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India's exports are booming, but will it last?

The uptick in exports has sparked hopes of a swift post-pandemic recovery, but there are reasons to be cautious.
  • The shortage of containers is also creating congestion and increasing the processing time at Indian ports. How these are tackled will determine the sustainability of the surge
  • Most sectors that lead India’s exports have fared well during the April to August period. During this five-month period, 17 of the 30 broad sectors recorded exports of above $1.5 billion. (Photo: HT)Premium
    Most sectors that lead India’s exports have fared well during the April to August period. During this five-month period, 17 of the 30 broad sectors recorded exports of above $1.5 billion. (Photo: HT)

    BENGALURU : In a year where the Indian economy is stuttering back to normal, the burgeoning export numbers have been a cause for cheer. August was the fifth straight month when India’s goods exports exceeded $30 billion. In the last five years, other than this ongoing run, it crossed $30 billion in just one other month—March 2019 (see Chart 1). In four of these five months in 2021, the change over the corresponding month of 2019 (the year preceding the pandemic) has exceeded 25%.

    This points to a significant uptick in goods exports that extends simply beyond a low base effect. The increase is also broad-based. For the period from April to August 2021, the government has released data disaggregated into 30 broad categories. As many as 24 of these categories have registered an increase in exports in dollar terms over the corresponding 2019 period. In 11 categories, the increase is greater than 20%. While this has led to enthusiasm that exports can lead the post-pandemic recovery of the Indian economy, there are two reasons to be cautious. The first point of caution is the nature of items driving the ongoing export growth. Primary commodities—essentially, goods available from cultivating raw materials without a manufacturing process—are behind the current boost.

    The largest gainer in exports vis-à-vis last year is petroleum products, and this is attributable largely to the rise in oil prices and the sharp recovery in mobility. Some of the other commodities that have registered the biggest increases over 2019—both in value and volume terms—are ores, metals, cotton and sugar. In this context, experts warn off the ‘bullwhip effect’, wherein the post-pandemic economic recovery globally causes a spike in demand for primary goods. But, a subsequent tapering of demand can be debilitating for the same exporters.

    The second point of caution is related to the international transportation of goods, which happens mainly via ships. Due to the pandemic, the number of ships, and containers in circulation fell. Meanwhile, world trade is topping pre-pandemic levels. The Baltic Dry Index, a measure of shipping transportation rates, is up nearly 200% in calendar 2021. The shortage of containers is also creating congestion and increasing processing time at Indian ports. In addition to general competitiveness on cost and quality, how corporates in India navigate these two factors will have a bearing on the sustainability of the current export upswing.

    Steady surge
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    Steady surge

    Primary demand

    For now, globally, trade boats are mostly rising, shows data put out by the Organisation for Economic Co-operation and Development (OECD), an inter-government economic organization. Total monthly exports of its 38 member-countries have moved from a band of $900-950 billion before the pandemic to above $1,000 billion between April and June 2021. Similarly, monthly exports of a set of 8 non-OECD companies tracked by it, including India and China, have gone from a band of $300-325 billion before the pandemic to around $400 billion between April and June 2021.

    Most sectors that lead India’s exports have fared well during the April to August period. During this five-month period, 17 of the 30 broad sectors recorded exports of above $1.5 billion. The highest increase was seen in iron ore (87%) and cotton (43%) (see Chart 2).

    Countries the world over use the harmonised system (HS) to categorize goods for trade purposes. This has four hierarchies, with each increasing the degree of specificity of items. At the apex is a 2-digit HS classification, which has 98 commodity groups. Next is the 4-digit classification, which has 1,201 commodity groups. This is followed by 6 digits and 8 digits, with the items increasing progressively.

    Data for 98 groups and 1,201 groups, which is available till June 2021, also confirms that India’s pick-up in exports is broad-based and driven by primary commodities. In the drilled-down categorization of 1,201 items, 677 recorded exports of above $5 million in the April-June 2021 period, of which, 635 exceeded their 2019 levels. The top 10 items among them accounted for about one-third of India’s total exports. This is led by petroleum, which grew 164% over 2019 levels. Also in the top 10 are worked and unworked diamonds (257% growth), iron ore (65%), unwrought aluminum (45%), and flat rolled products of iron and non-alloy steel (46%).

    As the global economy sparks to recovery, demand for these primary goods has shown an immediate increase. The largest importer of these primary products from India, especially metals, has been China. Demand has also picked up from the European Union. Italy and Belgium have been the largest importers of iron and steel from India in 2021. Bangladesh has been the largest importer of cotton from India, to feed its burgeoning textile industry.

    However, growth has been relatively modest in select key sectors in India’s export basket, especially in manufactured products. Notable among them is drugs and pharmaceuticals, which is up by a modest 17% despite the demand for drugs booming during the pandemic. Exports of ready-made garments has fallen by 11%.

