Indian exports will take time to catch up

Consider India’s merchandise exports, which stood at $450.4 billion in the last fiscal year. This represented an increase of 6.7% compared to the $422 billion worth of goods exported a year earlier. But when you start breaking down the aggregate figures, the constraints facing India’s exports begin to become apparent.

The merchandise export growth was achieved entirely through oil exports, which grew by a whopping 44.4%. Non-oil exports, on the other hand, contracted 0.4%. To be sure, India’s oil exports were marginally lower by volume, meaning that the sharp increase in dollar terms was purely a price effect (the average Brent crude price in 2021-22 is $95.5). per barrel versus $80). With oil prices improving and global growth slowing, oil export growth is bound to slow or even decline.

Non-oil exports also contracted, with several of India’s top 10 major commodities declining: gems and jewelery (-3.0% on-year), base metals (-22.4%), textiles (-17.6%) and plastics and rubber Articles (- 12.1%). Chemical products, India’s second largest export item, grew marginally by 2%. Many of these have a disproportionately large dependence on advanced economies, primarily the US and the Eurozone, which appear to be slowing down this year. This implies a further pressure on exports. And the fall in international commodity prices will only add to the impact.

India’s merchandise exports have contracted for three months in a row, witnessing a double-digit decline of 12.7% year-on-year in April. The thesis that growth is slowing in the US and Eurozone, but remains resilient in Asia-Pacific (which accounts for a large part of India’s merchandise exports), needs to be read with a caveat. If we exclude China, the Asia-Pacific region is expected to slow down this year due to lower demand for manufactured goods, which has increased since the post-Covid reopening, as well as higher interest rates. combined with the financial impact of

Second, despite being the largest export destination, the share of Asia-Pacific in Indian exports has declined in recent years.

Two of India’s top-10 export items—agriculture products and electronics—showed a healthy performance in the last fiscal year. While the former grew by 11.8%, the latter grew by a whopping 51.6%, reflecting support from the Production Linked Incentive (PLI) scheme. That said, if food production is hurt by the lurking risk of El Niño, agricultural exports could slow.

With regard to the ‘high’ growth in electronics exports (mostly mobile handsets), it is pertinent to note that its share in India’s total exports is still low, at around 5%, and are heavily import-dependent. This means that the kind of multiplier effect that can be had in exporting a large commodity, such as automobiles – which are manufactured using products from multiple industries, including tyres, engines, plastics, paints and steel – would be missing in the case. . of a mobile handset, as these are mostly assembled and dependent on imports, even though the ecosystem for their production is yet to develop in India.

While merchandise exports are facing near-term hiccups, services exports are providing much-needed support, helping to keep overall goods and services export growth in positive territory. Compared to a 6.7% increase in merchandise exports (including oil) in the previous fiscal year, service exports grew at a solid 26.7%.

India’s service exports continue to grow, their share in total exports to 41.7% in 2022-23 from 32.3% a decade ago; India’s commerce minister expects services exports to grow to $1 trillion by 2030, increasing its share to 50%. It also shows India’s global share of services exports rising to 4.5% in 2022 from 3.1% a decade ago. In comparison, India’s share in merchandise exports has stagnated at around 1.8%. Therefore, while India was the seventh largest services exporter, it ranked 18th in goods exports.

Even though computer services remain the mainstay of India’s overall service exports (45-50% share), professional and management consultancy exports have seen growth over the years; Their share in total service exports to increase from 7.9% in 2011-12 to 16.4% in 2022-23 (April-December). The growth in professional and management consulting exports reflects the successful emergence of Global Competence Centers (GCCs) that provide a wide range of value-added services such as research and development, systems design, etc.

According to the recently released report of NASSCOM Strategic Review 2023India will add 65 new GCCs in 2022, taking the total to 1,570, capturing a large share (about 50%) of GCCs worldwide. In fact, while computer exports (net) grew by an average of 20.7% in 2022-23 (April-December), growth in professional and management consultancy exports more than tripled to 66.7%. Therefore, strong professional and management consultancy can act as an export counterweight. From a medium-term perspective, however, the rapid growth of artificial intelligence applications in many service sectors remains a risk.

While healthy growth in services exports provides some relief, it does not fully compensate for the slowdown in goods exports, as the gap between the two is huge. Hence, a slowdown in exports looks imminent at this juncture.

Dharmakirti Joshi and Adhish Verma are Chief Economist and Senior Economist respectively at CRISIL