The story so far: On March 21, the value of India’s outbound shipments in the financial year 2021-22 hit $400 billion, the highest ever. By the time the year closes this Thursday, another $10 billion worth of goods is expected to be shipped out. This would translate into a growth of about 41% from the pandemic-hit year of 2020-21, making it India’s fastest exports growth rate since 2009-10.
How significant is the attainment of India’s $400 billion exports target?
First, 2021-22 reflects the first time in several years that the country has met its exports target, but for greater context, India’s trend line in exports before the COVID-19 disruptions was nowhere close to this year’s performance. According to data from the Reserve Bank of India, outbound merchandise trade had clocked $303.5 billion in 2017-18, $330.1 billion in 2018-19 before slipping to $313.4 billion in 2019-20, when numbers were slightly dented due to the harsh national lockdowns imposed in the last week of that financial year. While higher prices of commodities and oil helped drive up the value of exports, with petroleum products exports jumping over 141%, some of India’s industrial sectors shone through as well. Engineering exports, for instance, have jumped 46.5% to cross $100 billion for the first time, even as chemicals, cotton yarn, handloom products, and the apparel industry have done well. India has managed to achieve its export target despite supply disruptions due to the pandemic, the challenging shortages of shipping containers and surging freight rates. Part of this could also be explained by the world shifting its global procurement preferences to diversify their dependence on China following the outbreak of the COVID-19 virus. Australia, which is in the midst of a shrill trade battle with China, has made way for India, taking exports up 94% so far this year. Shipments to the U.S. are also up 47%. India would hope to consolidate these gains and establish its credentials as a credible alternative to China, even as it could face stiff competition in some sectors from Asian peers such as Vietnam and Bangladesh.
What about imports and the trade deficit?
Even as exports may rise nearly $120 billion this year, India’s imports have shot up to record levels and could end up nearly $200 billion over 2020-21’s import figure of $393.6 billion. The trade deficit for the year could be around $190 billion, sharply higher than the $102 billion recorded in the pandemic year. The monthly trade deficit has been spiking recently and had hit a record $22.9 billion in November 2021, with imports gaining greater momentum than exports.
What are the risk factors for Indian exports in the coming year?
Although India’s direct trade with Russia is not significant at about 1% of its trade basket, the Ukraine-Russia conflict may create some more opportunities for Indian farm produce exports, especially for crops like wheat and maize. But this would be offset by a sharp rise in India’s energy import bill as well as an uptick in costs of importing edible oils like sunflower oil, whose production is dominated by the two nations at war. India imports 80% of its oil and demand is likely to grow as the economic recovery picks up pace, provided the pandemic doesn’t resurface. This could translate into a ’term-of-trade’ shock, with elevated trade and current account deficits and sustained pressure on the rupee even as monetary tightening in the developed world may suck out dollars from emerging markets. The RBI Governor Shaktikanta Das has pointed out that unlike the taper tantrum of 2013, the country’s foreign exchange reserves, adequate to cover more than 12 months of imports, are robust and can finance higher current account deficits if needed. Most economists, however, expect the rupee to weaken over 2022-23, which in turn could be a minor perk for exporters.
While high shipping rates, container shortages and re-alignment of trade routes around the Black Sea will pose a challenge, timely actions on the policy front could help create more export opportunities. First, a swift conclusion of Free Trade Agreement pacts being negotiated with countries like the U.K., Australia and Canada, could create easier market access in these large markets. Second, exporters await a long-overdue revision of the Foreign Trade Policy for 2015-20, that has now been extended into the first few months of 2022-23 as well. Third, a parliamentary committee has urged the government to include Special Economic Zones and sectors such as pharma, steel, and chemicals under the Remission of Duties and Taxes on Export Products (RoDTEP) Scheme, which finally kicked off last year after a significant delay. These could help balance out some of the bigger tectonic shifts in trading patterns from the European crisis, including a firming up of the COVID-induced inward-looking shift in nations’ stance on globalisation.