Revise strategy as trade headwinds impact exports
Merchandise exports fell for the fourth consecutive month, while the trade deficit widened to a five-month high in May. Several key sectors saw negative growth, including petroleum products, gems and jewellery, engineering goods, textiles, chemicals, etc. On the other hand, the services sector, led by the IT industry, did well bridging the widening goods export gap, but we must avoid such part-good,part-bad performances and aim for a steady and uniform growth of the exports basket. After a noteworthy FY22 when India galloped to become the world’s fifth-largest economy, exports surged to a seven-year-high share in GDP. But exports growth moderated in FY23, as persisting geopolitical tensions and monetary tightening-induced recessionary fears dented demand across advanced nations.
Trade is an essential growth engine, and for India to break into the top three, we must first achieve the $1 trillion export target by 2030. More than the headline export growth number, the pattern of specialisation or the composition of exports is also crucial. For the first time, economists at RBI studied India’s Export Similarity Index (ESI) and offered both good and bad news. The share of principal commodities like engineering goods, chemicals, drugs and pharma, rice, and electronics in India’s overall export basket has increased in the past decade. In contrast, the share of commodities across labour-intensive items like textiles and others fell. This is in line with the shifting pattern in international merchandise trade and confirms that India is on the right track. However, only 60% of India’s exports are similar to that of the G7. Likewise, in services too, post-pandemic India did close the trade gap faster than the G7, but its services ESI, with respect to the world, is lower than all the G7 nations.
One way of raising exports includes Free Trade Agreements (FTAs) with other countries. India has 14 such FTAs, besides pacts with South Korea, Japan, Australia and UAE. An analysis of the FTAs shows that India’s merchandise ESI in the Asean region is lower than the Big-5 Asean economies, and worryingly, it has been falling. In contrast, Vietnam, the emerging manufacturing and export hub, has seen steep increases in its ESI values over the past two decades. Given India’s aspirations of becoming a developed country, its score on export competitiveness is rather low even among Asean peers and needs urgent attention.