Changing Landscape of Our International Trade
With the stupendous performance by exports, the contribution to our GDP ambitiously meets the ambition of becoming a US$5 trillion economy. There is optimism that exports can grow much faster, especially in services, given the emphasis on digitisation across the globe. — Vinod Johri
Our country’s goods export basket and destinations have seen a major shift in recent years. While it is ceding market area in traditional sectors, gains are being made in areas like electronics and machinery. In early 1990s, primary commodities such as tea, coffee and spices accounted for bulk of Bharat’s exports, there has been a major shift towards manufactured goods such as textiles, gems and jewellery and engineering goods. The share of primary commodities has declined from over 70% in early 1990s to around 20% at present, while share of manufactured goods rose from 30% in early 1990s to over 80%. There is a shift towards higher value-added goods such as engineering goods, pharmaceuticals, automobiles and petroleum products. Our goods, services exports to cross $760 billion in FY23.
The trade landscape itself is changing dramatically with three defining drivers shaping trade of the future—technology, geopolitics and global exigencies, and climate change. While all three drivers will be critical in redefining the trade landscape, the role of technology in trade is intriguing. As trade takes multiple leaps forward with changing technology, it is redefining what we trade, how we trade, and who trades what.
There has been major reign in global trade too. World trade has grown from $70 billion in 1950 to $28 Trillion in 2022. In past, the primary commodities such as coal, oil, farm products etc. accounted for the large share of world trade. With the advent of technology, there has been a shift towards manufactured goods.
India’s business services exports have grown so rapidly of late that their incremental impact is now as large as that of IT services exports. While their base is smaller, they grew by $21 billion last year, whereas the growth in IT services exports in 2022 was $27 billion. There is a global tide in services trade, and India is gaining market share. This growth is nearly as significant as the growth in IT services exports. The rise in business services exports is driven by structural factors such as the disaggregation of services value chains and the ability to deliver services remotely. There are both structural and cyclical reasons behind these trends. The most important structural reason for India gaining service trade market share is disaggregation in service value chains. This fosters specialisation and innovation and boosts trade.
These factors have meant that the global trade in financial, communication, computer, technical, legal, advertising and business services, is growing faster and now accounts for 40% of global service trade. Given that these dominate India’s service export mix, being 75% of total, its service trade is growing faster than the world. Additionally, India’s share of global financial, communication, computer, technical, legal, advertising and business services, has also picked up from 6% in 2018 to 8% last year, nearly 2.5 times its share of global GDP.
In India, growth for both imports and exports started rising from 2017 onwards and accelerated further during Covid. Exports have done better, driving doubling of net invisibles including remittances as a part of services exports. At this pace, the net invisibles will grow to $265 billions in three years, higher than the largest annual goods trade deficit India has ever seen.
Service exports can create around 3 million direct new jobs over next three years, 2 million of them high paying. If this continues, it could be as transformative for India’s aspirations as well as its middle class and cities as IT Services has been over the past three decades.
It can be seen that business services exports have risen from minus $0.3 billion in 20-21 to $7.3 billion in 21-22 to $14.7 billion in just the first nine months of 22-23.
The FM Nirmala Sitharaman recently said the focus of the government is on four Is — infrastructure, investment, innovation and inclusiveness — to make India a developed nation by 2047. Government initiatives, such as export promotion schemes and sector-specific Production Linked Incentive (PLI) schemes, are enabling Bharat to become a high-value commodity exporter. We have achieved a momentous growth in electronics exports due to a strong domestic manufacturing landscape. For instance, Bharat’s smartphone exports, which were nearly non-existent in 2014, have reached a record figure of $11 billion in FY2023 due to the increasing presence of global electronics manufacturers. The drugs and pharmaceuticals industry has also benefitted from PLI schemes for pharmaceuticals, bulk drug parks, active pharmaceutical ingredients, etc. However, exports also surged in the pandemic-induced years due to increased global collaborations and donations of critical drugs. While a spike in oil prices led to an increase in petroleum exports, it remains to be seen how easing inflation may affect the value of this going forward.
