Commerce minister Piyush Goyal was in a celebratory mood on January 3, the first working day of the year, after release of preliminary estimates of merchandise exports till December 2021. “We have $300 billion in first nine months, a historic record,” he said. He thanked Prime Minister Narendra Modi “for encouraging big thinking and providing vision and confidence to exporters, industry and missions all over the world,”adding that “he (Modi) brought stakeholders together with a common purpose, common goal. He personally interacted with exporters, missions across the world.”
Whatever be the inspiration behind the export surge, the fact remains that every month, from April to December 2021, saw India create fresh records in goods exports, which rose 49.66% to $301.38 billion during the period. In services, it earned $178 billion, and is expected to end FY2022 with $230 billion, a historic high, despite little contribution from Covid-19 hit travel and tourism segments.
Do these trends show resilience of Indian economy? Or are they a sign of global hunger for trade after several quarters of suppressed demand due to Covid-19?And more importantly, do they indicate that India is well on track to meet its $1.7 trillion export target by FY2028?
The answers are not as simple as headline numbers suggest.
Record Exports
On January 3 itself, India’s largest car maker, Maruti Suzuki India Ltd, said it exported 2,05,450 vehicles in 2021, the highest in a calendar year. Kenichi Ayukawa, MD & CEO, Maruti Suzuki, said his company “is dedicated to government of India’s vision of Make in India for the world and the achievement reflects confidence of customers around the world in quality, technology, reliability, performance and cost-effectiveness of Maruti Suzuki cars.” Ayukawa’s confidence was based on the fact that engineering goods, of which the auto sector is one part, was the largest contributor to India’s goods exports during April-December 2021. India exported $81.76 billion worth of engineering goods, 54.42% more than $52.95 billion in April-December 2020. Other sectors such as petroleum products, gems and jewellery, chemicals, electronic goods and textiles also grew. “Looking at trends, we are on course to achieve the $400 billion merchandise export target for the fiscal,” says A. Sakthivel, one of the country’s leading knitwear exporters and president of the Federation of Indian Export Organisations (FIEO).He says spectacular growth will take goods exports to $525-530 billion by FY2023.
The boom is not limited to merchandise exports. India’s services exports grew 20% in August-October. “Services exports will exceed $240 billion and set a new record this year (FY2022),” says Sunil H. Talati, chairman, Services Export Promotion Council. He expects growth across services with travel and tourism being the only exceptions. There are enough reasons to be optimistic, say experts. One is resilience of telecommunications, computer & IT, which account for almost 50% of services exports. Software major Infosys has reported 22.9% growth in revenue in the third quarter. Salil Parekh, CEO, Infosys, says this was the fastest in 11 years. “The growth was broad-based, across industries, service lines and geographies. With strong momentum in business, and robust pipeline, we are increasing our annual revenue growth guidance, which was previously 16.5%, to 17.5%. The demand outlook is good, digital transformation is strong,” he said while announcing the results. Infosys earns close to 97% revenue from outside India.
“It’s not just pent-up demand. Order books of exporters are pretty indulging. All exporters say there is revival of demand from India. Maybe China +1 policy (lowering risk by adding a country for sourcing goods) of most global companies is driving it,” says Ajai Sahai, director general and CEO, FIEO. He says India has set a target of $1 trillion merchandise exports by FY2028. “We have six years for that. We expect services exports to reach $700 billion by that time. That means overall $1.7 trillion exports by FY2028,” he says.
The Triggers
One reason the headline growth number looks great is low base of last year when pandemic had hit exports. That is why growth in services exports is comparatively moderate as the pandemic had minimal impact on IT and other services. Further, high export growth is not limited to India. The United Nations Conference on Trade and Development (UNCTAD) says global trade is expected to reach a record $28 trillion in 2021, a 23%increase over 2020. UNCTAD’s November update says goods trade reached a record in July-September 2021. Trade in services showed momentum but remained below pre-pandemic levels. Still, in overall trade, India’s 2021 performance is 2% below 2019 (pre-pandemic) levels if one combines imports and exports. The reason is simple. India’s imports have grown faster than exports during the last one year.
Increase in prices of commodities, especially petroleum products, has also helped. For instance, RIL’s July-September results show that exports (including deemed exports) from India operations rose 59% to `54,844 crore ($7.4 billion) as against `34,501 crore in corresponding quarter of the previous year, despite lower downstream product volumes, thanks to higher price realisation. The company’s record quarterly EBITA was led by its oil-to-chemical (O2C) business. RIL’s joint chief financial officer V. Srikanth says the company saw fifth sequential quarter of growth in O2C due to sharp recovery in refinery margins and revival of demand (to pre-Covid levels) for major polymers and polyester products. Incidentally, petroleum products, the second-largest contributor to merchandise exports in first nine months of FY2022, rose the sharpest —149.47% to $43.88 billion, from $17.59 billion in same period of the previous year.
