$1 Trillion Export Economy

After stagnating for nearly a decade at around $300 billion, Indian merchandise exports, despite disruptions caused by the Russia-Ukraine war, surged by nearly 40 per cent to $420 billion in 2021-22. But that’s only half the story. India’s service exports also spurted to over $250 billion in the last fiscal.  For the first time ever, India’s total exports will be within touching distance of $700 billion.

Most successful economies have a strong export base. India has long lagged behind. While the expansion of global trade in 2021-22 by an estimated 25 per cent helped boost exports, several other factors are at play. The Production-Linked Incentive (PLI) scheme has drawn global manufacturing firms to establish India as an export hub. Taiwan’s mobile phone makers Foxconn, Wistron and Pegatron have shifted some of their production lines from China to India. Automotive and electronics exports are also surging. According to data from the finance ministry, the PLI scheme has generated Rs. 2.34 lakh crore in investment commitments in 14 sectors. The five-year target for PLI-based investments is Rs. 28.15 lakh crore.

Beyond merchandise exports, the big story lies in services.  India’s services exporters, especially software, are rapidly moving up the value chain. From call centres in the early 2000s to SaaS  (Software as a Service), the industry has come a long way. Indian technology companies now offer a suite of services: engineering solutions, automation, artificial intelligence, fintech, edtech and deep machine learning. The move by global companies towards digitalisation will provide the IT sector ballast for several years.

Services exports leapt from $206.09 billion in 2020-21 to $250 billion in 2021-22, a rise of 22 per cent. The target  this fiscal is  $300 billion for services exports and just under $480 billion for merchandise exports. Total exports: $780 billion.

Assuming India’s nominal GDP (currently $3.1 trillion) will grow by 13 per cent to $3.5 trillion (on an estimated real growth rate of  7  per cent and inflation of 6 per cent) in 2022-23, total exports would amount to a healthy 22 per cent of GDP. That compares favourably with the export-to-GDP ratios of countries like Japan, Germany and China.

Is a $1 trillion export target therefore feasible despite a challenging geo-economic environment? Clearly it is. Once exports breach $800 billion – as they likely will in 2023-24 – a further increase of 25 per cent to $1 trillion is within sight. With an estimated  nominal  GDP in 2023-24 of  just  under $4 trillion, exports would be close to 25 per cent of the economy.

What could go wrong? Several speedbreakers lie ahead. The Russia-Ukraine war can cause more severe trading disruptions. Contrarily, the loss of production and trading capacity in the Russian and Ukrainian economies benefits Indian exporters. The International Monetary Fund (IMF) expects Ukraine’s GDP to fall by 35 per cent in 2022-23 due to the war. Russia’s GDP is projected to decline by around 10  per cent.  

Sanctions have crippled Russia’s trade with Europe, the United States, Japan and several other countries. India, however, has continued exports to Russia and is buying Russian oil at steeply discounted prices.   According to a report in The Economic Times on April 19, 2022, “India's exports to  Russia  have resumed with containers carrying goods including tea, rice, fruits, coffee, marine products and confectionery shipping out last week.  Banks led by Russia's largest lender, Sberbank, are facilitating settlement of bilateral trade moving largely through ports in Georgia.

“Trade is being settled through the rupee-rouble route to the extent possible, while some banks are providing remittances in euros. Officials of both countries have held talks relating to trade and payments. The immediate demand is for food as Russian stores are emptying out because of sanctions imposed on the country and the ban on supplies by the European Union.”
 
A second speedbreaker to India’s export drive is the continuing chip shortage. This has hit production targets particularly hard in the automotive and electronics sectors. The third impediment is a container shortage and congestion at both Indian and East Asian ports that have delayed export shipments.

Much of the slack could be made up by the series of free trade agreements (FTAs) signed recently with the United Arab Emirates (UAE) and Australia. The visit by British Prime Minister Boris Johnson is not expected to  lead to a quick India-UK FTA but  both sides are hoping to seal a broadbased agreement by year-end.  Negotiations for FTAs with the European Union (EU) and the Gulf Cooperation Council (GCC) have begun and seem promising.

Commerce and Industry Minister Piyush Goyal expects the FTA with Australia to nearly treble Indian exports to Australia from the current $1.9 billion to $5 billion in 2027.  With the Covid pandemic waning, despite  fears of a possible fourth wave, service sectors like tourism, hospitality and aviation are likely to boost exports this fiscal.

Meanwhile, India’s non-basmati rice exports to several countries more than doubled from $2.92 billion in 2020-21 to $6.11 billion in 2021-22. These exports mirror the likely rise in agri exports in 2022-23. The government has set a target of 328 million tonnes of food grain, the highest ever.

Will the trend hold in 2022-23? Early signs are propitious. In the first two weeks of April 2022, Indian merchandise exports surged 37 per cent over the same period a year ago to $18.7 billion, according to the commerce ministry.  If this trajectory is maintained for the rest of the year, merchandise exports could  meet   the informal target of $480 billion set for 2022-23.

The impact of India’s export surge will have several spin-off benefits for the Indian economy. The IMF’s latest projection for India’s GDP growth rate in 2022-23 is 8.2 per cent, making India the world’s fastest growing major economy. Other financial institutions are more conservative, forecasting 7 per cent growth in 2022-23.  China’s growth rate, according to the new IMF forecast, will fall to 4.4 per cent. Covid-led disruptions in Shanghai, China’s most important economic  hub,   could make even that forecast look optimistic.

For India though, attention must remain sharply focused on new FTAs, decongesting ports and helping exporters with  timely payments and less cumbersome  regulations. A $1 trillion export economy beckons.