    The emerging question, and risk for India’s exports basket, is what happens if demand for primary goods starts to drop. Ultimately, in order to have a sustained rise in exports, and for the domestic economy to benefit as a consequence, it is crucial that manufactured products drive the increase in exports.

    Shipping issues

    The rising trend in India’s exports can also be seen in India’s ports. The total cargo handled at Indian ports is hovering around pre-pandemic levels on a consistent basis. According to government data, Indian ports handled an average of 114,000 tonnes of goods in the first six months of 2021—more than the average of 113,000 during January to March 2020.

    But there are issues which could rein in growth. The current rise in exports has been despite an increase in freight costs and capacity constraints in transportation. A 200% increase in the Baltic Dry Index notwithstanding, freight rates are expected to rise further in the coming months, as demand for shipping peaks in India around the festive season in October and November. The rise in freight charges has particularly affected exporters from small and medium enterprises, which first faced demand and working capital issues during the pandemic, and are now having to absorb higher logistical costs.

    Indian exporters have alleged that global shipping companies are forming cartels to restrict the supply of containers, and have sought government intervention to regulate them. According to the United Nations Conference Trade and Development (UNCTAD), around 80% of global trade by volume takes place through the sea route. A handful of global shipping companies dominate the sector. Their profits have rocketed in 2020 and 2021 due to a steep increase in freight rates, which is a direct consequence of the lower supply of containers. For example, Wan Hai Lines, has reported a 128% year-on-year growth in revenues in 2020-21. The Business Standard reported in August that India has experienced a 15% fall in the supply of shipping containers in 2021, based on estimates from the Directorate General of Shipping. This is due to a range of factors such as low ship calls due to the pandemic and shortage of space in ports.

    The Container Shipping Lines Association, a consortium of 24 foreign shipping companies that operate in India, has said that the major issues inhibiting exports in India are the non-availability of ships and massive congestion at trans-shipment ports in China, as well as in Colombo and Singapore. This points to a global crisis as the shipping industry responds to the dramatic recovery of international trade following the pandemic.

    Export incentives

    In 2019-20, exports comprised 19.3% of India’s gross domestic product (GDP). Thus, a rise or fall in exports can have a significant bearing on economic growth. For India to succeed in export-led development, the focus should be on enabling manufacturing and global competitiveness.

    Asian tigers such as Taiwan and South Korea pursued an aggressive export-led industrialization growth strategy in the 1950s and 1960s. Their cue was followed by China, which is now the factory of the world. While the ‘Make in India’ program was launched to give a fillip to Indian manufacturing, the results have been underwhelming so far.

    One lever of competitiveness for Indian exporters is government incentives, which however need to meet norms established by the World Trade Organization (WTO). These prohibit a government, especially countries above a certain threshold of development, from providing financial benefits to exporters. The erstwhile Merchandise Exports from India Scheme (MEIS), which provided an incentive of 2-7% on the shipping value of eligible exports, was deemed illegal under WTO norms after India’s per capita GDP crossed $1,000 in 2017. To replace the MEIS, and comply with WTO norms, the government last month instituted the 12,454-crore Remission of Duties and Taxes on Exported Products (RoDTEP) incentive scheme. This provides rebates to eligible exporters for 8,555 products, with remission rates ranging from 0.3-4.3%. Exporters can use this to pay specified taxes.

    However, exporters say the remission rates are lower than expected, and also lower than the pre-existing rates under the MEIS scheme. Crucially, the scheme excludes certain key export sectors, including pharma, steel, chemical industries, as well as export-oriented units located in bio-technology parks, electronic hardware technology parks and special economic zones.

    Economist Indira Rajaraman, in a column for Mint, likened the RoDTEP scheme to a subsidy to select sectors disguised as a duty rollback. She adds this cross-sectoral unevenness may potentially lead to trouble with WTO, and that excluded sectors will need the rebate to survive in a global market. Further, she has called for a far more comprehensive sea-freight subsidy scheme to help exporters cope with rising freight costs.

    Post-pandemic, the growing appetite for goods globally presents an opportunity for India to capture a larger share of the export pie. According to trade economists, beyond primary goods, India has a comparative advantage in lower-skilled, labour-intensive manufacturing such as textiles, which also has the potential to create large-scale employment. India here has, however, been losing ground to Asian peers such as Bangladesh and Vietnam. Another sector where India has a cost advantage is pharmaceuticals.

    Moving up the value chain has its challenges. Last year, with the stated objective of increasing competitiveness and exports, the government introduced production-linked incentive (PLI) schemes in 10 sectors, including pharma, auto and auto components, electronic products, telecom and solar power equipment. One example of policy support paying dividends is smartphones, where India has become a net exporter, though with low value addition.

    In the months ahead, Indian exporters have to contend with a fiercely cost-competitive global market in an environment of inflated freight costs. Therefore, they will need all the possible support from the government to remain competitive. How the government manages to do this, without running afoul of WTO, will present a compelling policy challenge.

    The writer is with howindialives.com

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    Updated: 21 Sep 2021, 01:29 AM IST
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