Written by CA Samiksha Punamiya

Background:

Trade is an important contributor to the economic growth. Post globalisation reforms, international trade have reached new heights. Traditional economists believed (more from a perspective of developing economies) exports spurs economic growth using the theory of comparative advantage, excess demand in the domestic economy, greater economies of scale due to large market; increasing the rate of investment and technological changes and other favourable macro conditions.  Development of trade inevitably calls for structural reforms encompassing infrastructure, technology and innovation. When we look at exports, two aspects clearly are very critical – quality of the goods produced and competitiveness in the global market.

Let us look at India’s trade for a set of 10-year period pre and post globalisation reforms of 1991:

Exhibit 1: Table showing India’s Trade during Pre and Post Reform Period from FY 1981 to FY 2014 (Amount in $mn)

 

Year (Pre)	Export	Annual Growth Rate (%)	Year (Post)	Export	Annual Growth Rate (%)	Year (Post)	Export	Annual Growth Rate (%)
1980-81	8486	6.78	1992-93	18537	2.17	2003-04	63843	21.10
1981-82	8704	2.57	1993-94	22238	19.97	2004-05	83536	30.85
1982-83	9107	4.63	1994-95	26330	18.40	2005-06	103091	23.41
1983-84	9449	3.76	1995-96	31797	20.76	2006-07	126414	22.62
1984-85	9878	4.54	1996-97	33470	5.26	2007-08	163132	29.05
1985-86	8904	-9.86	1997-98	35006	4.59	2008-09	185295	13.59
1986-87	9745	9.45	1998-99	33218	-5.11	2009-10	178751	-3.53
1987-88	12089	24.05	1999-00	36715	10.53	2010-11	251136	40.49
1988-89	13970	15.56	2000-01	44076	20.05	2011-12	305964	21.83
1989-90	16612	18.91	2001-02	43827	-0.56	2012-13	300401	-1.82
1990-91	18143	9.22	2002-03	52719	20.29	2013-14	314405	4.66
CAGR (%)	7.15		CAGR (%)	9.97		CAGR (%)	15.6

*source- Ministry of commerce and Industry

We can see that exports have increased post the LPG reforms of 1991. A great thrust was given to opening of economy to a more liberalised trade environment and gradually withdrawing of trade restrictions. Global demand was booming, which led to increase in exports. Bottoming out of commodity prices, easy repatriation of export proceeds and a favourably /free flowing exchange rate were other macro-economic factors, which helped exports to grow.

Exhibit 2: Table showing India’s Trade during NDA government from FY2015 to FY2020 (Amount in $ mn)

Year	Export	Annual Growth Rate (%)
2014-15	310338	-1.29
2015-16	262291	-15.48
2016-17	275852	5.17
2017-18	303526	10.03
2018-19	330078	8.75
2019-20	314310	-4.78
CAGR (%)	0.21

*source- Ministry of commerce and Industry

Exports have clearly not performed well during last 5 years. The fall in exports during 2015-16 was mainly attributed to Goods and Services Tax. Delay in processing of export credit resulting in shortage of working capital as well as non-availability of export credit guarantee were major cause of concerns for exporters. Effects of Demonetisation also left the economy in a position of tightened liquidity.  Flow of global trade is attuned to vagaries in the major trade economies and India is no exception. Issues like trade wars and Brexit have influenced global demand conditions, which has affected India’s export confidence.

Looking at 2020 and the years ahead, in the event of the pandemic, warrants a clarion call for a major reform in exports. Expanding aggregate demand domestically as well as globally will be a challenge faced by the Indian Economy. Though services exports have continued to sustain, a global recession will impact its sustainability going forward.

Analysis of India’s key products and key markets:

While India’s product portfolio has a gamut of commodities that are exported, 30% of them form part of defensive and industry- based products while 70% are consumer based or discretionary.

