Is India's exports growth momentum sustainable?

It has been a season of records for the Indian export sector. In late March India comfortably crossed the $400-billion export mark by $20-billion — nine days ahead of the end of financial year 2021-22. Previously, outbound shipments had touched a record of $330.07 billion in 2018-19.

And amid high commodity prices and the ongoing Russia-Ukraine conflict, India’s merchandise exports swelled by 24.2% in April to $38.2-billion, the third-highest level ever.

The growth seen in exports in April was partly a function of commodity prices. Consider that petroleum product exports more than doubled, with a 113 per cent increase compared to April 2021. Meanwhile, chemicals increased by 27 per cent.

But, as a Business Standard editorial highlighted, there were also indications that the increase in exports of electronics goods had possibly become sustainable. In fact, exports of electronics goods surged by 64 per cent YoY.

Let us also consider the key drivers for FY22's exports performance. Exports of engineering goods jumped 32% in the first 11 months of FY22, compared to the previous financial year. It was the biggest export item.  

However, in April, exports of engineering goods registered sub-par growth at 15.4 per cent.

Quoted in a previous Business Standard report, Engineering Export Promotion Council Chairman Mahesh Desai had said that high logistics cost and unprecedented increases in raw material costs had been hurting engineering goods exports. Although, he saw the growth momentum seen in FY22 continuing. According to Desai, the trade deals with the UAE and Australia would give a boost to the sector. And, the proposed free trade pacts with the UK and Canada would further add to this positive momentum.

“While the trade deals with the UAE and Australia are expected to give a boost to the sector, the proposed free trade pacts with other countries like the UK and Canada would further give impetus to exports from India,” says Engineering Export Promotion Council Chairman Mahesh Desai.

This brings us to two deciding factors that will impact India's exports growth going forward. First, how much of this growth can be attributed to the medium-term effects of higher commodity prices and how much to the long-term effects of a more export-focused finished goods sector? Second, the impact of recent and future trade deals.

Recent developments also indicate challenges going ahead. The last week saw central banks across India, the United States, the United Kingdom, and Australia commence actions to fight inflation. This has translated into an increase in benchmark interest rates. And, also the withdrawal of excess liquidity, which had been injected during the past two years to counter Covid-19's economic impact. These steps are likely to result in lower global trade and economic growth.  

Then there are the disruptions in global shipping and supply chains due to the strict lockdowns in China and the Russia-Ukraine war. Amid all this, there are various measures that the government can take to secure exports growth. 

First, ensuring that competitiveness increases throughout the exporting sector, which will require an upgrade of both physical and soft trading infrastructure. Second, it must speed up new trade agreements that lower tariffs all around and enhance market access. On a related note, it will also have to leave behind the practice of raising tariffs to protect domestic industry. Finally, exporters will be helped by the weakening of the rupee against the dollar. The RBI should play a supportive role in this regard.  

India's merchandise exports to GDP ratio has been on a declining trend. While this ratio will show an improvement in FY22, it will still be nowhere near the record seen more than a decade ago. It remains to be seen whether the government can reverse this trend.