Certain factors have catalysed the manufacturing capabilities –
1. Strengthening manufacturing capabilities: Since the launch of the ‘Make in Bharat’ movement in 2014, annual FDI growth has doubled from $45 billion in 2014–2015 to $84 billion in 2021–2022, leading to an improvement of the manufacturing sector. Further, numerous PLI schemes across sectors—such as automobile, textile, electronics, pharmaceuticals, and food products—are empowering domestic manufacturers to become globally competitive. Bharat has also been focusing on improving logistics. Recent reforms such as PM Gati Shakti and the National Logistics Policy have been implemented to further reduce logistics costs and increase the competitiveness of our products. Bharat’s rankings in the World Bank’s Logistics Performance Index improved significantly over the years, rising from 54 in 2014 to 44 in 2018 and further advancing to 38 in 2023.
2. Trade regulations: The government has focused on export-specific regulatory developments, which has helped exporters gain global recognition. The introduction of the World Trade Organisation (WTO) compatible schemes, such as the Remission of Duties and Taxes on Export Products (RoDTEP) and Rebate of State and Central Taxes and Levies (RoSCTL), continue to be beneficial. Recently, the government expanded the list of items applicable under the RoDTEP scheme from 8,731 to 10,481 to boost their shipments globally. These include products across sectors of chemical, pharma, and textiles.
3. Changing global landscape: The growing sentiment of the ‘China plus one’ strategy among developed economies is putting the commodities on the global map. The country is also experiencing growing demand from new markets, such as the Netherlands, Brazil, and Saudi Arabia, which is leading to considerable export gains. Additionally, Bharat has been proactive in signing Free Trade Agreements (FTAs) with strategically significant countries to boost economic activities. Recently, Bharat concluded FTA deals with Mauritius, Australia, and the UAE, which are expected to further provide impetus to our exporters. For instance, the Bharat-Australia Economic Cooperation and Trade Agreement is expected to increase the total bilateral trade to USD45–50 billion by 2035.
4. Key learning from Southeast Asia: Bharat needs to make itself more prominent in global trading patterns, as the country’s share in global exports was 2.1 per cent in 2022. The government can consider drawing strategic lessons from Southeast Asian countries that are capitalising on the global trading opportunity. Low labour costs, reduction in tariffs and a significant growth in trade ties have enhanced these countries’ export competitiveness. Additionally, Hong Kong (SAR) China, Singapore, Malaysia, and Vietnam have been consistently focusing on the production and export of high-value products. For instance, high-technology exports as a percentage of manufactured exports for Hong Kong (SAR) China is around 71 per cent whereas for Bharat, it is just around 10 per cent.
5. Regulatory reforms: Bharat has implemented significant structural changes to improve its export patterns. For instance, the new Foreign Trade Policy (FTP) will provide a necessary boost to Bharat’s trade. Key features of this policy include internationalisation of our currency rupee, digital transformation, enhanced collaboration, and a dynamic period for policy upgradations. Bharat also plans to establish a single trade body, replacing the existing multiple export promotion councils, to facilitate efficiency and accountability in trade. Moreover, corrections in input tariffs to maintain a stable cost structure can also be considered.
For years, Bharat has been trying to be an integral part of global value chains. The Rs. 1.97 Trillion Production linked incentives have given a tremendous boost to various sectors of the industry. Tariff adjustments too have facilitated exports. Bharat exported $ 10.9 billion worth of smart phones in Financial year 2022-23 and $ 3.7 billion in first quarter of current financial year FY 24 while imports attract 20% tariff.
Leveraging on the G20 Presidency and the edge Bharat has today, the need of the hour is speedy and aggressive outreach to global markets with focus on investment, trade, technology and tourism, the minister said.
With the stupendous performance by exports, the contribution to our GDP ambitiously meets the ambition of becoming a US$5 trillion economy. There is optimism that exports can grow much faster, especially in services, given the emphasis on digitisation across the globe.
(Sources – Economic Times, Times of India, Financial Express, Live Mint, Money Control)
Vinod Johri: Retd. Additional Commissioner of Income Tax
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