion.

The UAE is the eighth-largest investor in India, having invested $11 billion between April 2000 and March 2021, while investment by Indian companies in the UAE is estimated to be over $85 billion.

India's major exports to the UAE include petroleum products, precious metals, stones, gems and jewellery, minerals, food items such as cereals, sugar, fruits and vegetables, tea, meat and seafood, textiles, engineering and machinery products, and chemicals.

Top imports from the UAE include crude petroleum and petroleum products, precious metals, stones, gems and jewellery, minerals, chemicals and wood and wood products. India imported $10.9 billion of crude oil from the UAE in FY20.

While the CEPA will create new jobs, raise living standards, and provide wider social and economic opportunities in both nations, the new strategic economic agreement is expected to increase bilateral trade in goods to $100 billion within five years of the signed agreement and increase trade in services to $15 billion.

Because of the trade deal, while UAE will get priority in India’s big plans in infra development and asset monetization, UAE investors will also feel more confident in investing in India. The UAE on its part may focus on advanced industrial products including petrochemical equipment, ICT products and fintech. 

The pact will build on a number of landmark projects between the nations in the last few years. In June 2020, Mubadala, the Emirati state-owned holding company that functions as a sovereign wealth fund, invested $1.2 billion in Indian telecom provider Jio Platforms, while in 2019 a number of UAE entities committed $7 billion to India’s food production and agriculture sectors. In return, India’s Reliance recently announced an investment of $2 billion in Abu Dhabi’s TA’ZIZ Industrial Chemical Zone.

Foreign investors watching

Foreign investors are closely watching these moves. Alain Spohr, MD,  Alstom India and South Asia, feels that while things are moving in the right direction, more needs to be done. He says that India can become the export hub of the world, provided the government gets its act right. While ease of doing business has improved over the past few years, Spohr feels that the country needs to improve project execution and that dispute resolution remains a big issue. If a well-designed incentive scheme is provided, it could be a mega boost for India, he said, adding that some sort of subsidies or financial incentives could spur companies to bring large investments to the country.

Alstom is keen to make lightweight coaches for Indian Railways and is looking for clarity on tramrail used in Europe. Some sort of financial incentives could spur companies like Alstom to bring large investments to India, he feels. 

Besides, there needs to be increased focus on faster project execution, dispute resolution, interaction between customers and vendors. “I did not see much focus on these as part of ease of doing business. Problem is not to come to India, but to stay in India,” said Spohr. 

There is also a need for more balance in terms and conditions governing contracts. “Dispute resolution, cash neutrality, protection against abusive termination of contracts should be built into today's contracts because these things are important for businesses who may want to invest,” he said.

The way ahead

Many economists have spoken of the spurt in exports as an “exogenous”(having an external cause) factor in the performance of the Indian economy. Alas, some of them feel that export-led growth can only last for a time. Such growth also comes fast. But for it to sustain over a period of time is not easy. Countries which grow on their home consumption have a much safer way to reach lasting growth. An ideal combination, of course, would be the right endogenous and exogenous factors. 

 In the past (pre-Covid),  Krishnamurthy Subramanian,  the Modi government’s chief economic advisor who has now tendered his resignation,   attributed both “endogenous and exogenous” factors like deceleration in developed countries and trade conflicts as some of the reasons behind the slowdown in the economy.

The incremental factors beyond Q2 FY22 are also not very favourable, given the steep slowdown in China, following the housing market disruption, and the spread of the Omicron threat, which would slow global trade activities. Then there are the looming headwinds, including runaway freight rates and the growing shipping container shortage, alongside the possibility of global central banks putting a stop to their quantitative easing policy that could, in effect, progressively temper consumer demand in these markets. A slowdown in global trade could have a significant impact on growth in the coming quarters, particularly if the government is predicating its economic strategy on exports.  

The China gambit

If India plans to emulate China as an exporting nation, it will also have to keep in mind the subsequent change of gears in economic strategy effected by the Communist Party of China. China adopted since 1979 an ambitious export driven model by making full use of domestic and international markets and resources. China’s rise in the 1980s and 90s was fuelled by an export-led growth. But now the Chinese leadership is striving for a transition to a domestically-driven, services-led growth.

The  new development paradigm to re-establish its position as a global economic power was unveiled in its 14th Five-Year Plan (2021-25)  in July 2020. It is enshrined in a novel concept called ‘dual circulation.’ It is a model in which domestic circulation and international circulation promote each other .While this is where space for India can open up, it also holds lessons for us.

Some economists believe that to be a major player like China, India will have to dovetail its policies to the premise that currently it is global firms that control trade. Production is shared across a group of countries. Each specialises in making a part and not the complete product.  This applies not only to high-end technology products but also to simple products like, say,  chocolates which while being made in Belgium use hazelnuts from Turkey, palm oil from Malaysia, cocoa from Ghana, sugar from Europe, and vanilla from the US.

