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Why India’s exports are faltering?

and , December 7, 2015, 0 Comments

India’s dismal export performance is bad news for Modi’s much touted Make in India campaign. Exports contracted 2% in FY15 and the weakness has continued in FY16. Weak external demand has adversely impacted growth. India’s exports are quite significant and account for 23% of India’s GDP. Exports declined 1% in FY15 and the weakness has continued in FY16. Exports have been contracting since Dec-14. FY16 year to date growth was -17% and the September contraction was 20%yoy. One obvious explanation is the weakness in global commodity prices. Commodity exports account for around 33% of India’s total exports. However, even non- commodity exports are down primarily due to weak global demand. As India’s exports are more income elastic than price elastic, weakness in global demand impacts exports adversely.

india-exports-decline-marketexpress-inA detailed break-up of exports since Dec-14 shows that the decline is broad based. Commodity exports have declined more sharply than non-commodity exports. Biggest decline is seen in Petroleum & crude, agriculture and allied products, ores & minerals and electronic goods (most income elastic categories). Pharmaexports however, have grown at 9.5% on an average in FY16.india-exports-yoy-decline-marketexpress-in

Three years back the export growth trajectory was different. Exports grew at a healthy annual average growth rate of 22% in the five years preceding the Lehman crisis. After a small blip in FY10, exports smartly recovered and grew at an average pace of 30% in the next two years post the crisis. However since FY13, export growth has remained flat. At the current rate the government’s target to double exports to USD 900bn by 2020 looks like a distant reality.

India’s exports have diversified both in terms of markets and products in the past two decades.

There is no doubt that the export sector has moved up the value chain. The share of traditional exports like primary products, textiles,readymade garments, leather products and agriculture commoditieshas nearly halved from 57% in FY92 to 27% in FY15. Petroleum products and engineering goods together now account for over 40% of exports, as compared to 14% in FY92.


Indian exports have gradually found their way into new markets. The size of developed countries in India’s exports has declined and that of emerging economies has increased over the years. Even though United States and Europe still account for a sizeable portion of its exports, their share has declined significantly over the past decade. Asia and Africa together now account for 60% of India’s total exports up from 37% two decades ago. This however doesn’t mean that India is losing its traditional markets. In fact this trend reveals that it is fast integrating into the global and Asian value chain.

Manufacturing exports will be the key

In the past Indian exports have grown on the back of product and geographic diversification. In order for our exports to grow further, Indian manufacturing (which accounts for 67% of the export basket) will have to become more competitive. UNIDO’s CIP (Competitiveness of Industrial Production) Index is a composite index that measures ‘the ability of countries to produce and export manufactured goods competitively’ – with 1.0 being the best score. India’s CIP score improved from 0.04 in 2000 to 0.07 in 2010. During the same time, China’s CIP score improved from 0.16 to 0.33.

The technological backwardness of Indian manufacturing exports can be gauged by the share of medium and Hi-tech activities. The share of medium and Hi-tech activities in manufacturing exports improved from 18.7% in 2000 to 28.2% in 2010, but is still far behind that of China – 60.2% in 2010.

Are FTAs helping ?

Trade agreements are a means to promote trade, but India seems to have not benefitted much from its trade pacts. According to Asian Development Bank, the utilization rate of India’s Free Trade Agreements (FTAs) varies between 5% and 25 % which is one of the lowest in Asia. Moreover exports to FTA partner countries and non-partner countries has grown at the same pace. Complex rules of origin criteria, lack of information on FTAs, higher compliance costs and administrative delays dissuade exporters from using preferential routes. India has actively pursued FTAs with several major trading partners in the past. India’s trade deficit with FTA partners like ASEAN, Japan and Korea, has widened in the post FTA period. In this regard a comprehensive review of trade agreements is imperative.india-exports-growth-marketexpress-in

The only way forward to get back on a higher export growth trajectory is to improve manufacturing competitiveness. Moreover India now exports few price sensitive items (like textiles, leather etc) and more income sensitive items such as chemicals, engineering goods and petroleum products, making our export basket more income elastic. This means that increasing overall exports will require much bigger price cuts if global growth remains muted. UNCTAD estimates that a 1% decline in global GDP growth leads to 1.88% decline in India’s growth of exports to the world. While a 10% reduction in prices will lead to only a 5.4% increase in exports.

India’s export performance is crucially linked to the performance of India’s domestic manufacturing sector, and this time around it needs a Make in India push. India’s share in global exports is a mere 1.7% and manufacturing output as a percentage of GDP is around 13%, much lower than its Asian peers. Emphasis on the manufacturing sector, especially micro, small and medium enterprises, will be critical to India’s export growth. SMEs account for 40% of India’s manufacturing exports and 45% of manufacturing output, but a lack of access to credit, poor technology and difficulties in hiring skilled labor are thwarting their growth.

Authors are corporate economists based out of Mumbai. Views are personal.