In the last couple of months, India’s exports have seen encouraging signs. In July, it jumped 47.9% year-on-year to $35.17 billion this year. Spurred by these numbers, the government has set a merchandise export target of $400 billion for 2021-22.
However, the headline numbers don’t tell the entire story. A study by the Federation of Indian Export Organisations (FIEO), based on UN Comtrade data for 2016-2020, showed that while global imports grew at a CAGR of 3% during the period, India’s exports grew by only 2%. Of course, the lockdown due to the coronavirus hit exports significantly for a few months in 2020.But there are several other factors that have stopped India’s exports from growing into a considerable share of global trade, provided there is a concerted policy push. It includes India’s unchanged export portfolio, which needs to be upgraded and adapted to changing global needs. Unless this is done, the country’s goal of reaching $400 billion exports in 2021-22 could remain a pipe dream.
If the country has to increase its exports in line with the Prime Minister's Aatmanirbhar Bharat, a recent report by the Confederation of Indian Industry (CII) stated that India must aim to achieve 5% share in world merchandise exports and 7% in services exports by 2025. Now, the country’s merchandise exports contribute 1.67% to global merchandise exports and in services, it enjoys a 3.54% share.Global trade’s ups and downs have a lot of impact on India’s exports, says Ajay Sahai, Director General of FIEO. “But that does not mean that when global trade slows, we should also slow down. Today, exports of electronics, machinery, electrical equipment and automobiles dominate global trade. Technology-based products are driving global trade, which was worth around $19 trillion in 2019. About $6.4 trillion out of this was for these sectors only. But India’s share in these is not even 1%,” he says.
Since 2015, labour-intensive sectors have majorly driven India’s exports. However, the shift in global trade to technology-based sectors has eroded the market share of these segments. “Yes, the labour-intensive sectors are really important to us. But a quantum jump in exports is only possible if we look at technology-driven sectors,” says Sahai. After all, electronics contribute roughly 60-70% of global imports, he adds.Even in the labour-intensive sectors, India has lost the market to smaller neighbours, says Dharmakriti Joshi, Chief Economist at CRISIL Limited. “Exports of low-end, but labour-intensive manufacturing items such as garments, leather products and footwear started moving out of China when the labour costs went up there. These were captured by Vietnam and Bangladesh.” India’s lack of competitiveness — stemming from lower scale of operations, labour policies and logistics costs — are barriers to trade,” Joshi says. “Although India has an advantage in raw material availability, it loses out on production competitiveness.”
For perspective, despite Covid pangs, China’s share of global trade in 2020 increased to 14.7%, according to the UNCTAD. While China tops this list, India occupies slot 21, a notch after Vietnam.
The electrical and electronics segment has a huge potential to drive India’s export economy, the FIEO study stated. While global imports in the segment grew at a CAGR of 4% during 2016-2020, it said, India’s exports had a CAGR of 16%. “However, India’s share in global electronics exports was just a little over 0.5%. The growth is on a very low base,” Sahai says.
Just before the Covid second wave hit the country, India’s exports of electronic goods reached an all-time high of Rs 9,812 crore in March, according to the commerce ministry. However, FY20-21 saw a 1.17% decline in exports from the previous period.
“We are doing very well by exporting mobile phones and we are competing with Chinese companies in many other countries. There is a lot of potential here. But we need to ramp up manufacturing and build domestic capabilities. We have to align our production base with local and global demand,” the FIEO chief says.
George Paul, CEO, Manufacturers Association of Information Technology (MAIT), credits the increase in electronics exports to the exponential growth in demand for tech products as people started working online. “A shift in electronic manufacturing is happening. Globally, companies are looking at the China-plus-one (a business strategy to avoid investing only in China and diversify business into other countries) approach to not be overly dependent on one economy,” he says, adding that India should seize this opportunity. “The government has now come out with various schemes, including PLI (production-linked incentive) schemes for mobiles, IT hardware and telecom. India needs to properly implement the road map it has made for itself to become the most competent destination for electronic manufacturing.”
Sectors of Interest
The other sectors that have done exceedingly well in recent months can also push up exports. The FIEO study has named these: mechanical machinery and parts, agriculture commodities and medical and surgical equipment.Mechanical machinery and parts had a CAGR of 3% in global imports during 2016-20. India’s exports here grew at a CAGR of 8% in the period, though the exports were less than 1% of the global share. In 2020, when the global market size of mechanical machinery parts stood at $2,142 billion, India’s was $18 billion.