Exhibit 3: Chart showing the key 15 products exported by India from FY2010-2020:

*source- Ministry of commerce and Industry

Exhibit 4: Table showing Product share of key 10 commodities: (Amount In $ mn)

Items	2019-20 (Apr -Feb)	% Share
Petroleum Products	38700.65	13.27
Pearl, Precious, Semiprecious Stones	19545.68	6.70
Drug Formulations, Biologicals	14736.12	5.05
Gold And Other Precs Metal Jewellery	12895.04	4.42
Iron And Steel	8647.97	2.96
Organic Chemicals	7783.43	2.67
Rmg Cotton Including Accessories	8035.18	2.75
Motor Vehicle/Cars	7268.81	2.49
Electric Machinery And Equipment	8274.72	2.84
Products Of Iron And Steel	6543.21	2.24
TOTAL	291705.65	100.00

From the above chart, it is evident that over the years exports have not been so encouraging in lines with India’s economic growth. Key export products that have shown positive growth include petroleum products, drugs and pharmaceuticals, gold jewellery, iron and steel, electrical machinery, motor vehicles and organic chemicals.

On the other hand, products such as precious and semi-precious jewellery, readymade garments of cotton, gold and marine products had a competitive edge but failed to perform in the international market. As I have mentioned above, reasons such as quality and competitiveness for global markets play an important role.

Textile exports saw major headwinds. Glitches on the supply chain side of the retailers in the importing countries led to procurement issues. Synthetic textiles saw a major cost movement because of higher tax incidence, which is affecting their exports. As a result, India has been losing the edge for textile and the procurement of importing countries has shifted to more competitive countries like Bangladesh and Vietnam. In addition, since textile market in India is largely clustered, India is considerably petit in scale compared to China in terms of digitization and e-commerce.

Observing this, the GST Council is expected to give out various export incentive schemes for textile sector. Normalisation of GST in synthetic textiles from 12% to 5% and refund of input tax credit paid on exports shall unblock the working capital constraints and increase export competitiveness.

 Agricultural Exports policy announced in June 2019 lay a framework for increase in exports of key agricultural commodities and processed foods including marine products. Agri exports amounted to $31bn in 2017 and the policy aims at doubling exports to $60 bn by 2022. This is a part of doubling farmer income by 2022 programme. 

While the pandemic has destructed economies globally, India has witnessed an opportunity in disguise to revive exports in lagging areas. Focus should be on improving infrastructure, technology and marketing for development of these products. At a time where US companies are contemplating to shift their base from China to other countries, India stands a chance to win in this situation.

However, global demand conditions pose a challenge and will be critical to assess as time progresses. In this situation, aggressive demand creation techniques and further liberalising of trade can be adopted.

Exhibit 5: Chart showing key markets for Indian Exports from FY2010-2020:

*source- Ministry of commerce and Industry

From the above chart, one can see that India’s exports have been concentrated to a few countries. Top 15 countries make up for 60% of the exports. On the other hand, countries namely, Italy, Japan, Indonesia, Sri Lanka and Brazil used to be key markets but failed to in the last five years. Increasing competition from China and other emerging economies such as Thailand, Bangladesh and Vietnam have come to dominate the exports in global markets.

A detailed analysis of India’s export commodities portfolio points out that only 14% of the total commodities make for 70% of the total value. These commodities include petroleum products, pharmaceuticals, chemicals, vehicles, machineries and metals, which are defensive in nature. However, for the balance 86% products, which are demand-driven, adhering competitive strategies, as well as expansion in the untapped markets should be on focus for the Indian Government.

Opportunities after the pandemic:

Last five years before the pandemic did not prove to be successful for India’s exports. While the economy was recovering from twin shocks of Demonetisation and GST, global growth slowdown was already underway. Revised downward estimations of global growth by IMF made it very clear, as to where the global economy is headed. This slowdown was supposed to be the process of a normal economic cycle, but Corona virus pandemic is and continues to be a major disruption to the global economy. So much so that the entire scenario of globalisation and flow of trade; is expected to alter in a revolutionary way. This will entail significant changes in trade partners and consequent supply chain logistics.

