It is time for our corporate sector to work on export performance

Context: In fiscal year 2021-22, India’s exports did rather well. They were nearly $420 billion, raising hopes that India was putting behind it a decade of export under-performance.

For India to be a $5 trillion economy by 2024-25, we need to export at least $1 trillion worth of goods and services, as exports contribute around 20% to overall gross domestic product (GDP).

What would it take to sustain India’s export growth?

Boost export competitiveness: To export $1 trillion by 2024-25, it is necessary to boost export competitiveness.

– Do exchange rate devaluations affect export competitiveness?: A country may mask its underlying competitive weakness by manipulating exchange rates—through devaluations, for example, or by maintaining a weak currency. In the case of India too, studies have pointed to the exchange rate as an important determinant of exports and our trade balance. However, it is not the key determinant.

Between 2011 and 2021, while the Chinese yuan appreciated by around 57% relative to the Indian rupee, our merchandise trade deficit increased by around 78% with China.

So there was no improvement in our trade balance with China despite rupee depreciation versus the yuan, implying there are other forces at work affecting export performance.

Other than the exchange rate, the following factors play a critical role in determining export competitiveness –

tariffs and quotas

non-tariff factors like infrastructure, research & development (R&D) expenditure, innovation, the ease of doing business and efficiency of logistics.

Indian industry needs to urgently invest in technology, corporate R&D and product innovations to be competitive and make India a global technology and innovation leader.

To reduce logistics cost and make supply chains efficient, the country must digitize supply chain operations, leverage disruptive technologies such as blockchain and Internet of Things, and move towards green supply chains.

What are some associated issues?

Lack of R&D investment 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, as against 2% in China, and that too driven mainly by the government with a share of 56%.

Research suggests that weak protection of intellectual property (IP) rights leads to low returns on innovation, thereby disincentivizing companies to innovate. India ranked 43rd out of 55 nations in recent IP rankings.

India holds a comparative advantage in mainly labour-intensive commodities such as cotton, carpets and other textiles, etc, while Indian exports more capital-intensive products such as transport equipment, machinery and mechanical appliances. This is reflected in our declining share of labour-intensive exports over time, raising concerns for a country that is labour abundant.

In services sector, export competitiveness does not exist for sectors like health and education, despite India’s inherent potential in providing cost-effective, high quality services in these areas. This is reflected in the negligible share of these services in total service exports.

Way forward

India’s private sector needs to acquire specialization in products in which it is competitive.

India needs to climb the rankings of the Economic Complexity Index. The higher this score, the better the export performance. In the 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 global ranking has remained unchanged.

Source: This post is based on the article “It is time for our corporate sector to work on export performance” published in Livemint on 09th May 22.

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