Gear up to ride the export boom

The rise in India’s exports — 63.1 per cent on-year in the first half of calendar 2021 (January-June) has been nothing short of spectacular, with more than a ‘low-base effect’ as its driving force.

Quite the apposite hour to raise India’s export competitiveness because global growth is accelerating as Covid-19 afflictions and vaccinations go the right way, and fiscal support is ample.

Global trade in goods and services is ticking along nicely, growing 10 per cent on-year in the first quarter of 2021 and sailing past 2019 levels, according to an UNCTAD report in May.

The World Trade Organisation expects global merchandise trade volumes to increase 8 per cent on-year in 2021, after having contracted 5.3 per cent in 2020. Goods demand is forecast to be stronger in North America and Europe, particularly due to the large fiscal stimulus in their economies. Importantly, the organisation expects majority of this global demand to be met by Asia.

Riding the global wave

India has a golden chance to support its own economy through exports after the second Covid-19 blow, if only it leverages this growing strength in global trade. India’s major trading partners — the United States, European Union, United Kingdom, China and Hong Kong — which together account for 43 per cent of India’s total exports, have seen their growth forecasts for 2021 revised upwards (see table below).

Consequently, India’s exports to these destinations have soared. It grew 6.9 per cent, 13.9 per cent, 14.1 per cent and 1.9 per cent to the EU, UK, China and US, respectively, in the three months to March (in seasonally adjusted terms). This trend is expected to continue, as demand improves further.

But core export lagging

However, even as overall exports have grown steadily, core exports (non-oil, non-gold exports) growth has been relatively muted (see figure below).

The growth in overall exports could partly be attributed to rising petroleum exports, on the back of improving global demand and rising crude prices.

Among core exports, large industrial sectors, such as electronic goods, engineering goods and chemicals too, are seeing robust growth. Electronic goods have particularly benefited from increased global demand during the pandemic.

On the other hand, growth in exports of labour-intensive products such as readymade garments, leather, and agriculture and allied products (rice, fruits and vegetables, meat, dairy, and poultry, and seafood) have slowed down after a transitory pickup in early 2021. This is particularly so in April and May, when the second Covid-19 wave raged in India: exports of fruits and vegetables, readymade garments and leather products declined 3.8 per cent, 3.6 per cent and 0.7 per cent in the three months to May (in seasonally adjusted terms). These trends suggest that exports have supported growth but not so much employment.

Seize the moment to raise competitiveness

The pace of India’s export growth should sustain for the rest of 2021, given the swift rebound in its major export partner regions (US, EU, China) is only set to get stronger in the second half. Besides, global demand for petroleum, pharmaceuticals and electronic goods — major constituents of India’s export basket — is also expected to be robust. Rupee depreciation would be an added boost.

However, the slowdown in labour-intensive textile and agriculture and allied exports is bad news for the domestic economy, reeling under employment losses since the pandemic began. India has already lost market share in global trade in 2020: its export share has declined to 1.5 per cent from 1.7 per cent in 2019. Moreover, export competitiveness has been eroded particularly in apparel and minerals sectors (according to UNCTAD, February 2021).

So while a depreciating rupee and accelerating global economic growth offer a window of opportunity to increase exports over the next couple of quarters, structural improvements must assume significance.

The government’s recently announced support for project exports by enhancing insurance cover is positive and will help India expand its footprint in this area over the medium run.

But there are still many creases to iron out. Lower comparative advantage of India’s exports is often attributed to higher trade costs (tariff and non-tariff barriers), infrastructure bottlenecks, and land and labour laws. The World Bank, in its Global Economic Prospects (June 2021) shows how trade costs can double the price of a good traded externally over a similar domestic good, particularly in emerging economies, hindering competitiveness.

Lowering these through reduction in compliance costs at border processes and improving domestic infrastructure, especially in shipping and logistics, could help boost trade flows. India’s progress on the ease of doing business rankings, particularly in reducing ‘time and costs of trading across borders’, is one step forward in this regard.

The pandemic has accelerated the process of diversification of suppliers and production destinations, especially away from China. This again offers a chance for India to integrate itself further into global value chains. Improving competitiveness of exports through a focus on domestic infrastructure building and reduction in trade costs would go a long way in improving its chances of being noticed. India needs to do more than just ride on the turning tide.

Joshi is Chief Economist and Ghare Junior Economist at CRISIL Ltd

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