India’s ambitious target of doubling export of goods and services to $900 billion by March 2020 from $470 billion in 2014-15 is facing structural headwinds, rating agency Crisil Ltd said.
“While the current global cyclical slowdown and the new Trans-Pacific Partnership (TPP) are casting a long shadow, the bigger challenge is structural. Falling trade intensity of global growth is the external structural constraint while declining competitiveness, infrastructural bottlenecks and labour market rigidity are domestic,” Crisil said in a report on Thursday.
Merchandise exports, which are almost two-thirds of India’s shipments, have been declining in the past 11 months. Cumulatively, they have fallen 17.6% in dollar terms in the first seven months of this fiscal year, after seeing a 1.5% decline in the year ended March. Even real exports of goods and services, adjusted for price changes, shrank by 6.5% in the first quarter of the current financial year.
Apart from investing massively in vocational ecosystems that generate a large number of skilled workers, India also needs to quickly develop its infrastructure if it has to attract foreign investment and become a world-class exporting hub, Crisil said in its report.
“Not doing so could upend the government’s flagship ‘Make in India’ programme, which aims to generate large-scale manufacturing employment,” said Dharmakirti Joshi, chief economist, Crisil.
Trade openness, or the proportion of trade to gross domestic product (GDP), has shrunk drastically from a high of 55.6% in 2012-13 to 47.1% in 2014-15 and further to 42.6% in the first quarter of the current fiscal year.
Curiously, trade deficit in goods and services reduced from 6.5% to 1.4% of the gross domestic product in real terms between 2012-13 and 2014-15, the Crisil report said.
The trade balance has, however, improved because while exports have declined due to a sharp fall in international commodity prices, especially crude oil, constraints to domestic growth have slowed imports as well, the report said.
“But this could prove transient. While global sluggishness will keep exports subdued, especially when there is structural weakness in trade, India’s imports would rise as domestic demand and investments pick up and commodity prices stabilize. That would, in turn, bloat India’s trade and current account deficit again,” said Joshi.
India’s merchandise exports contracted for the 11th consecutive month in October, as the value of oil shipments declined on lower crude prices and external demand remained weak amid tepid global economic recovery.
In comparison, China’s October exports fell 6.9% from a year ago, down for the fourth month, while imports slipped 18.8%, leaving the country with a record high trade surplus of $61.64 billion.
India is targeting $900 billion in exports of goods and services by 2020 and wants to raise the country’s share in world exports to 3.5% from 2%. Exports in the past four fiscal years have been hovering at around $300 billion.
“True, the Indian export destinations are not doing well, prices of many export items have fallen, and the rupee, too, has appreciated in real terms against a basket of 36 currencies. But our analysis shows the decline in exports is more than that warranted by these factors,” cautioned Crisil.
For instance, while world real GDP growth improved from 3.2% in 2009-11 to 3.4% in 2012-14, India’s real growth of exports came down from 11.1% to 4.1%, it said.
“This suggests the decline isn’t merely cyclical—there are structural elements at play as well. The cyclical component of exports will move up when cyclical factors (world GDP growth, prices) turn favourable, but structural factors, if not addressed, will continue to act as a drag on India’s export performance,” it said.
The report noted that falling competitiveness is another structural factor restricting export growth.
“For key export items such as gems and jewellery and textiles, India’s ‘revealed comparative advantage’ has come down over the years,” it said.
Lastly, there is the threat from regional trading agreements of which India is not a part, such as the TPP, forged between 12 countries including the US, it said.
“TPP countries account for 25% of India’s exports. Because of not being a part of TPP, India risks losing out a significant chunk of its export market to rivals,” it added.
TPP is a free trade agreement signed by 12 countries including the US, Japan, Malaysia, Vietnam, Singapore, Brunei, Australia, New Zealand, Canada, Mexico, Chile and Peru.