Relevance: GS-3: Indian Economy and issues relating to planning, mobilization of resources, growth, development and employment; Effects of liberalization on the economy, changes in industrial policy and their effects on industrial growth.

Key Phrases: Merchandise exports, $400 billion plus exports, imports-to-exports ratio, ESG rules, bull run in exports, trends in exports.

Why in News?

• The crossing of the $400 billion mark is being seen as a sign of exports bouncing back strongly. But how significant is this landmark?

Key Points:

• Logically the $400-billion mark would have been crossed at some point of time, just like the target of $5 trillion economy where the GDP in nominal terms will cross the ₹375 lakh crore number in the next 4-5 years.
• Therefore, achieving this target is not such a landmark; in the past exports growth had turned negative after touching a high, before ascending again.
  • Export growth turned negative in five of the last 10 years, reflecting a high degree of volatility.
  • This is quite unlike GDP growth which progressively increases and rarely falls into negative zone (the pandemic year being an exception).
• The reason for this difference is that exports tend to be mainly demand driven and hence any slump in the global economy gets hits their growth.

Exports Growth Story:

The exports growth story is interesting as trends vary over various periods.

• In 1990-91, when the economic reforms were implemented, exports were at around $18 billion.
  • From FY’92 to the end of the century the CAGR was 8.2 per cent while exports in absolute terms just about doubled.
  • However, in the next six years, CAGR was 18.7 per cent as exports touched the $100 billion mark.
  • In the next five years ending FY11, exports crossed the $200 billion mark jumping to $251 billion with CAGR of 19.5 per cent.
  • FY11 had witnessed the highest growth of 40 per cent from $178 billion to $251 billion.
  • The bull run in exports continued in FY12 with growth of 21.8 per cent, touching the $300 billion mark.
• However, the climb from $300 billion to $400 billion has been arduous. It has taken a decade to traverse this route with a CAGR of just 3 per cent.
  • This was the period where there were five declines in absolute level of exports.

Therefore, sustainability of growth in exports is a question which will nag policy makers.

• The other interesting aspect of foreign trade is that exports and imports tend to move in the same direction.
  • In fact, when exports grow at a high double digit rate, imports tend to grow at a faster rate.
• In this context it is useful to track the imports-to-exports ratio. This ratio has shown an increase in the last couple of decades.
  • In the 1980s it averaged 1.33 and then declined to 1.19 in the nineties which was the first decade of reforms.
  • It rose to 1.37 in the first decade of this century ending 2009-10 and since then has gone up to average 1.49.
• Clearly the dependence on imports has risen quite sharply over the years which is a natural corollary of globalisation, as companies source their raw materials and intermediary goods from nations which provide them at a better cost.

Concerns:

• The fact that FY23 has started against a backdrop of the Ukraine crisis means that global growth will witness a setback, which will hurt exports.
• The high base of $400 billion plus in FY22 will provide an unfavourable base effect for growth.
• Merchandise exports are dominated by manufacturing, whose annual growth has been satisfactory at 5.9 per cent in the last decade.
  • This implies that exports growth was affected mainly by global factors where demand conditions were tepid.
• Central banks have provided extraordinary support to support growth since the Lehman crisis of 2008.
  • The rolling back of liquidity will affect global growth prospects and particularly foreign trade.
• Export basket: The two main challenges for exports are competition and product composition. The two are interlinked.
  • The composition of goods though changing is still tilted towards traditional goods like gems and jewellery, textiles, handicrafts, leather products etc. which typically also face competition from other developing countries.
  • This basket has a share of 25-27 per cent.
  • The price advantage enjoyed by other competing countries impacts domestic exports.
  • Engineering and chemicals account for around 38 per cent of total exports.
  • The domination of SMEs here implies that they need to work harder as a group, as quality issues as well as cost militate against rapid growth.

Therefore, while it is possible to conjecture growth in GDP and take a call on when the $5 trillion mark will be attained, it is unlikely that exports would hit the $1 trillion mark.

Way Forward:

• The government has been providing a number of incentives especially for MSMEs starting from export processing zones to finance being facilitated by the RBI.
  • However, SMEs here need to get better organised to push exports.
  • There are around 60 million units of which half would be in manufacturing, concentrated in the micro and small sectors, which makes the task more challenging.
• The future of exports will be more challenging as the ESG rules (Environmental, Social, and Governance) kick in and countries get more discerning in choosing their imports.
  • The price and quality factors which have been the dominant, will be replaced with compliance with ESG standards.
  • As the world moves in this direction, the entire exports ecosystem will have to reorient its production processes.

Conclusion:

• The developing countries so far have leveraged their cheap labour which has been highlighted often in discussion forums but not been an exclusion factor. Things are changing and we need to keep this in mind as we move towards scaling up exports to $500 billion a year to begin with.

Source: The Hindu BL

Mains Question:

Q. India’s export crossing $400 billion mark is a landmark achievement, however the problem lies in its sustainability. Critically analyse.