Why has exports engine stalled?

India’s export engine of growth has stalled. Its growth fell to 1.5% in FY24 (AE2) even as GDP growth has galloped to 7.6%. Not just that, in the current decade of FY15-FY24, average growth in exports fell to 5.2%, against 13.9% during the previous decade FY05-FY14 ((2011-12 GDP series, constant prices).

One may argue that the fall in exports is miniscule in terms of GDP – exports accounting for 21.3% of the GDP during FY15-FY24, compared to 21.7% in the previous decade FY05-FY14. But this small 0.4 percentage fall may be because (i) the overall slowdown in the economy with the GDP growth falling to average of 5.9% in the current decade, against 6.8% in the previous decade (2011-12 GDP series, constant prices). But it shouldn’t be forgotten that (ii) the 2004-05 GDP series (constant prices) of the time showed exports accounted for 24.1% of the GDP during FY05-FY14. So, the fall in exports is quite substantially – 2.8 percentage points of the GDP.

But why this fall in exports?

Decadal agricultural exports crash to 2% – from 20.3%

The latest data on agricultural exports (Ministry of Commerce and Industry and RBI) – first flagged by agriculture expert Ashok Gulati on May 13, 2024, shows:

(i)        In FY24, agricultural exports fell to $48.8 billion – from $53.12 billion in FY23 and $50.2% in FY22. A decade ago, in FY14, it stood at $42.6 billion.

(ii)     Growth in agricultural exports crashed to average of 2% in the current decade of FY15-FY24, against 20.3% during the previous decade of FY05-FY14.

(iii)  As against one negative growth year in the previous decade, FY09 (-4.9%), the current decade has four negative growth fiscals – FY15 (-9.8%), FY16 (-17%), FY20 (-8.8%) and FY24 (-8.2%).

(iv)  In all, agricultural exports grew 1.1 times in the current decade – over the previous decade while the GDP grew by 1.8 times in the same period.

Two primary reasons for this fall can be easily discerned: (a) fluctuations in international food prices (exogenous factor) and (b) arbitrary trade policies (endogenous factor). There are more.

First the exogenous factor.

The FAO’s Food Price Index (FFPI) shows, international food prices sharply went up during 2008-14 (averaging 115.1) – from 2005-07 (averaging 78.1). Recall the Great Recession of 2007-09 and the upheaval it caused? The FFPI then crashed during 2015-2020 (averaging 95.4), but sharply went up during 2021-2024 (averaging 128.4). The sharp spike, which started in 2021, was caused by the pandemic and uncertain climatic conditions. It continues due to the disruptions caused by the Russia-Ukraine war, which began in February 2022, and the global inflation around and after that (which is easing now).

While external factors are beyond control (both decades saw sharp fluctuations in international food prices), it is the frequent and overnight bans and restrictions on agricultural exports on key items like wheat, rice, sugar, onion etc., beginning with 2022, which has severely damaged agricultural exports. For instance, a complete ban on onion exports (imposed in December 2023) was partially lifted, only for the Gujarat’s white onions on April 25, 2024– just ahead of the polling in state on May 7. For the Maharashtra’s red onions, the ban was lifted on May 5– Maharashtra’s onion belt of Nasik and Dindori go to polls on May 20.

Decadal merchandise exports crash to 4.4% - from 18.1%

Official data (Ministry of Commerce and Industry, in USD) shows a drastic fall in the growth of (a) merchandise exports (b) merchandise imports and (c) a rise in merchandise trade deficits. The details:

• Growth in merchandise exports fell by -3.1% in FY24.

• Average decadal growth in merchandise exports fell to 4.4% during FY15-FY24 – from 18.1% during FY05-FY14. As against two negative growth fiscals in the previous decade – FY10 (-3.5%) and FY13 (-1.8%) – it increased to five – FY15 (-1.3%), FY16 (-15.5%), FY20 (-5.1%), FY21 (-6.1%) ad FY24 (-3.1%).

• Merchandise exports’ share of the GDP also fell – from average of 15.5% during first half of FY12-FY17 to 12.5% during the second half of FY18-FY23 (RE1, MoSPI, in Rupee terms), FY24 data will be released by the MoSPI next year).

• Growth in imports of merchandise goods fell drastically too – from 20.5% in the previous decade to 5.9% in the current decade.

• Deficits due to merchandise trade has risen sharply – from an average of $107.9 billion in the previous decade to $166.9 billion in the current decade. Although overall trade deficits in terms of the GDP have fallen substantially – significantly improving forex reserve – the real reason for this would be clear soon.

For better appreciation of the above point, and their adverse implications, a few things need to be kept in mind.