The recent package of Rs.20 lakh crore with a vision of AatmaNirbhar Bharat announced by Modi Government does highlight on India’s export potential. Certain sectors such as coal and defence have been opened up for private sector at large. Also mention of India as a MRO hub for global aircrafts will prove to be beneficial for India’s growth. While the concerns relating to GST, capacity building and private investments had its roots in the supply side of the economy, demand has remained unaddressed. The current slew of measures still cater to the supply side, but how effective are they in invigorating demand with the pandemic in picture, needs to be seen.

Observing the current situation for petroleum products contributes to 13% of our exports) demand has been significantly affected. On the other hand, we already witnessed a slowdown in vehicles, machineries and electrical equipment.  This resulted in India’s exports to decline by 34% YoY in March 2020 and 60% YoY in April 2020.

Therefore, ideally products that India can focus on for exports going forward in the near term needs to be the matter of discussion.

Exhibit 6: Table depicting classification of Exported products into existing, lagging and potential.

Existing	Lagging	Potential
Pharmaceuticals	Gems and Jewellery	Coal
Organic Chemicals	Handicrafts	Minerals
Masks and PPE	Leather products	Articles of Plastic
Agricultural products, marine products and horticulture	Readymade apparels	Aircrafts
Engineering goods	Agriculture allied products	Vehicles
	Steel and articles of steel
	Wood products/furniture

Considering the demand conditions in the domestic market, India has a brilliant opportunity to expand exports since the capacity is expected to remain underutilised. In addition, with the AatmaNirbhar Bharat package, a push to the supply side can prove to be momentous for India’s long lost manufacturing sector. As per RBI’s survey, capacities have been underutilised and private investments in capital formation have been lacklustre. Prospects for exports will increase manifold if manufacturing sector is given the right kind of environment to operate.

Exports will have to be undertaken with a new mind-set. Commodity prices are in the phase of bottoming out and a sooner than expected recovery from recession will accelerate the trade processes. Setting up of quality standards, improving technological infrastructure and competitive pricing are aspects, which will help exports, take its course in the long term. A thrust to liquidity and spending by the government will ensure smooth functioning of the export related processes. In addition, strengthening of labour laws in this regard will be a critical aspect.

As far as other macro-economic factors are concerned, rupee has been in a favourable range at $75 levels for exports. Since oil imports have declined along with import of certain non-essential items, a depreciated rupee will prove to be a silver lining for exports to take place. On the other hand, capacity utilisation has declined sharply to 68.6% in Q3FY20 as compared to 69.1% in Q2. This will further drop in Q4 FY20 and Q1FY21. We are at an advantage to use this idle capacity for exports (job work) when domestic demand is subdued.

Special Economic zones in India:

Special Economic Zones (SEZs) and Export Oriented Units (EOUs) were established in India with a view to expand India’s exports, create employment, facilitate international trade and achieve economic growth. These units are given special incentives in order to operate. Supplies from these units are considered as zero-rated and do not attract any tax liabilities. There are 421 approved Special Economic Zones in India.

  Exhibit 7: Table laying out sector wise bifurcation of SEZs:

Industry Type	Approved	Operational	% of Operational
Major	390	227	58
Agro-processing	5	2	40
Alumina/Aluminium	2	1	50
Biotechnology	23	4	17
Building prod./mal./ transport equipment / ceramic and glass	2	2	100
Electronic product/Industries	2	2	100
Engineering/Metallurgical Engineering	14	12	86
Food Processing	3	2	67
Footwear/Leather	5	4	80
Gems and Jewellery	4	4	100
Handicrafts & Carpets	2	1	50
IT/ITES/Electronic Hardware/ Semi-conductor/ Telecom equipment	276	145	53
Multi-Product	20	25	125
Multi-Services	4	2	50
Non-Conventional Energy	2	2	100
Petrochemicals & petro./oil and gas	2	0	0
Pharmaceuticals/chemicals	17	12	71
Textiles/Apparel/Wool	7	7	100
Potential	11	5	45
Airport based multiproduct	2	0	0
Auto/Automobile Ancillary	2	1	50
Aviation/Aerospace/ Copper	5	3	60
Beach & mineral/ metals	2	1	50
Other	20	8	40
Grand Total	421	240	57

