There is a wave of optimism in the country as India will be the second fastest growing economy for the second successive year. Apart from aspiring to become a $5-trillion or $10 trillion economy, achieving the $2 trillion export target by 2030 has also become part of the narrative.
Trade data now captures the changing pattern in composition. Data which earlier used to cover only merchandise now includes services on a monthly basis which provides a comprehensive view of the trade situation.
The $2-trillion export target includes both goods and services. In FY23 goods exports amounted to $450 billion while that of services was $322 billion. In FY22 exports of goods were $422 billion while services were $254 billion. The ratio of services to goods exports has gone from 60 per cent to 72 per cent which is impressive.
To achieve the $2-trillion mark, the two segments needs to be looked at separately as the factors driving them are different.
Merchandise exports have had a bumpy ride as they are inextricably linked with the state of the global economy. During the period of Great Moderation (FY03-08), when global growth soared, exports grew by a CAGR of 24.5 per cent. When the financial crisis struck in 2008, things changed quite dramatically.
As the Western economies went into a tailspin Indian exports continued to do relatively well with growth of around 14 per cent for the next quinquennium ending FY13. It was argued then that the emerging economies were decoupled from the West and China and India drew some benefits.
Subsequently growth averaged just 0.6 per cent for the period FY14-18 which then improved to 9.6 per cent for the period FY19-FY23.
The curious part of these trends is that in two years of each quinquennium there have been negative growth rates. Therefore the path has not been even, which shows that world growth prospects are a major factor.
The CAGR of exports in the last 15 years has been around 7 per cent. Nominal GDP growth for this period has been 12.1 per cent. Hence quite clearly growth in exports has not kept pace with GDP growth as it is dependent on external conditions. Intuitively, being less reliant on goods exports has insulated India from global recessions. This is what is seeing us through in the period FY23-FY24 as the world moves into the slowdown mode.
Also it has been observed that when exports have increased sharply, the petroleum component has been one of the drivers. In FY23 for example when exports peaked at $450 billion, $97 billion were from refined oil products. This means that there is a pass through of higher imports of crude through this value addition process. Hence high exports growth aided by petro-products is accompanied by a higher trade deficit.
Exports of services has been an enigma. Around 50 per cent of services exports is accounted for by the IT sector. The advantage here is that around 90 per cent of the inflows are would be accounted for in net terms too. For other services like tourism, transport, IPR there are negative net flows as the outflows tend to be higher as it is the case with open economies.
Services export ($254 billion in FY22) has risen quite sharply in the last two years post Covid. In FY23 they have peaked at $322 billion. Growth in the 10-year period ending FY23 was 8.2 per cent. For the seven-year period ending FY20 it averaged 5.6 per cent. However, in the last two years, growth has risen phenomenally from $206 billion to $322 billion. IT’s share is likely to be upwards of 50 per cent in FY23 too. The question is whether this momentum can be maintained.
Achieving the target by 2030 appears unlikely going by the trends observed for goods. To reach the target of $2 trillion in seven years, both components have to grow at a CAGR of 15 per cent a year which is a tall order. Going by past trends, goods exports are likely to growth at 10 per cent a year. This would also mean that the world economy has to keep accelerating which is unlikely given that the upward part of the cycle tends to be shorter than the downward movement.
The tech turn
Services exports’ impressive growth despite the global slowdown can be attributed to the greater use of technology across industries during the lockdown which has intensified subsequently. The focus on AI and ML has increased demand. But sustaining this high level will be the challenge.
In the past it has been seen that the boom time normally lasts for a period of 3-4 years before reverting to trend growth. For the next seven years at the higher end growth can be around 12-13 per cent. This combined with 10 per cent CAGR in merchandise exports can achieve the $2-trillion mark in nine years. It would take another two years in case merchandise and services increase by 7 per cent and 10 per cent respectively.
Exports of merchandise are largely coming from the SME sector which is facing headwinds. Government support through PLI needs to get translated into higher investment and output.
Services can grow for sure but will tend to slow down once initial economies are realised. The silver lining is that given the challenge in getting work permits in the US, companies are also working from India to provide such services.
Services exports will play a vital part in controlling our current account deficit as imports will tend to increase as growth accelerates. Services can temper this increase and ensure that CAD remains closer to the 2 per cent mark which will help the economy to increase forex reserves along with steady capital inflows.
The writer is Chief Economist, Bank of Baroda. Views expressed are personal