A couple of weeks ago, the Department of Commerce announced the heartening news that in the first quarter of the current financial year (April-June 2021), merchandise exports were $95 billion, the highest ever for a quarter in India’s history. In fact, the earlier high of nearly $90 billion was recorded in the immediately preceding quarter, namely, January to March. Thus, this positive augury could help in a complete turnaround of exports in the current financial year, after it had slumped by over 7% to settle below the psychological barrier of $300 billion in 2020-21.
The government has set an ambitious export target of $400 billion for 2021-22 and if this target does materialise, the eagerly awaited economic turnaround could be well on its way. A sustained rise in exports would bring into play foreign demand as an important factor for stimulating the economy, which could compensate, to a degree, the persistent sluggishness in domestic demand.
The most obvious factor stimulating India’s exports is the strong economic rebound being experienced by major economies, especially from the beginning of 2021. The US, India’s largest export destination, grew by 6.4% in the first quarter of the year and recent forecasts suggest that the world’s largest economy could grow by 10-11% in the second quarter. The Chinese economy had put behind the pandemic-induced downturn in 2020, and it began 2021 with an 18.3% growth in the first quarter. Though its second quarter growth has slowed down, the second largest economy still grew by almost 8%.
These growth numbers have been reflected in India’s export numbers. Exports to the US grew by nearly 20% in January-March of 2021 on a year-on-year basis, while the corresponding figure for China was nearly 61%. Some may argue that January-March of 2020 was an abnormal period for China as it was in the midst of a severe coronavirus wave and strict lockdown was in place. However, even if the level of India’s exports to China in a “normal” pre-Covid quarter is taken as the baseline, exports in January-March 2021 were significantly higher.
What is important to note here is that during the Financial Year 2020-21, India’s exports to China increased almost 28%, the highest ever in a single year. As a result, China, along with Hong Kong, emerged as India’s third largest export destination. But more importantly, the northern neighbour is now India’s largest trade partner, also because imports from China had remained unchanged. Interestingly, these developments have occurred during a year in which anti-China sentiments were at their peak following the border skirmishes between the two countries. There is thus an important message that India-China trade trends send out—markets are seldom influenced by political headwinds and market forces would exploit every opportunity that exists.
While the big picture regarding exports looks promising, it would be useful to drill a bit deeper to understand how much of the impulses provided by increasing exports would translate into meaningful job creation and, therefore, higher incomes. Data from the previous financial year, especially the last quarter of 2020-21, do provide thetrends that are quite useful for making this assessment.
Although India’s exports registered the second steepest fall in the past two decades, next only to the 15.5% decline in 2015-16, three sectors, namely, ores and minerals, agriculture and allied products, and base metals, primarily iron and steel, registered impressive export growth, of 41%, 24% and 16%, in that order. During the January-March quarter, exports of most sectors bounced back, but the aforementioned three sectors exporting raw materials and intermediate products registered even higher export growth, of 95.4%, 43.6% and 49.5%.
The composition of exports to China mirrors the big picture. India’s expanding export basket of agricultural commodities to China included cereals, oil seeds and vegetable oils, while exports of iron ore, and iron and steel continued to be the two largest product categories, as they have been for several years. It may be noted that raw materials and intermediates accounted for over two-thirds of India’s exports to China, while finished products have an overwhelming presence in India’s imports.
Despite its robust growth, exports may not bring adequate benefits to the Indian economy simply because raw materials and intermediates are driving this growth, which is tantamount to exporting jobs. India’s interests would have been much better served if the domestic manufacturing sector had utilised them, providing in the process the much-needed fillip to job creation in the country. The value of creating jobs at this juncture is extremely crucial as according to the Centre for Monitoring Indian Economy, India’s employment rate has been hovering well below 40%.