*source- sezindia.nic.in

From 420 formally approved SEZs, only 240 are operational. There is a huge scope here for development of special economic zones and addressing the challenges. Since the inception of special economic zones in 2005, exports have grown by more than 30% in 2018-19 with IT services contributing more than 50%. These zones have created approximately 2 million jobs and has proved to be an employment generator for the economy.

From the above table, we can see that only 57% of the SEZs are operational. For existing sectors, as defined earlier, we can see that only 58% of the SEZs are operational, majority of which is contributed by IT and ITES. (Services). Agri based products, footwear and handicrafts are not operating at their full capacity. In addition, potential sectors have a greater scope of development, which needs to get attention. The SEZ division of Ministry of Commerce and Industry, needing to be addressed by the government, raised following issues:

1. Unutilised land (more than 25000 hectares) on account of lack of flexibility across different sectors
2. Rationalisation of multiple models of economic zones including coastal economic zone, Delhi-Mumbai Industrial Corridor, National Investment and Manufacturing Zone, food park and textile park.
3. Under-utilisation of existing capacity as job-work from DTA is not admissible.
4. Unfair tax regime for domestic sales from SEZ in context of basic customs duty even under Goods and Services Tax.
5. Lack of support from the state government when it comes to developing effective single-window system for clearances

These issues require government’s immediate attention to revive exports and thus help achieve economic growth. Macro factors remain favourable as far as exports are concerned.  In light of the pandemic, revamping of special economic zones in economically backward regions, agricultural regions to support farmer incomes and keeping in mind the interests of migrant labourers will be key in serving the socio-economic objectives. Sector specific measures for aircrafts and mining of minerals in the recently announced AatmaNirbhar Bharat Package will help boost exports.

Exhibit 8: Table showing state wise bifurcation of SEZs in descending order:

States/UTs	Approved	Operational	% of operational
Chandigarh	2	2	100
West Bengal	7	7	100
Gujarat	26	20	77
Tamil Nadu	56	41	73
Odisha	7	5	71
Kerala	29	19	66
Maharashtra	50	32	64
Andhra Pradesh	32	20	63
Punjab	5	3	60
Rajasthan	5	3	60
Uttar Pradesh	23	13	57
Karnataka	63	32	51
Chhattisgarh	2	1	50
Telangana	63	30	48
Madhya Pradesh	12	5	42
Haryana	23	7	30
Delhi	2	0	0
Goa	7	0	0
Jharkhand	2	0	0
Manipur	1	0	0
Nagaland	2	0	0
Puducherry	1	0	0
Tripura	1	0	0
GRAND TOTAL	421	240	57

*source- sezindia.nic.in

Data from above table suggests that SEZs in north – eastern states and other backward states have not yet been operational. A resource wise allocation of states can be beneficial at arriving the kind of SEZs that need to be developed. Infrastructure spending by the government will play a pivotal role in the development of SEZs.

At 57% capacity, India has delivered exports of USD 314bn in FY20, comprising of ~10.8% of GDP in dollar terms. Increasing this capacity will increase exports and help India achieve the $5tn economy target. Global demand continues to be a concern.

India can benefit from cost competitiveness as well as opportunities arising from the event of boycotting Chinese products by developed countries. Venturing in emerging market economies will be a key driver for exponential growth as developed economies are worst hit due to the pandemic.

 In this context, the time is potent for attracting Foreign Direct Investments, forming bilateral treaties and laying a framework for robust export infrastructure by integrating India in global supply chain.