The protectionism (import tariff and non-tariff barriers) has hurt merchandise exports (i) because of “import intensity” of exported goods. India is (ii) not a significant participant in global value chains (GBCs). Restricting imports hurt its future trade prospects. India has (iii) kept away from mega trading blocs of the world – RCEP and IPEF – which affects its chances of becoming part of GVCs.

The origins

In a paper for the Harvard University with fellow economist Shoumitro Chatterjee (“India’s Inward (Re)Turn: Is it Warranted? Will it Work?”), former Chief Economic Adviser Arvind Subramaniam pointed out that import tariff had been hiked “since 2014” by “reversing a 3-decade trend” which “for three decades a stellar export performance has played a critical role in India’s overall growth”. This reversal was “akin to killing the only goose that lays golden eggs”.

This paper said there were “about 3,200 tariff increases” – up from 13% to 18% – which “affected” about “$300 billion or about 70% of total imports”. Growth in exports crashed to (-) 3.4% in FY20 and (-)7% in FY21. Its share of GDP was lowest at 19.4% in FY20 (in the 2011-12 GDP series) and fell further to 19.1% in FY21 (pandemic fiscal). This import substitution policy became part of the “AatmaNirbhar Bharat” mission in the pandemic year of 2020 (with the slogans of “vocal for local” and “local for global”).

Viral Acharya, former RBI Deputy Governor, wrote in 2023 that India had become “tariff king” of the world with its tariffs “fourth highest” behind Sudan, Egypt and Venezuela, on par with Brazil, and substantially higher than China and Mexico. Acharya drew attention to the Big 5 companies – Reliance, Tata, Birla, Adani, Bharti groups – their profiteering by misusing dominant market positions in “manufacturing of metals, manufacturing of coke and refined petroleum products, retail trade, and telecommunications”. He asked for “dismantling” the Big 5 not to just control inflation but also to end the skewed trade policies aimed at benefiting them.

But why did the Centre go back to the failed import substitution policy of 1960s and 1970s?

The impulse was very much the same: Protecting inefficient domestic industry from external competition. This is also the reason why India opted out of mega trade blocs, RCEP in 2019 and IPEF (trade pillar) in 2022.

This is also why bans/restrictions on imports have become unstable – as opposed to a stable and predictable trade regime.

Take the case of complete and overnight ban on imports of laptops/PCs announced in August 2023. This was done without consultations with the industry and despite the fact that 90% of all domestic sales are imported. The ban accompanied with a ‘licensing’ regime – just four days after the Reliance launched “made in China” JioBook. Imports of laptops/PCs from China have jumped 76% of all such imports in April-July 2023 (before the ban) to 87.5% during November 2023-January 2024 – even as India is trying hard to reduce imports from China after the border class in 2020. Now, after two years, China has overtaken the US as India’s number one trade partner (merchandise goods).

Then, there was another change. Weeks after the “license raj” for laptops/PCs was announced, Centre replaced it with “import management system”. In March 2024, US official documents revealed that this change happened due to US pressure.

Meanwhile, something else is happening – without attracting positive policy responses.

Services trade growing quietly – turning into saviour

Here is the answer to the mystery about the fall in overall trade deficits (mentioned earlier) – despite sharp falls in merchandise and agricultural exports.

In the 2011-12 GDP series (constant prices, in Rupee terms), trade deficits see a falling trend and averages (-)2% of the GDP in nine fiscals of FY15-FY23 – falling from (-)4.9% during FY12-FY14 (previous three fiscals). The MoSPI is yet to release the data for FY24.

But if you exclude the services trade, the equation changes. Trade deficits still fall but averages very high at (-)5.4% of the GDP during FY15-FY23.

It is the services exports which has come to the rescue.

The services trade is not only growing at higher rate (averaging 8.2% during FY15-FY23), it is generating very high surpluses – averaging 3.5% of the GDP during FY15-FY23.

But this surplus is not because of any particular policy or fiscal push.

The services trade still rides on the IT and ITeS sectors – which grew without receiving the support the Centre has, historically, extended to manufacturing and merchandise trade (for details, Fortune India’s “Future of Indian trade is in services exports”). Even the Foreign Trade Policy (FTP) of 2023 is silent on the services exports and the Centre provides no disaggregated data on services exports. Tax incentives for output and exports are focused on manufacturing alone – the PLIs and DLIs are the latest addition. On the contrary, the services export is being harmed by changes in the education (NEP 2020) and recruitment policies (UPSC exams) – both promote vernacular languages at the cost of English language skills.

Caveat: Decadal comparison for the merchandise and services exports can’t be done (in the way agricultural exports could be) because none – the 2011-12 GDP series data, 2004-05 GDP series data available on the MoSPI site and the Ministry of Commerce and Industry’s trade data provide disaggregated data in time series going back to FY05, along with the GDP numbers.