The Indian media is full of stories about imminent doom and gloom caused by a worsening Euro Zone debt crisis and continuing economic slowdown in the US. Every day, one hears about a lower GDP growth for India, though most forecasts give it a growth rate of 7 per cent or so.
Is India really doomed as predicted by a growing number of analysts? Is India as dependent upon Europe and the US for its exports as it was, say, ten years back?
An economy is exposed to foreign markets through trade. It would be interesting to see how India's dependence on Europe and the US for its export has changed over the years. Besides, it would help to see the composition of India's GDP and its bearing on economic management.
The combined per cent share of Europe and the US in India's merchandise export has declined from 49 per cent in 2000-01 to 31 per cent in 2010-11.
Thus, in 2010-11, 69 per cent of India's exports of goods went to destinations other than Europe and the US.
For Indian merchandise exports, a largely unexplored Africa is roughly as important as the US and accounts for 8.3 per cent compared with the US' 9.8 per cent.
Areas of opportunity
Latin America and West Asia are the fastest growing export markets for India. China, including Hong Kong, accounts for 12 per cent of India's export and is the largest export market for engineering goods. The BRICS region, as a whole, now accounts for one-sixth of India's merchandise exports.
Among Asian Tigers, Taiwan and South Korea are key export markets to fall back on in times of crisis.
In Europe, a non-EU fast growing country, Turkey, has become an important export destination for India and witnessed an export growth rate of 79.1 per cent in 2010-11.
The acceptance of Russia into the WTO fold will further open up this high-potential market for Indian businesses.
Among key export items with more than 2 per cent share in India's overall exports, only a few items such as organic chemicals and pharmaceuticals, readymade garments, iron & steel, machinery & mechanical appliances and electrical machinery & equipment have high (more than 30 per cent share in India's export of an item) exposure to Europe and the US, taken together.
Again, only two product categories — readymade garments and electrical machinery & equipment — have very high exposure to Europe (as shown in table 2).
Given the slow progress of WTO talks, India can use bilateral routes under PTAs/FTAs to secure improved market access for heavily protected textiles and clothing items.
Services
India's export to GDP ratio is about 25 per cent (16 per cent in goods and 9 per cent in services). When it comes to export of services, IT & ITES is the most important category, accounting for approximately 40 per cent of the export of all services and with high exposure to Europe and the US. But, luckily, it will benefit from the decline in rupee.
Besides, the crisis in developed countries presents an opportunity to explore inward (domestic market) and high-growth emerging economies for supplying IT services. The BRICS region, with a combined population of 3 billion and GDP of $4.6 trillion, is a huge market to tap.
So why not take this crisis as an opportunity?
The composition of India's GDP is a source of resilience. Private final consumption expenditure accounts for roughly 60 per cent of India's GDP compared with China's 35 per cent or so. Thus, India's dependence on the external sector is still not very high though it has increased over the years. India is primarily a consumption story and with rising income and expanding middle-class it will remain so.
Increasing income of rural population will further generate demand for industrial products and keep the economic wheel moving.
Hurdles to cross
But even though India has reduced its dependence on Europe and the US by diversifying towards non-traditional markets in emerging economies, challenges to its economic performance remain.
External challenges: A worsening sovereign debt crisis in the Euro Zone and growing risk aversion on the part of FIIs may keep net forex inflows low for a far longer period. With the RBI's limited manoeuvrability in the forex market, rupee will remain under pressure. This may affect the cost-competitiveness of import-dependent manufacturing industries already facing a high cost of borrowing, such as copper smelters or petroleum refineries.
The other challenge is the consequences of fiscal mismanagement and sustainability of easy money policy in the US. Yet another concern is whether China will be able to maintain its growth momentum in the light of its high dependence on the external sector, low domestic consumption and high investment rates; and growing resistance in the US against Chinese trade surplus when China is expected to play the role of global growth driver?