While Goyal, on his part, is exuding confidence that the export targets can be achieved, it is not going to be that easy. For one thing, global trade has been hit by a shortage of ships and containers. This has led to a jacking up of shipping costs.  Goyal admits that there is not much the government can do about it.  “We cannot regulate international shipping rates. It is market driven and we are in dialogue with them to see that more ships dock in India. But since it is an international phenomenon and affects all exporters across the world and all international trade, I do believe that while it may take some time to settle down, it may not affect as badly as was thought earlier,” he says.

To tackle the surge in shipping costs, the government recently extended some relief to exporters of specified select products by reintroducing the Transport and Marketing Assistance (TMA) scheme, with wider coverage and much larger support, for one year. Under the TMA, which was valid up to March 2021, the government reimbursed exporters a certain portion of freight charges and offered assistance for the marketing of select agricultural produce. Rates of assistance have been increased by 50 per cent for exports by sea and 100 per cent for those by air.

Policy re-invention

As the world explores alternatives to China, India will have to rise to the challenge by reinventing its policies. As a long-term strategy, it needs to wean exporters away from tax reimbursement schemes, as they could attract both WTO scrutiny as well as countervailing duties in the importing country. Instead of getting mired in the debate on whether Remission of Duties or Taxes on Export Products (RoDTEP) reimburses exports sufficiently or covers all exporters who benefited from the Merchandise Export Incentive Scheme (MEIS), the focus should be on developing infrastructure and logistics.

he benefits of export promotion schemes need to be assessed. Finally, it needs to develop a product-specific export strategy, such as the Production Linked Incentive (PLI) for man-made fibres. Creating an export basket of both low value and high value goods and services should be the goal, going forward.

Possibly, the government will have to strike a middle path on schemes such as RoDTEP and RoSCTL (Rebate of State and Central Taxes and Levies). Should the schemes be scrapped? Currently the issue is mired in a never-ending debate which misses the wood for the trees.  While officials at the ministry of commerce have maintained that duty remission schemes have helped free the financial headroom available for exporters, players in the garments and textiles sector have flagged concerns over delayed operationalisation of tax rebate schemes and lower-than-expected benefits. 

 The consumption angle

 Finally, the government will have to contend with the sad truth of the Q2 numbers: total consumption – including private (57.3 per cent of GDP now, 55.8 per cent previous quarter) and government spending (11.1 per cent vs 13.7 per cent previous) – is on a very gradual recovery path. Private consumption is 15.6 per cent lower than the pre-Covid trend and fixed capital formation is 9 per cent lower. That is why the GDP trajectory remains fairly muted. 

It may thus become imperative to loosen the fiscal strings. Additionally, the financial condition is expected to tighten due to stagflationary concerns in advanced economies that are forced to adopt quicker monetary stimulus rollbacks. It is quite likely next two quarters will see real GDP decelerating further, thereby affecting the projected growth for the ongoing year. If not reversed, the trend could even spill over into FY23. Therefore, growth from exports will be a bonus till we get our act together.

5-point mantra

1. High duty on inputs results in expensive finished product that is out-priced by imported goods, both in the domestic and export markets. Low duties make domestic firms competitive. Many start shipping directly. Gradually, with better forward and backward linkages, jobs increase as both exporting and importing sectors grow. In Vietnam, 5 million workers work with direct exporters while 7 million work for firms supplying products to exporters.

2. Increased access to formal finance is the key. Less than 4 per cent of small firms in India have access to formal finance. The figure for the US, China, Vietnam and Sri Lanka is 21 per cent. The government should enable the top 1 million small manufacturing firms to get bank finance without collateral at regular interest rates. 

3. It is essential to simplify process of exporting for small value consignments. Many people buy local sarees, suits, handicraft, ready-to-eat/cooked products and ask the shops to courier to friends and relatives abroad. For such small value exports, we need to simplify and integrate compliances relating to Customs, GST, DGFT and other concerned agencies. Schemes like making districts as export hubs would benefit from such simplification. The simplification will also help exports by small artisans and firms located in class B and C cities.

4. Large anchor firms in critical products should be invited to set up operations in India. This is a tested strategy for promoting the manufacturing and export of Basket A items. Government initiatives like simplified labour laws, PLI incentives, low corporate tax on new manufacturing operations and scrapping of retrospective tax have enthused many firms searching for China plus-one location to shift base to India. India's large number of competitive ancillary units and skill base are a big plus over competing countries.

5. Since inputs crisscross across countries several times as parts and sub-assemblies before the final product is ready, low duties and quick port exit of containers at ports and customs are preconditions for participation in global value chains. Any delay at one point disrupts the entire value chain.