Trade: A call to action for rapid growth

For India to attain high-income status by 2047, it must urgently prioritise trade as the primary driver for achieving accelerated growth

India’s quest for faster economic growth has reached a critical stage. In contrast to our current growth momentum of 6.1 per cent (2023-28), as projected by the International Monetary Fund, the Reserve Bank of India estimates that we need to grow at over 7.6 per cent annually for the next 25 years to become a high-income country by 2047, reaching a nominal per capita income of about $22,000 at today’s dollars.

No country has achieved such a growth rate without achieving significant export growth. During its exceptional growth years, between 1980 and 2006, when China’s real gross domestic product (GDP) grew by over 10 per cent per annum, its exports (goods and services combined) grew at an annual rate of 19 per cent, increasing their share in GDP from 5 per cent to 36 per cent. India’s experience during its faster growth years is similar. In the 10 years between 2002 and 2012, when India’s GDP grew by 7 per cent per annum, its annual exports growth was 20 per cent, with the export share in GDP increasing from 14 per cent to about 25 per cent. Our estimates suggest that this 11 per cent increase in export-to-GDP ratio would have accelerated annual GDP growth by about 1 per cent during this period. 

Thus, exporting more is critical for faster growth and India has great potential for catching up; we are the fifth largest economy in terms of GDP but 17th in terms of exports. Recognising this, the government has set an ambitious target to expand exports to $2 trillion by 2030. This implies an annual growth rate of 15 per cent, a far cry from the 4.2 per cent exports growth witnessed over the last 10 years (2012-22). The ask becomes even more challenging because exports growth must accelerate in an environment where global trade growth has sharply decreased — from 11 per cent during 2002-12 to barely 1 per cent over the five years prior to the pandemic.

While forecasts for global trade are slightly better than the growth experienced in recent years, it may hover around half of the double-digit growth achieved during 2002-12. Achieving 15 per cent growth in India’s exports is going to be hard, making it crucial for India to emphasise trade with a renewed sense of urgency.

India needs to focus on three pillars to penetrate deeper into the global markets. First, India’s economy needs to open further to integrate into the global value chain (GVC). Tariff reduction and rationalisation, along with the removal of quantitative restrictions, are a prerequisite for greater integration. Although our average tariff rates have reduced from 30 per cent in the late 1990s to around 6 per cent now, they are still substantially higher than our Asian neighbours (1.3 per cent, 1.7 per cent and 2.4 per cent in Vietnam, the Philippines, and China, respectively). Participating in GVCs becomes difficult with such tariff differences and import restrictions. The recent regressive action to restrict computer imports will be highly damaging, limiting our access to GVCs. Further, high tariffs on imports are effectively equivalent to taxes on exports, making us less competitive in global markets.

Second, India must develop deeper engagement with Asia in the Indo-Pacific, since that will be the fulcrum of the global economy in the conceivable future. The share of emerging and developing (EMD) Asia in global GDP has already risen from 10 per cent in the early 2000s to 25 per cent in 2020. These countries are expected to contribute about half of the increase in global GDP till 2028 and beyond, thus presenting huge prospective markets for our exports. In 2022, just 20 per cent of our exports went to the EMD Asian countries, compared to 36 per cent to the troika of the US, EU and UK. Imports into the US and the UK are expected to grow by only about 2 per cent over the next five years. This makes achieving export growth of 15 per cent per annum, necessary to achieve the $2 trillion target by 2030, a daunting task when the key markets are expected to grow at only 2 per cent.

The world is being increasingly divided into global trade blocs and Asia is no different. The region is being covered by the Indo-Pacific Economic Framework (IPEF) and the Regional Comprehensive Economic Partnership (RCEP). India’s need to deepen engagement with Asia for its growth ambition runs the risk of being handicapped if it is not part of these trading blocs. With the RCEP coming into force in 2022, our future trade prospects with the faster growing Asian countries are likely to be adversely affected. Even though these trade agreements come with trade-offs, such as increased competition, especially from countries with strong manufacturing sectors like China, our historical performance should give us confidence about continuing with these reform measures. It is no coincidence that India’s export-multiple — the pace at which our exports grow relative to world export growth — increased from 0.9-1.2 times during the 1970s and 80s to 1.9-2.1 times after 1994, when India began integrating with the world through measures like reduction in import barriers and tariffs and a correction in the overvalued exchange rate. Further, participating in trade agreements with our Asian neighbours will facilitate deeper integration into the GVC, which is necessary for increased exports to our current big markets in the West.

Third, sound management of the real effective exchange rate (REER) is essential. An overvalued exchange rate erodes India’s export competitiveness in global markets, thus handicapping export expansion and economic growth. During 2000-2010, India broadly kept its REER at its fair value, which showed up in our export performance. However, since then, our REER has gradually become overvalued by about 15 per cent more than its fair value. If the real exchange rate had been broadly stable post-2009, India’s share in world exports in 2020 could have grown to 2.8 per cent as opposed to 2.2 per cent. In value terms, our exports would have been around $650 billion in 2020, instead of the actual $528 billion.

As India embarks on its journey towards accelerated economic growth, a renewed and urgent focus on international trade is essential. There is no time to lose.

The writers are, respectively, president emeritus and distinguished fellow, CSEP, and member of the Economic Advisory Council to the Prime Minister;  COO and senior fellow, CSEP; and research associate, CSEP