Internal challenges: India's lacklustre performance on the policy front — be it land acquisition, speedy environmental clearance, allowing FDI in specific sectors or checking fiscal deficit and inflation or tackling corruption — is making investors, domestic and foreign, nervous.
The question is: can India deliver?
It is indeed good analysis on current status of Indian foreign Trade.
Agree with your well researched article.
India can deliver better if area of improvment in Infrastructure is addressed effectivly, which is essential for increase of trade by Mfg sector.
This year Industry would expect from Govt a major policy support towards expanding trade to LATAM and AFRICA which posses good potential for India.
IT sector can look for the domestic opportunities as US & EU may not be as potential as it were and BRICS although a good market but probably their home companies have geared up very fast to take the challenge of emerging opportunities.
Availability of knowledge based proffesionals for Services in Engineering, Designing are the strong area where India is looked as strong base and can be a good platform for reexport activities.
Thanks for this useful article. We are sharing it with ICCI (Indian Chambers of Commerce & Industry) members.
While the jerk of US and European Debt crisis is felt all over the world in some way or the other, fundamentals of Indian economy is rather robust and sustainable in long run. What is required at this moment is to shift the gear supported by a strong political will and vision to tap the abundant potential. What we are witnessing of late is again the return of red tapism, political and bureaucratic inaction and fear psychosis to take decision.
This is a nice analytical article and my compliments to the author.
Very good analysis. However, while the growth of share of exports to Africa and South Americal is impressive, these exports are still a small part of our total exports. Our over dependence on software exports is worrisome. If the going gets tough in US or Europe, every company axes non-essential (rather not immediately needed) costs such as software and focus on their core businesses which can translate into a disproportionately large impact on Indian software exports for a small slowdown in the west.
I think our future lies largely in our domestic market. A lot needs to be done on the infrastructure front which is a wonderful opportunity for growth.
With the growing incomes of the poor in the rural areas with schemes such as NREGA, the demand for food (especially non-cereal items such as dals, onions, vegetables and eggs) is growing faster than the economy. Consequently, food inflation has been consistently higher than both the GDP growth and the general inflation. Growing and producing more food and processing and storing it to reduce wastage (which is very high in India) and cutting levels in the distrbution chain form the second big opportunity for businesses to grow and the nation to prosper.
China does remain a concern especially now that it has become an important trading partner for India. Only other concern is that if the Middle East and China get more adversely impacted by the European crisis, that would affect India. Apart from trade, what is worrying is the capital flows that are sensitive to European and US developments currently causing the Rupee to weaken.
Krishna
The analysis of the author regarding implications of global crisis on Indian exports is insightful. No doubt, India's reliance on Europe and America for export market has lessened and trade with China and ASEAN in general has increased over the last decade. There is some shift in the direction of trade in favour of Africa and the latin America as well. But the matters for concern still remain. Firstly, all said and done, India's balance of payments has once come into red zone with an estimated BOP deficit of $150 billion with estimated exports of $300 billion and imports worth $450 billion. Secondly despite China emerging as a major trading partner with approximately $60 billions of trade, India has a massive trade deficit with the country standing at $20 billion. Thirdly, as India has become one of the major importers of services, its surplus on services account has shrunk from approximately $105 billion to $40 billion. So we cannot remain indifferent.
The article is very much informative and good analysis of data. The author is very
positive in his approach. Exporters can take a note of it and plan a strategic business
entry.
Hi Ritesh. A good summary. You ask you get. The crucial answer in this whole Global issue will be "Productivity" However you wish to explain the particular criteria developing in the disaster, you will be in effected or affected, by this small word. Nothing else will matter. Savings and debt on domestic spread, of capital before the capture of consolidated accounts in treasury of Government, in the debt surge, will be the second denomination. If these result are wrong you will see bottoms up, sorry! It means that if your banks sold debt at lower rates to get rid of the problem you have transgressed the Rubicon.