Some agricultural commodities have also shown promising figures. According to the study, while global imports grew at a CAGR of 1% during 2016-20 for tea, coffee and spices, India’s grew at 4%. Global imports in preparation of fish and meat products grew at a CAGR of 4%, while India’s grew at 17%.
The country should play to its strengths to ensure growth. Mahesh Jaising, Partner, Deloitte India, says it is important to look at the ecosystem of the country and that of the competitors. “The sectors where India has the maximum potential to increase exports are apparel, chemicals, auto components and electronics.”
Arvind Sharma, Partner, ShardulAmarchandMangaldas& Co, says we should bet big on the IT and ITeS segment, “We have strongly established ourselves in these services. The top IT companies have Indian CEOs and leaders. We have to capitalise on that.” Another potential growth segment is minerals, he says, as “we have a lot of natural resources, particularly coal.”
Pharmaceutical exports can also become a value-added segment, says Sahai. The FIEO study pointed out that while global imports in the medical & surgical equipment sector grew at a CAGR of 3% during 2016-20, India’s exports jumped 5% in the period.
We require a change in certain domestic factors for the exports basket to widen and grow. Sahai suggests India invite large companies to set up base here, and involve small and medium businesses in the manufacturing process. The Production Linked Incentive (PLI) Scheme has a clause to involve local players as suppliers. “We also need to provide plug-and-play specialties for manufacturing. Many countries, such as Kenya and Ethiopia, are attracting investors by creating such facilities. They are also training the workforce for capital manufacturing. Large manufacturers are now expanding in Ethiopia because they can start production within a week of landing,” he says.
While India’s lucrative domestic market attracts investors, the FIEO official says the longer time taken to reach the production stage deters them. Scaling up the skill sets of the workforce is also important to attract MNCs, says Sharma of ShardulAmarchandMangaldas& Co. “The global services market is already looking at India because of the low production costs.”But the shortcomings in many other areas related to logistics and financing have to be dealt with, says MAIT’s Paul. “There is a crying need for India to have a global transit hub.” Easing regulations for faster clearance of goods is an obvious solution, he says, adding that the situation is better now than 25 years ago. “We have to become world class. Countries are measured in terms of how much time it takes to get your material into your plant. You should benchmark yourself against the best in the world.”
Paul recommends that the government work on uplifting SMEs in terms of finance as these ancillary units feed the bigger companies. “We have to go beyond the PLI scheme. We should do more for electronics. One advantage of electronics is that shifting of a manufacturing base is quicker when compared with sectors such as chemicals.”
The government has identified potential sectors that can give the country a competitive edge. In March 2020, Finance Minister Mrs. Nirmala Sitharaman announced the PLI Scheme for 13 sectors. It provides incentives to companies to enable domestic manufacturing, thereby reducing the import bill and improving cost competitiveness of local goods.The government expects it to result in minimum production worth more than $500 billion in the next five years. The sectors include electronic or technology products, pharmaceuticals drugs, telecom and networking products, food products, high-efficiency solar PV modules, automobiles and auto components, advanced chemistry cell battery, textiles and specialty steel.
“The sectors seem to have been hand-picked, and for the right reasons. They exhibit a strong potential for growth,” says Deloitte’s Jaising. He says the bonded manufacturing scheme introduced a couple of years ago will also help. This scheme exempts businesses from customs duty on imported inputs, which can be later used for making goods that are exported. “It is a one-size-fits-all scheme, for exporters and for domestic market supplies. It will help all sectors, and particularly technology-driven products, as electronics and tech are a very large segment. India will certainly benefit from a full-blown, end-to-end form and the finished product. Therefore, the capital investment needed is indeed significant,” he says.
Jaising also says the government’s attempt to redraw the strategy on negotiating free trade agreements is going to be a booster. “We have been in touch with the Prime Minister’s Office on this and they are looking at products where India is strong in manufacturing and the countries on the other side have a market for it but no manufacturing base.” The priority areas here are electronics, auto, chemical and pharmaceutical segments.
India should also own a shipping line if it wants exports to reach $1 trillion by 2025, says Sahai. Why? If the shipping line gets 25% of the estimated $1 trillion export business, it amounts to a captive market of $25 billion, he says. “The Shipping Corporation of India has a market share of less than 5% of our shipping business. Besides, it is being disinvested. We remit close to $60 billion annually as transport charges overseas. If we can develop a shipping line, we will save a lot.”
Such a move will make India more self-reliant. The recent global container shortage, which has inflated freight rates, is a reminder that India should become less dependent on others. The biggest hit has been taken by the MSMEs, which are not necessarily cash rich but contribute the largest share to exports.