India’s export performance: Bucking the trend

• India registered exports of US$ 535.45 billion during 2018-19 with a growth of 7.97%, according to estimates from the Department of Commerce.
• The performance is exceptional, especially considering the current turbulence in the global trade environment.
• The growth in March was led by engineering, chemicals, pharma-ceuticals, petroleum and RMG of textiles.
• The global environment is expected to remain hostile in the current fiscal, with the WTO projecting a deceleration in global trade growth.

India’s total exports grew by 7.97% yoy to reach US$ 535.45 billion during FY 2018-19, according to data released by the Department of Commerce on April 15, 2019. In line with projections last month, merchandise exports grew by 9.06% yoy to reach an all-time high of US$ 331.02 billion during 2018-19, crossing the previous benchmark of US$ 314 billion achieved in 2013-14.

Merchandise imports have also risen strongly by 9% yoy to reach US$ 507.44 billion, precipitating a rise in the merchandise trade deficit by 8.9% to US$ 176.42 billion. Services exports, on the other hand, are estimated to have grown by 6.3% during 2018-19 to touch US$ 204.43 billion with a trade surplus of US$ 80.57 billion.

The growth comes amidst a difficult trade environment, especially with the rise in protectionist measures by a number of countries. The WTO’s World Trade Outlook Indicator released in February 2019 showed a reading of 96.3, indicating below-trend expansion in the first quarter. This is driven by strong declines in component indices – export orders (95.3), international air freight (96.8), automobile production and sales (92.5), electronic components (88.7) and agricultural raw materials (94.3).  The decline is attributed to trade tensions, political risks and financial volatility.

One of the major reasons for this resilience in India’s exports is better awareness and matching of quality and standards by the exporters. As a result, the acceptability of the consignments has been better. In addition, exports have remained strong even as the rupee appreciated against the US dollar over the past few months. This shows a strong demand for Indian exports. Improvement in the liquidity situation also helped boost the numbers, as did low inflation, which ensured that pre-shipment credit was not as expensive.

On a long-term trend basis, there is a discernible shift in India’s exports towards higher value added manufacturing and technology-driven items. RBI data indicates that between 2011-12 and 2018-19, there is a significant rise in exports of chemicals and products as well as engineering and related goods. This has helped keep Indian exports relatively resilient to changes in the global trade environment.

Leading the growth trend

The major sectors that showed positive growth in March 2019 were chemicals (16.98%), engineering goods (16.3%), RMG of all textiles (15.13%), drugs & pharmaceuticals (13.59%) and petroleum products (6.55%). Most of the categories comprise intermediate products, implying that India provided raw materials/inputs for final production in overseas markets.

The engineering sector has been a standout performer, recording exports of US$ 83 billion during 2018-19. India has set an aspirational target of US$ 200 billion for engineering exports by 2025. Within the engineering sector, one can notice a strong positive performance in most panels over the year. Exports of iron & steel (along with products of iron & steel) have declined by 5.85% yoy to reach US$ 15.4 billion, according to latest available data for April-February, 2018-19. Non-ferrous metals and products (copper, aluminium, zinc, lead, etc) have witnessed an even sharper decline by 15.6% yoy to reach US$ 7.7 billion.

The major reasons for the decline in iron & steel exports during the period are – relatively better domestic price realisation, aggressive pricing strategies leveraged by China and protectionist policies adopted by the US and EU. Copper production dropped significantly during H1, 2018-19, primarily due to the shutdown of Sterlite Copper’s smelter in Tuticorin, which caters to 40% of India’s copper smelting capacity.

However, the trend in value added products is much more positive. Industrial machinery & parts exports grew by 15.1% to reach US$ 13.04 billion. A similar trend is visible in electrical machinery, which grew by 28.7% to reach US$ 7.64 billion. Other major panels that saw strong growth during the period include auto components/parts (11.84%); ships, boats and floating products and parts (35.7%), railway transport (37.1%) and other construction machinery (17%).

Exports to the US were recorded at US$ 10.8 billion during April-February, 2018-19, growing by 16.9%. Nepal (20%) and Bangladesh (16.75%) also witnessed strong positive growth, while UAE (1.7%) and Germany (3%) saw relatively modest increase. The strongest growth was seen in Nigeria (52.6%), Thailand (31.6%), Sri Lanka (29.35%) and Japan (22.29%), indicating that the engineering sector has managed to significantly diversify the export basket over the years.

In the chemical sector, China has invited increasing scrutiny from its trade partners like the EU on environment-related concerns in the past few months. This has been a positive for India, which is now seen as a stable source of high quality chemical products. Exports of organic chemicals to Europe were recorded at US$ 3.93 billion during April-January, 2018-19, compared to US$ 4.2 billion during the entire year 2017-18. Inorganic chemicals export to the region stood at US$ 277 million during April-January, 2018-19, compared to US$ 252.11 million for FY 2017-18.

Growth in RMG exports over the past few months can be attributed to the base effect, as the sector was badly impacted by the reduction in export incentives under the GST regime last year. However, the sector is going through its fourth successive year of weak growth/decline. India’s RMG exports have declined by 3.4% yoy in 2018-19 to reach US$ 16.15 billion.

Going forward, the environment remains challenging. A major setback for the RMG sector this year has been fall in demand from traditional markets like Middle East, France, Sri Lanka and Sudan. Other issues include the challenge to Indian export subsidies under WTO, emerging competitors like Bangladesh and Vietnam, domination of unorganised players at the low end of the value chain and lack of trade agreements with major importing nations.

The pharmaceutical sector had a good year with exports at US$ 19.15 billion, growing by 10.85% yoy. The growth was led by new product launches by companies like Lupin, Dr Reddy’s Laboratories, etc. Performance has been better than expected in the US, which faces a serious shortage of drugs. This is due to discontinuation of products by large generics, plant-specific issues impacting certain companies, and stringent failure to supply penalties from customers.

Drugs in shortage have reportedly increased to 112 in the US, the highest since 2012. Pharmexcil is now focussed on tapping newer markets with huge potential through bilateral talks. For instance, the council is working with the China Chamber of Commerce of Import and Export of Medicines and Health Products to expedite the registration and procurement of medicines from India.

Export growth in petroleum products has actually decelerated due to the international fall in petroleum prices. Non-petroleum and non-gems & jewellery exports increased by 8.24% yoy to reach US$ 243.02 billion during April-March 2018-19.

Navigating choppy waters

The current fiscal is generally expected to be a challenging for exports, with the WTO projecting a slowdown in trade growth to 3.7% in 2019, compared to 3.9% in the previous year.

The industry is asking for urgent short term support measures, including further easing of credit to the industry, GST exemption for SME exporters, online refund of input credit and interest equalisation support to agri-exporters. However, it is also critical for Indian policy makers and industry to look at long-term measures to boost exports.

One of the major emerging sectors for boosting exports is agriculture, for which the government has come up with a new Agricultural Policy. The policy focusses on five areas – agriculture, horticulture, plantations, fisheries and meat. Besides this, the government has emphasised on the need to diversify exports to new markets like Africa and China.

The current fiscal is also important from the viewpoint of trade agreements, with Regional Comprehensive Economic Partnership expected to be signed this year. It has to be seen how India finally negotiates this critical agreement to minimise the potentially negative impact on its trade deficit.

Meanwhile, India also continues to tackle a number of trade related issues at the WTO and with partner countries. These include the recent discussions on e-commerce policy, India’s data protection rules, challenges to India’s export subsidies, case by EU for import duties on electronic products and the planned removal of India from the GSP regime by the US.