Jan 30, 2022, 20:00 IST | Neelkanth Mishra
This appeared in the Times of India on 31 January, 2022 (link).
There’s something to cheer before the budget – India’s goods exports are a record high $393 billion, after having stagnated in the $250-330bn annual range for a decade. A robust revival in global goods trade helped, of course, but India’s global share of exports also rose to an all-time high, and in the last quarter likely crossed 2%. While higher commodity prices contributed, which could reverse, too, trends in several large sectors seem sustainable.
Take electronics, the largest sector by value in global goods trade, where India has been noticeably absent so far. In 2021, India exported $16 billion, a fraction of a percent of global trade but double the level of 2018. While the government’s target of $110 billion in four years seems ambitious, a multifold increase from current levels is likely.
Thirty firms are now assembling handsets in India: Only 10 of them benefit from production-linked incentive (PLI) schemes, implying handset assembly is now competitive in India. Other electronics assembly is picking up too, and component firms are also setting up factories in India, which should add to the domestic value-add in these exports.
Another segment growing in size is fine chemicals, where India’s global share has doubled to 3% over the past decade. India has few competitive advantages in bulk chemicals, but it does in fine chemicals (including pharmaceuticals): abundant chemistry and process engineering skills and a complex ecosystem. Pharmaceutical exports continue to grow, and after two decades of steady compounding, growth in the specialty chemicals industry is now beginning to matter as well.
Textiles and apparel exports also hit a record $38 billion in 2021, after being stagnant in the $32-33 billion range since 2013. So far, yarns and fabrics, which are benefiting from price increases, have driven the improvement, but there is good momentum building up in garments too. Some garment manufacturers have customers asking for a 50% rise in output on top of record output last year.
There are several generic and some sector-specific drivers behind this change in India’s export trajectory.
An important change is manufacturing beginning to move out of China in several sectors, even though over the last two years China’s exports have grown. A big factor is demographics: A shrinking industrial workforce is pushing labour-intensive work out of China. This can continue for at least the next decade, and India is emerging as one of the alternatives. Separately, stronger enforcement of environmental norms is also eroding the arbitrage that Chinese firms benefited from earlier in chemicals.
Government policies help: Central and state incentives offer capex subsidy, provide land, speedy permissions, electricity and skilling reimbursement and tax deferrals. Progress on some PLI schemes has been slower than expected, like in autos and apparel, mainly due to the need to recalibrate and refocus incentives, but further meaningful delays appear unlikely as most are in the execution phase now. As these schemes ramp up, they can add substantially to exports going forward.
Some anecdotes are striking: A large handset component manufacturer is only weeks from starting commercial production at a plant where groundbreaking occurred less than 15 months back. Land allocation took less than a week, and work on highway connectivity for the site started within weeks. Similarly, allocation of land, construction and production scale up of electric two-wheeler manufacturing by a firm that is new to the business, occurred in surprisingly fast time.
There are some sector-specific factors as well, like the specialty chemicals industry gaining scale. That there are now 18 firms in the sector with over a billion dollars in market capitalisation (just six in 2015) could be due to high price of chemicals that may not last; or just valuation excesses. However, industry profits and balance sheets have grown with remarkable steadiness.
This, together with access to cheaper capital allows firms to target larger products, investing in R&D, capacity and further global expansion. Separately, the US ban on Xinjiang cotton is likely helping the Indian cotton value-chain.
Entrepreneurial workers in new industries like hardware technology can also break away to set up their own businesses, a trend already seen in Taiwan and China.
India’s manufacturing competitiveness continues to drive much hand wringing. Not only was India’s global share of goods exports stagnant for close to a decade, manufacturing share of GDP fell from 16% in 2012 to just 13% last year. A surge in manufacturing exports, as well as import substitution (already seen in categories like air conditioners) can help reverse these trends. Goods exports can add nearly 2.5% to GDP over the next five years. This is also important for job creation at scale.
That said there is much ground to cover: Gains must continue for 15 years or more for India’s export share to be in the same ballpark as its share of the global workforce.
For that to occur, growth must pick up in other sectors as well, like autos, capital goods and defence. As technology and geopolitics reshape global value chains over the next decade, new opportunities will emerge. For example, the disruptions in autos, with several new entrants (like Apple and Sony), an accelerating transition to electric vehicles, changes in mobility, and emergence of new manufacturing models (like custom assembly), could provide new opportunities for Indian firms.
For this sector and others, skill development is necessary not just for workers and entrepreneurs, but also regulators and administrators. Continued investments in infrastructure may also be necessary to remove bottlenecks for export growth to sustain.