India needs to take urgent steps to get exports back on track

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Fiscal year 2021-22 ended on an exceptional note for India’s merchandise exports with the $400 billion mark breached for the first time. The $200 billion threshold had been exceeded in 2011-12, and although the then government had expected exports to increase to $500 billion by 2013-14, during the entire period since, $300 billion (realised in 2018-19) was the best India’s exporters could achieve.

Therefore, when $422 billion of exports were realised during the previous fiscal year, and that too, immediately following one of the most crippling economic downturns in India’s history, the government and the businesses were both in an upbeat mood.

One of the significant outcomes of merchandise exports reaching their new high was the complete turnaround of the government’s approach towards global economic integration. If the slowdown in exports, which had preceded the COVID-19-pandemic, had forced the government to take a step back from the process of globalisation, characterised in part by its refusal to engage in bilateral/regional free trade agreements (FTAs), the export surge changed its approach towards these agreements.

By the end of 2021, Commerce and Industry Minister Piyush Goyal had announced that India was negotiating seven FTAs that included reviving the stalled FTA-negotiations with the European Union, Australia, and Canada, besides engaging with new partners, namely, the United Kingdom, Israel, the United Arab Emirates, and the Eurasian Economic Union. The underlying message was that a resurgent India had shed its past inability to expand its footprint in the global market and to, therefore, maximise its benefits from the new crop of FTAs.

Seven months into the 2022-23 fiscal year, India’s merchandise exports are facing serious uncertainties. The year had begun with exports continuing their surge carried forward from the previous year, expanding by almost 25 percent during the first quarter (April-June) over the corresponding period in 2021-22. However, after a period of reasonably impressive growth, exports lost their growth momentum completely during the second quarter, having expanded by less than 3 percent. In October, exports declined sharply by nearly 17 percent, the first time since the onset of the pandemic. This means that during April-October 2022, exports have expanded by just 9 percent over the corresponding period in 2021-22.

Preliminary estimates for 30 broad product groups show worrying trends. In October, 24 of these groups registered negative growth over the corresponding month in 2021. Three major drivers of export growth during the previous year, namely, petroleum products, engineering goods, which also includes iron and steel, and gems and jewellery had experienced slump during the current financial year. Besides, several key manufacturing products, like textiles and garments, pharmaceuticals, and a range of engineering goods, had also faced slump in exports. These are among the sectors for the strengthening of which the government has been investing heavily under the Production Linked Incentive (PLI) scheme during the past two years.

The only manufacturing sector that showed up in positive light was the electronics sector, which maintained an upward trend, backed by the thrust provided by growing exports of mobile phones. This had also contributed a modest fall in the imports of these gadgets, which augers well for the country. Rice is the only other major product that had bucked the trend of falling exports, but only marginally.

Perhaps the more disconcerting fact is that the falling trend in exports of major manufacturing sectors has set in since the end of the first quarter. Since these are also the sectors that have benefited from the PLI scheme, it is vitally important for the government to consider measures to improve their global competitiveness. Unless urgent steps are taken to identify the factors that have had an adverse impact on exports, the remaining months of the current fiscal year and beyond could see a significant worsening of the current trends. This is because global markets are facing rough weather due to continued uncertainties arising from Russia’s invasion of Ukraine, the macroeconomic challenges being faced by the two largest economies, and Europe’s struggles to overcome its energy crisis.

Getting the exports back on track is vital as imports have expanded significantly as the Indian economy continues to recover. As against a 9 percent expansion of exports during April-October, imports have expanded by nearly by 33 percent, resulting in a near doubling of merchandise trade deficit as compared to the previous year. With the rupee already under considerable pressure due to a combination of several factors, India can ill-afford additional headwinds on account of rising current account deficit.