India's value added export in jeopardy since commodity price spike

India's export capability will be hit with the worsening commodity crisis looming over the world, largely because a majority of goods exported by India happen to be value added products created from the same imported commodities whose prices are sky-rocketing.

Between April 2021 and January 2022, India's top exports were petroleum derivatives ($52.47 billion), pearls, precious stones and metals ($32.29 billion), organic chemicals ($18.11 billion), iron and steel ($19.24 billion), vehicles and parts of accessories ($16.1 billion) while the top imports were mineral fuels, mineral oils and derivatives ($151 billion), pearl, precious metals and stones ($68.45 billion), nuclear reactors and boilers ($41.65 billion), organics chemicals ($23.88 billion) and plastics ($16.35 billion) as per the website of the Ministry of Commerce and Industry.

Two out of top five Indian exports are directly dependent on import of commodities like crude, gold, and diamonds. Prices of these commodities have spiked 20% to 25% in the last six weeks.

IT services to the rescue

Product import into India in last fiscal (2020-21) was $394 billion that far exceeded product exports worth $292 billion. As commodity prices soar, this trade deficit will grow bigger, unless the focus shifts from current export sectors to sectors that are less impacted by commodity prices. Export of services, especially SaaS, may be the biggest opportunity for times like these. Increasing focus on exporting IT, software, and business process management services would not only help India fill up its trade-deficit but also create more jobs within the country.

Pre-pandemic (in 2019), India exported $204 billion worth of services, and imported services worth $120 billion. Software, computer, and information technology-based services fetched $90 billion of business into India.

As per NASSCOM strategic review released in February 2022, the IT services industry is estimated to grow over two times from pre-pandemic levels to $227 billion in current fiscal. Overall, exports are expected to contribute $178 billion to total revenues while the balance would be domestic, led by growth in hardware and products.

Indian SaaS (Software as a Service) businesses have emerged as a strong contender for global dominance. As per the Bain & Company India SaaS Report 2021, India had around 8000 to 9000 SaaS companies in 2021 with 13 Unicorns and 7 to 9 companies with $100M plus Accounting Rate of Return (ARR). ARR is the percentage rate of return that is expected from an investment compared to the initial cost of investment.

For SaaS, India has a thriving ecosystem comprising 400+ SaaS investors, 500+ incubators and accelerators, and numerous communities and government initiatives to foster the ecosystem, the report adds.

In 2019-20, India accounted for approximately 55% market share of the global IT & Business Process Management (BPM) sourcing, as per IBEF report.

Top Trading Partners, A Dissection Of Indian Trade

In the last fiscal, the US was the largest market for Indian exporters and yet India's share was just over 2% of the total imports by the US, as per the statistics of the Ministry of Commerce and Industry, Government of India. At the same time, the US bought 17.69% of total exports from India. The second largest export market, China, imported around 1% of its requirements from India. However, India's export to China was 7.26% of the total export from India. Sporting third spot, the UAE purchased 5.71% of overall Indian exports. Ironically, these countries, China, followed by the the US and the UAE, also happen to be the largest importers into India.

In 2021-22, China's exports to India were $65.21 billion while its imports from India were merely $21.18 billion. At the same time, India exported $51.62 billion worth of goods to the US and imported worth $28.88 billion, while $16.68 billion was the value of exports to UAE and imports were worth $26.62 billion.

Bangladesh, Nepal, and Sri Lanka feature among the top 25 export markets of India, with Bangladesh ranking as the fifth largest export market for India. India's exports are largely limited to its neighbouring countries and rest of Asia as 46.9% of our exports, by value, were to other Asian countries. North American importers purchased 20.1%, while 18.7% worth of Indian goods were sold to Europe. Exports to Africa were 9.5%, Latin America excluding Mexico but including the Caribbean was 3.4%, followed by Oceania, led by Australia, which corresponds to 1.5%, as per Observatory of Economic Complexity (OEC) data.

High Product Complexity Index Oriented Export Strategy

Product Complexity Index (PCI) measures the knowledge intensity of a product by considering the knowledge intensity of its exporters. As per CEPII, the leading French centre for research and expertise on the world economy, India has a high level of specialisation in processed hair, spice seeds, granite, other organic compounds, and groundnut oil.

The highest complexity exports of India, according to CEPII product complexity index (PCI), are esters of inorganic acids nes, salts, derivatives; tool plates, tips, and such like; sintered metal carbide; bar or rod of stainless steel, hot rolled, coiled; ion exchangers based on polymers in primary forms; and hand-operated spanners, wrenches and sockets.

This implies that India has the highest skill level in manufacturing these products and thus can dominate the market by commanding the best price for quality assurance. Increased attention to these industries would help India raise capabilities and expand markets for its specialised goods.

On the back of a huge population and growing economy, in current times, it may not be possible for India to reduce its expenses of import of commodities but it is possible to strengthen its export earnings. By concentrating efforts on export of high PCI products and IT services that can reduce its trade deficit, and possibly nullify the losses, India can overcome the challenge of commodity crisis.