Exhibit 9: Chart showing exports as a percentage of GDP growth rate in $terms:

*source- World Bank

The required growth rate for exports to reach the target is 10% in dollar terms and ~13%-14% in Indian Rupee terms (Adjusted for inflation). Similarly, nominal GDP is also required to grow by 12% in dollar terms and 15%-16% in rupee terms.

Exhibit 10: Chart showing level of Exports at different Capacity Utilisation levels of SEZs:

We can see that at 100% capacity, other conditions remaining constant, we can export goods worth $500bn. If we aim to achieve this, we will have to increase operations at a faster rate. Except for IT and ITES, other SEZs, based on the workers’ population and other conditions, need to operate effectively at a faster rate.

Conclusion:

To reach $5tn target by 2025, the economy will be required to grow at 12% in $ terms. Also for exports to reach $500bn goal, required growth rate is 10% YoY at current levels of exports keeping the interest rate of 4% constant. If we are able to turn over non-operational SEZs to operational in an efficient and effective manner, we can achieve the required level of growth.

Recommendations:

• The government should focus on addressing existing issues faced by SEZs and ensure and liquidity measures are adequate. RBI in its April 2020 Monetary Policy briefing did mention that support will be granted to exporters in terms of export credit.
• The government should set up at committee, especially focussing on labour requirement for exports state wise. We are witnessing reverse migration in large numbers at the time of pandemic.  A system should be made to match demand and supply for required workforce in SEZs.
• Along with this, robust reforms in labour code addressing economic security, upgrading minimum wages and other relevant measures.
•  Infrastructure development mainly focussed on technological systems should be prioritised in existing SEZs.
• The government in order to sustain export businesses contemplate continuity of incentives such as tax holidays and faster processing of GST refunds.
• Other measures will include revamping strong quality control systems and strategizing price competitiveness at this time essentially to recreate global demand for Indian Products.

References:

1. Press Information Bureau, Government of India, Ministry of Commerce and Industry, India’s Global Trade.pdf (June 2019)
2. Pesala Peter, India Manufacturing Sector Exports in the context of globalisation”, Journal of International Economics (July 2014)
3. Dr. Priyanka Sahni, “Trends in India’s Exports: A Comparative Study of Pre and Post Reform Period”, IOSR Journal of Economics and Finance (2018)
4. Pooja Yadav, “A comparative study of India’s Foreign Trade in Pre and Post Reform Era”, Apeejay-Journal of Management Sciences and Technology ( February 2018)
5. Formal Approval.pdf, Sector wise distribution.pdf, State wise distribution.pdf,  sezindia.nic.in
6. https://tradingeconomics.com/india/exports
7. https://economictimes.indiatimes.com/news/economy/foreign-trade/india-maps-out-post-covid-export-plan-to-take-on-china/articleshow/75457477.cms
8. https://commerce-app.gov.in/eidb/ecomq.asp
9. https://commerce.gov.in/writereaddata/UploadedFile/MOC_637251634305315092_Press%20Release%20April%202020.pdf
10. https://commerce-app.gov.in/ftpa/default.asp
11. https://ustr.gov/countries-regions/china-mongolia-taiwan/peoples-republic-china
12. https://www.bloombergquint.com/business/capacity-utilisation-in-manufacturing-sector-drops-to-a-record-low-rbi-survey-shows#!/homepage
13. https://m.rbi.org.in/Scripts/QuarterlyPublications.aspx?head=Quarterly%20Order%20Books,%20Inventories%20and%20Capacity%20Utilisation%20Survey
14. https://economictimes.indiatimes.com/small-biz/policy-trends/gsts-impact-on-special-economic-zones-export-oriented-units-to-be-a-mixed-bag/articleshow/59540067.cms
15. https://www.thehindubusinessline.com/economy/62-of-sezs-are-operational-and-have-created-20-lakh-jobs/article25827760.ece