“The numbers are heartening, especially after last year’s dip. At the same time, if we look at cumulative export growth, from April 1 to November-end, CAGR on a two-year basis, FY2020 verses FY2022, is about 8%. That’s good but not out of the world. It is good to bounce back but much needs to be done as this is not taking us any close to becoming an export powerhouse comparable to China or other South East Asian nations,” says Manasvi Srivastava, partner, Trade & Customs, KPMG. The rebound is clear, though, she says. “Petroleum product exports played a significant role. At the same time, the notion that growth has been seen only in essential commodities is not correct. There has been about 80% growth in gems and jewellery so, compared to previous year, there has been a bounce-back,” says Srivastava.
The Challenges
One hurdle Indian goods exporters faced during pandemic was container shortage. The crisis is over, but only temporarily, as India is not self-reliant in either shipping or containers. FIEO’s Sahai says logistics costs are much higher in India and that is the biggest challenge for exporters. “We should have an Indian shipping line of global repute so that we have some say in this space,” says Sahai. The second hurdle is capacity constraint. It’s a chicken and egg situation as you need demand to create capacities,but unless you have capacities, you cannot meet sudden demand in a volatile global trade environment.
A broader problem that may surface any time is incentives and subsidies to exporters. India, say experts, has not withdrawn every scheme branded as non-compliant with World Trade Organization (WTO) rules. “Most of our export incentive schemes violate WTO norms. We got a breather as WTO’s appellate is not functional. India has gone for an appeal and the order of the panel (seeking withdrawal of such schemes) has not been implemented. Otherwise, we would have had to do away with a lot of schemes. There is a need to neutralise taxes and duties as far as possible,” says KPMG’s Srivastava. He cites schemes such as Remission of Duties and Taxes on Exported Products scheme and Manufacturing and Other Operations in a Warehouse scheme as WTO-compliant replacements introduced by government. However, he wants exporters to be eligible for both the schemes,which reimburse different types of taxes and duties impacting competitiveness of exporters. One is meant to reimburse taxes and the other allows import of raw materials at zero duty.
Hope Trade
The streamlining of export incentive schemes will help India tap its inherent advantages over competitors. Take steel. Tata Steel managing director T.V. Narendran says India is better placed than Japan and China to become a steel hub. “Japan exports 30 million tonnes steel after importing iron ore and coal. China exports 60 million tonnes steel after importing iron ore and coal. India exports 10 million tonnes of steel, may be it will do 25 million tonnes this year, but as a country, it has a great opportunity to be a big exporter of steel because it has iron ore,”
Similarly, 0.62% growth in drugs and pharmaceutical exports during April-December 2021 does not do justice to India’s pharmaceutical manufacturing prowess. One reason is that unlike other exports, pharmaceutical exports did well during the pandemic year (FY2021). Still, the sector has immense potential. “If we want to be the pharmacy of the world, we should take our share from 3-4%(of global pharmaceutical market) to at least 6-7%,” says FIEO’s Sahai.
The Production Linked Incentive (PLI) scheme will also aid export growth in 13 promising sectors in coming years. Companies will build scale and incremental production mandated under the scheme will encourage them to look at global markets. Some mega flagship programmes of government of India like mega textile parks, food parks and district-level export hubs will also push exports. While PLI schemes have been welcomed by respective industrial sectors, the last one to get notified, PLI for semiconductors, was highly appreciated by IT industry body Nasscom. “Over the next six years, this programme will form the foundation of a new era in electronics manufacturing and a vital pillar of government’s AtmaNirbharBharat (self-reliant) vision, in addition to addressing the global supply chain crisis,” it said on December 15.
Meanwhile, government is fast-tracking negotiations for free trade agreements (FTAs) with a host of countries at the earliest. FIEO hopes to see FTAs with UK, Australia and UAE becoming operational by the end of the current calendar year and many others, like with GCC, EU and Canada, take firm shape next year. These FTAs are expected to help services exports too. Education and medical sectors, for instance, are gearing up for big opportunities once the India-UAE FTA is implemented.
Going by these trends, the trillion-dollar dream does not seem to be very unrealistic.