Underwhelming performance

Without economic integration, trade strategy will not work

The government’s focus appears to be on identifying high-value exports to high-income countries, and on reducing the trade deficit. Superficially, it might appear that this strategy has achieved moderate success, given that the data for April 2023, released on Monday, showed the merchandise and services trade deficit came at a 21-month low. The headline figure for exports over the 2022-23 financial year has also shown growth, albeit less than 7 per cent. But these figures do not tell the story, which is revealed by a closer look at the disaggregated data as well as through a more long-term perspective. Such a look reveals that India is far from having a successful strategy for economic growth and integration. The low merchandise trade deficit emerges, if anything, from shifts in discretionary patterns of demand for oil and for gems; these cannot be the basis for stability on the external account.

While services exports have been growing, that has not been the focus of the strategy and, furthermore, the IT-enabled services sector is continually at threat of losing market share and value-added as a consequence of major technological shifts such as the arrival of artificial intelligence-like large language models. The longer-term data shows that, while exports to the European Union and the United States have seen growth, those to Asian and African countries have seen a decline. Even exports to the EU and the US have been bumped up by India’s role as a refiner of Russian oil, which cannot be directly exported to the West. If India is to become a trading and manufacturing hub, then its exports to and imports from other middle-income countries should also see a rise. This does not appear to be happening. This is not an artefact of a single year but a structural problem. According to the data from the Indian Cellular Electronic Association (ICEA) reported in this newspaper, Indian electronics exports to the US may have more than tripled since 2018, but that represents real growth of only $3.2 billion as distinct from almost $40 billion for Vietnam.

This, looking at the rate of growth, as the ICEA points out, conceals that India is in fact underperforming with respect to its Asian peers. The inability to take advantage of decoupling away from China to the same degree as countries like Vietnam or Malaysia stems from the same root as the fall in exports to countries in Asia and Africa: An unwillingness on the part of the government to enter into large trading agreements. Vietnam, which is both in the Regional Comprehensive Economic Partnership and the Comprehensive and Progressive Agreement for Trans-Pacific Partnership, is an example of a country that utilises the economic integration that such trade pacts provide to build up its export markets in the developed world.

Trade with fellow middle-income countries and growth in export to the developed world are not substitutes for each other. In fact, they will expand in tandem, given the nature of decentred supply chains in today’s world, particularly in high-value industries like electronics. A truly sustainable trade policy would stop trying to chase momentary ups and downs in the trade deficit and instead put into place structural features that would allow Indian companies and producers to enter global value chains.