Top 10 reasons why India's exports will not pick up any time soon

In 20 out of the last 21 months, India's merchandise exports have posted negative growth. Services export, which was earlier doing fine, have now started to decline as well - fell 4.56% (yoy) in July. What explains this? Is there any scope of the revival of India’s exports in near future?

India’s officials say that export decline has seemed to have bottomed out. It declined just 0.3% in August and it should soon pick up. However, that doesn’t seem a plausible argument because of the following:

Protected global economic recovery will impede revival of international trade. That means there will be lower demand for imported goods and services. To make it worse, global trade, which on an average grew at double the rate of global GDP i.e. 5% versus 2.8% or so during 1991-2011, is now growing at the same or lower rates as global GDP. According to WTO, world trade is likely to grow at 1.7% compared to world GDP at 2.2% in 2016. Even in 2017, world trade is not likely to grow above 2% or so.

2. Global trade liberalization is progressing at snail pace as trade policy has now to deal with contentious non-tariff trade issues such as labour and environment, services in particular movement of natural persons, intellectual property rights, investment and public procurement rules.

3. Growing sentiment against globalization and trade in general, rule out any serious change in this equation any time soon. If that was not enough, Brexit could be another serious worry for India as EU accounts for roughly 17% of India’s merchandise shipments with some sectors such as textiles, automobiles, pharmaceuticals and IT services having high exposure to the region.

4. China factor: slowing growth in China will adversely impact India’s exports i) by limiting direct exports to China, ii) Chinese products competing with India in third country export markets in items ranging from apparel and foot ware to steel and chemicals, and iii) by limiting the growth of commodity exporters such as Australia, Brazil, Russia, Middle East and Africa which together account for over 30% of India’s merchandized exports iv) by limiting exports of ASEAN, Japan and Korea ( and in turn their GDP growth) that buy India's goods and services

5. The share of services (which are mostly produced and consumed locally rather than traded) in global GDP is increasing sharply but increase in services GDP is not adding much to the global trade. Dr. Raghuram Rajan aptly says, ‘as countries become richer, non-traded services constitute a greater share of output causing GDP to grow faster than trade.’ Thus, a significant portion of global GDP growth simply bypasses global trade.

Indian peculiarities

6. Narrow export basket: India has narrow export basket, both in goods and services. The top 20 product categories account for 80% of its total goods exports. Despite services sector accounting for 60% of its GDP (and global trade in traded services is growing faster than trade in goods), India is not able to benefit much as it has a narrow services export basket as well with information technology being its main export.

That’s not the only problem. Over 62% of India’s IT export goes to the US alone, and one vertical, BFSI accounts for 40% of total IT export. Despite its diverse geography and rich cultural heritage, India has not been able to tap its tourism potential primarily because of infrastructural bottlenecks and women safety issues.

7. Most of India’s exports are either commodities or, have commodity like nature. For instance, contract export of labour intensive items such as apparel or foot ware, have no pricing power and hence operate on thinner margins. Contrary to popular belief, gimmicks like keeping rupee undervalued won’t help. Rupee depreciation usually leads to demand for steeper discounts from buyers in a sluggish global demand environment.

8. India’s dream of replacing China as the exporter of low cost manufactured goods as envisaged under its Make in India initiative is going to be seriously challenged by growing competition from LDCs which are likely to have labour cost advantages. On the other hand, India is pressured to hike minimum wages despite labour productivity in the country being lower than Bangladesh and Vietnam.

9. Though, Modi government is trying to fix trade infrastructural bottlenecks, yet a lot remains to be done. Obsessed with revenue collection targets, India’s finance ministry has not shown much urgency in addressing the problem of inverted duties in key manufacturing sectors such as chemicals, electronics and textiles that continues (and may be, will continue) to constrain India’s exports, going forward.

10. Badly conceived and poorly negotiated trade pacts will not help push India’s exports either. India's trading partners are devising ever new ways to deny real market access. For instance, Japan as per the terms of India-Japan CEPA allows duty free import of apparels (from India) only if all the materials used for the manufacture of apparels are either of Indian or Japanese origin with the exception of a maximum 7 per cent content by weight that can be sourced from third countries. As a result, Indian apparel exports have not benefited from duty free market access.

Similarly, Indian pharmaceutical companies are not able to push their exports to Japan (despite India-Japan free trade pact) because of the difficulties in dealing with Japanese drug regulators.

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A modified version of this post has been published in The Hindu Business Line: It's a long overhaul for India's exports

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