How trade can boost India’s growth

India’s exports surpassing the pre-pandemic level of $331 billion in FY 2018-19 and reaching $418 billion in FY 2021-22 is certainly an achievement. Total exports, including the services exports of around $240 billion, amount to more than $650 billion. The revival of exports has provided relief at a time when major components of aggregate demand such as consumption and investment had been slowing down. Total merchandise trade, including imports of $610 billion, amounts to $1.28 trillion for FY 2021-22. These milestones on the trade front are a sign of a India, which would certainly accelerate the growth and the increasing imports are a good sign given the high import intensity of India’s exports. If we sustain the momentum and capitalise on our exports’ potential, we will meet the targets of $1 trillion in merchandise exports by 2027-28 and $1 trillion in services exports by 2030, which will help achieve the $-5 trillion economy goal sooner.

The trade achievements are a sign of growing confidence in the Indian economy. The proactive policy schemes by the government — such as merchandise exports scheme, duty exemption scheme, export promotion assistance capital goods, transport and marketing scheme — have helped the export sector. Sches like the gold card scheme and interest equalisation scheme by RBI and the market access initiative by the export promotion councils are also useful.

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Though achievements in trade are laudable, India still has much potential. For example, the annual growth rate of India’s exports between 2011 to 2020 is a little over 1 per cent compared to 3 per cent and 4.2 per cent, respectively, for China and Bangladesh. If we go by India’s Trade Portal estimates, we find a huge difference in India’s exports potential and actual exports in many sectors, especially pharmaceuticals, gems and jewelry and chemicals. Therefore, it is time to address sector-specific and market-specific problems so that we fully capitalise on exports across sectors. For example, India’s potential in diamond and jewelery exports is close to $58 billion but actual exports are at $30 billion.

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To achieve the export target, India has to aggressively increase its participation in global value chains (GVCs). India’s best endowment for the next couple of decades is its working-age population and its strength is in labor-intensive manufacturing. However, the space vacated by manufacturing giants such as Japan, Korea, Malaysia and China has been captured by Vietnam, Bangladesh, Mexico and Thailand. Many of these manufacturing giants are moving away from the labor-intensive assembly of network products, which offers India an opportunity. As the Economic Survey (2019-20) suggests, “assemble in India”, particularly in network products, will increase India’s share in world exports to 6 per cent and create 80 million jobs. It is time to find out and research why MNCs are (re)locating to countries like Vietnam, Bangladesh and Mexico when India offers a big market and cheap manpower. We are yet to capitalise on “China+1 strategy”.

India also needs to work on institutions facilitating trade, processes for exports and imports and logistics that not only reduce trade and transaction costs but also ensure reliability and timely delivery, which is important to becoming part of GVCs. India’s rank in the logistics performance index is 44 while China’s rank is 26 and South Korea’s 25. The unit cost of a container of exports is significantly higher for India compared to China, South Korea and others, thereby reducing the price competitiveness of India’s exports.

Recently, the Niti Aayog, in partnership with the Institute of Competitiveness, prepared the Export Preparedness Index (EPI) 2021 for Indian states. There are wide variations in the EPI index, which is based on trade policy, business ecosystem, export ecosystem and performance. It’s time to focus on the first three of these input pillars in states whose scores are below the national average. State-level reforms in reducing red tape and complex laws including taxation will go a long way. One way to reduce the complexities of trade and business is by signing free trade agreements. These not only reduce tariffs and give market access but bring down non-tariff barriers such as administrative fees, labeling requirements, anti-dumping duties and countervailing measures. It’s a good sign that Delhi recently concluded FTAs ​​with the UAE, and Australia and is negotiating with the UK, GCC and Canada. Though FTAs ​​may not necessarily help the trade balance immediately, they help in streamlining policies.

Along with the merchandise exports, India should focus on services exports. As per the Ministry of Commerce (MoC), services exports are expected to reach the target of $1 trillion before the deadline of 2030. India has done well in IT and IES exports and it can accelerate services exports in other categories including travel and tourism and business, commercial and financial services. However, the services sector needs government support.

The acceleration of merchandise and services exports could potentially make the Indian economy a $5-trillion economy sooner provided we are proactive in policies to capitalise on our exports potential, explore new markets and curb protectionism. There are also opportunities arising out of geo-political conflicts and the intention of the world to diversify its supply chain portfolio. India should capitalise on the “China+1” strategy. However, we must avoid protectionism and inverted duty structures which may give temporary relief to domestic industries but will affect India’s overall competitiveness.

(Sahoo is professor, and Mujtaba is research analyst, at the Institute of Economic Growth (IEG), Delhi)

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