Sceptics, however, see the boom as largely driven by global commodity inflation. That is, India is selling the same or even lower of volumes of a commodity, but higher international prices are fetching exporters much larger dollar amounts.
For something as heterogeneous as goods exports, broad generalisations are misleading. The assessment has to be granular. The drivers of each category of goods sold abroad need to be analysed objectively, untarnished by the agenda or proving a point or picking a side. For one thing, export growth in 2021-22 has been broad-based. About 89% of the export basket has already crossed the pre-pandemic levels.
However, going by HDFC Bank estimates, perhaps most importantly, the share of India in global exports has risen to over 1.8% in 2021-22, about 15 basis points (bps) higher than pre-pandemic levels. A bps is one-hundredth of a percentage point, and while 15 seems a small number, given the sheer magnitude of global trade, it is not to be sneezed at.
A couple of trends are worth noticing. There was a noticeable shift in the composition of exports in the pre-pandemic years that has sustained through the pandemic. The decline in the share of gems and jewellery (G&J), traditionally an export heavyweight, in the overall basket is a good example. Much of this category comprises diamond-cutting and polishing, where rough stones are imported and polished stones re-exported. The economy’s net gain from these exports is simply the value addition in processing ‘roughs’.
The fall in its share has been the gain of more ‘genuine’ exports such as engineering goods and electronics. In 2016-17, the share of G&J was 15% of total exports. In 2021-22, it was 9.5%. Over this period, the share of engineering goods went up by 23-26%, and that of electronics from roughly 2% to 3.5%.
Export Mettle
Second, the rise in commodity-related exports has not been on the back of price alone. Take ‘base metals and its products’, a key component of engineering goods. While higher metals prices have certainly helped export value, volume growth has been in double digits for 2020-21 and 2021-22. Textiles is the one category where both anecdotal evidence and data support the ‘China+1’ theory. Manufacturers point to a noticeable shift in demand from Western producers from China to India.
Between 2020 and 2022, the share of China in US apparel exports declined by 8 percentage points. India, along with Malaysia, has been the big gainer from this shift with India’s market share up 1.7 percentage points. Yarn and cotton exports have both significantly exceeded pre-pandemic levels and Indian manufacturers are looking to set up fresh capacity.
However, this is not to deny the fact that the surge in global commodity inflation has played a key role in boosting export value. Petroleum products, for instance, contribute a hefty $65 billion to the $418 billion total. The 73% increase in average oil prices between 2021 and 2022 has certainly played a role. The same holds for metal products.
Commodity inflation, alas, affects imports as well. Thus, while exports have hit a record, so have imports, resulting in a massive trade deficit of $192 billion. However, it is important to emphasise that as percentage of GDP (the correct metric to make comparisons), the deficit remained at 6.2%, roughly the same as the couple of years before the pandemic. It may be interesting here to think of the counterfactual – what would have happened to India’s external balances and the rupee if exports had not boomed?
The problem with the current discussion on India’s exports is the fixation with both the record figure of $418 billion for 2021-22 and the assertion that $500 billion for the next year is a done deal. If, indeed, global trade shrinks along with the world economy this year, export value could be lower. Exports, both in terms of value and volumes, are cyclical. That’s just the nature of the beast.
The focus should, instead, be on the gains made over the last few years in terms of diversification towards higher value items and gains in market share. How can this be driven forward? Here fundamental questions of policy need to be re-examined. For instance, is the protectionist stance implicit in the increase in import tariffs of a number of items in sync with our export ambitions?
Got the Import?
How quickly can logistics and other infrastructure be ramped up? Will this effort work best through export enclaves such as the special economic zones (SEZs)? Do they need to be scaled up further? Should our somewhat unsavoury experience with free trade agreements (FTAs) keep us reticent from signing more deals? Instead, should the recently signed comprehensive trade deal with Australia be the new playbook?
There is much to still ponder over and changes to implement when it comes to India’s export model. One just hopes that 2021-22’s high score does not bring about a sense of complacency.
