In FY 2021-22, India’s exports have performed quite well. They amounted to nearly $420 billion, raising hopes that India was putting behind it a decade of export underperformance. For India to be a $5 trillion economy by 2024-2025, we need to export at least $1 trillion worth of goods and services, as exports contribute about 20% to gross domestic product ( GDP) overall. What would it take to sustain India’s export growth? We are exploring a few avenues.
To export $1 trillion by 2024-25, it is imperative to enhance export competitiveness. Although competitiveness is often observed through changes in global market shares, a country can mask its underlying competitive weakness by manipulating exchange rates, through devaluations, for example, or by maintaining a weak currency. Also in the case of India, studies have shown that the exchange rate is an important determinant of exports and our trade balance. However, this is not the key determinant. Between 2002 and 2007, our merchandise exports grew at a healthy annual growth rate of around 25%, while the export-weighted real effective exchange rate (REER) for 36 currencies appreciated by 1.2 % per year (Veeramani, 2008). Similarly, between 2011 and 2021, as the Chinese yuan appreciated by around 57% against the Indian rupee, our merchandise trade deficit widened by around 78% with China. So there has been no improvement in our trade balance with China despite the depreciation of the rupee against the yuan, implying that other forces at work are affecting export performance.
Besides the exchange rate, factors such as tariffs and quotas and non-tariff factors such as infrastructure, research and development (R&D) expenditure, innovation, ease of doing business and Logistics efficiency play a vital role in determining export competitiveness.
Lack of investment in R&D remains a concern for India, as the share of gross domestic expenditure on R&D in GDP stood at a low 0.65% in 2018, compared to 2% in China, and that too mainly supported by the government with a 56% share. Indian companies account for just 37% of national R&D spending, compared to 68% in other major economies and 77% in China. This may explain why India, once almost self-sufficient in pharmaceutical inputs in the 1990s, is now critically dependent on imported inputs.
Research suggests that weak intellectual property (IP) rights protection leads to low returns to innovation, thereby discouraging firms from innovating. India ranked 43rd out of 55 nations in recent IP rankings. On the 2021 Global Innovation Index, India ranked 46th. Although this is an improvement from our previous ranking, we are falling short of China, which was ranked 12th.
Given that cutting-edge technologies represent a $350 billion market that is expected to grow to over $3.2 trillion by 2025, according to UNCTAD estimates in 2021, Indian industry urgently needs to invest in technology, business R&D and product innovations to compete and make India a global technology and innovation leader. To reduce logistics costs and make supply chains efficient, the country needs to digitize supply chain operations, take advantage of disruptive technologies such as blockchain and the Internet of Things, and move towards green supplies, while improving skills development.
It is also observed that none of the export products for which India has a high comparative advantage are among its top exports in terms of share and value. India holds a comparative advantage mainly in labour-intensive commodities such as cotton, carpets and other textiles, etc., while India exports more capital-intensive products such as transport equipment, machinery and mechanical devices. This is reflected in our declining share of labour-intensive exports over time, which raises concerns for a labor-abundant country.
In services, the export specialization index suggests that we hold relative export competitiveness with major economies in computer programming, consulting and information services, which are our main exported services. However, export competitiveness does not exist for sectors like health and education, despite India’s inherent potential to provide cost-effective and high-quality services in these areas; this is reflected in the negligible share of these services in total services exports.
The Indian private sector must become specialized in the products for which it is competitive. India needs to climb in the Economic Complexity Index ranking. The higher this score, the better the export performance. In Harvard Growth Lab’s Atlas of Economic Complexity, India’s score in 2019 was 0.46. It was 0.32 in 2000. The country’s world ranking remained unchanged.
India’s private business sector has several advantages as it enters a new decade. Its balance sheets are healthier than before. Its profitability is high while Indian corporate tax rates and actual borrowing costs are low. The space is opening up for India to exploit the avenues created by the myopic policies pursued by some other nations. It’s time for Indian companies to aim bigger and stretch their horizons. The focus must be on win-win: paying small suppliers on time, helping the prosperity pie grow bigger, and focusing on competitiveness gains through investment in research and technology, rather than weaker currency and tariff protection.
These are the personal opinions of the authors.
V. Anantha Nageswaran, Prerna Joshi and M. Rahul are respectively Chief Economic Advisor and Indian Economic Service Officers serving the Government of India