Indian exports will take time to get wind in their sails

Goods exports growth was achieved solely through oil exports, which grew a massive 44.4%. (BLOOMBERG)
Goods exports growth was achieved solely through oil exports, which grew a massive 44.4%. (BLOOMBERG)


India’s merchandise exports have contracted for three consecutive months, with April witnessing a double-digit decline of 12.7% on-year.

India’s overall exports (goods plus services) hit a high of $772.9 billion in 2022-23, surpassing the country’s $750 billion target and rising 14.2% over 2021-22. The performance since the pandemic abated has been impressive. However, challenges loom.

Consider India’s merchandise exports, which stood at $450.4 billion last fiscal. This represented a 6.7% growth over the $422 billion worth of merchandise exported the year before. But when you start breaking down the overall figure, the headwinds facing India’s exports start becoming evident.

Goods exports growth was achieved solely through oil exports, which grew a massive 44.4%. Non-oil exports, on the other hand, contracted 0.4%. To be sure, India’s oil exports were marginally lower by volume, which means the sharp rise in dollar terms was purely a price effect (average Brent crude oil price was $95.5 per barrel versus $80 in 2021-22). With oil prices correcting and global growth slowing, oil exports growth is bound to slow or even decline.

Non-oil exports also contracted, with many key items in India’s top 10 dwindling: gems and jewellery (-3.0% on-year), base metals (-22.4%), textiles (-17.6%) and plastic and rubber articles (-12.1%). Chemical products, India’s second-largest export item, grew a paltry 2%. Many of these have a disproportionately large dependence on advanced economies, mainly the US and the Eurozone, which are seen slowing this year. That implies a further drag on exports. And the decline in international commodity prices will only exacerbate the impact.

India’s merchandise exports have contracted for three consecutive months, with April witnessing a double-digit decline of 12.7% on-year. The thesis of growth set to slow in the US and Eurozone but remaining resilient in the Asia-Pacific (which commands a larger share of India’s merchandise exports) needs to be read with a caveat. If we take China out, the Asia-Pacific is expected to decelerate this year owing to a waning of demand for manufactured goods that sprang up after post-covid reopenings combined with the financial impact of higher interest rates.

Second, despite being the largest export destination, the Asia-Pacific’s share of Indian exports has declined in recent years.

Two of India’s top-10 export items—agricultural products and electronics—did display a healthy performance last fiscal. While the former grew 11.8%, the latter grew a massive 51.6%, reflecting support from the production-linked incentive (PLI) scheme. That said, agricultural exports could slow if the lurking risk of El Niño hurts food output.

As for the ‘high’ growth in electronic exports (largely mobile handsets), it is pertinent to note that its share in India’s overall exports is still low, at about 5%, and these are heavily import-dependent. This means that the kind of multiplier effect that the export of a large item can have, such as automobiles—which are manufactured using products from a number of industries, including tyres, engine, plastic, paint and steel—will be missing in the case of a mobile handset, as these are mostly assembled and import-dependent, even as the ecosystem for their production has not yet developed in India.

While merchandise exports are facing near-term hiccups, services exports are providing much-needed support, helping keep total goods and services exports growth in the positive zone. Compared with the 6.7% growth in merchandise exports (including oil) last fiscal, services exports grew a solid 26.7%.

India’s services exports have been rising steadily, taking their share in total exports to 41.7% in 2022-23 from 32.3% a decade ago; India’s commerce minister expects services exports to rise to $1 trillion by 2030, which could increase its share to 50%. This also reflects in India’s global share of services exports, which rose to 4.5% in 2022 from 3.1% a decade ago. In comparison, India’s share of goods exports has stagnated around 1.8%. So, while India was the seventh-largest services exporter, it ranked a much lower 18th in goods exports.

Even as computer services remain the mainstay of India’s overall services exports (45-50% share), the past few years have seen a rise in professional and management consulting exports; their share in total services exports rose steadily from 7.9% in 2011-12 to 16.4% in 2022-23 (April-December). The rise in professional and management consulting exports reflects the successful rise of global capability centres (GCC) that provide a wide range of value-added services such as research and development, system design, etc.

According to Nasscom’s recently released Strategic Review 2023, India added 65 new GCCs in 2022, taking the total to 1,570, commanding a lion’s share (about 50%) of GCCs across the world. In fact, while computer exports (net) grew an average 20.7% in 2022-23 (April-December), growth in professional and management consulting exports more than trebled to 66.7%. So, robust professional and management consulting exports can act as a counterbalance. From a medium-term perspective, however, the rapid rise of artificial intelligence applications in many services areas remains a risk.

While healthy growth in services exports does provide some cushion, it does not fully compensate for the slowdown in goods exports, as the gap between the two remains huge. A slowdown in exports, therefore, looks imminent at this juncture.

Dharmakirti Joshi & Adhish Verma are, respectively, chief economist and senior economist at Crisil

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