Changing terms of trade

India must aim to boost export share

The beginning of a fresh term of the government provides an opportunity to revisit policy issues and make interventions to achieve higher, sustainable growth in the long run. One such area is trade. It is well established that international trade significantly drives aggregate demand, and no country can achieve rapid growth without expanding exports. Higher exports will reduce India’s dependence on foreign savings while creating much-needed jobs for its growing workforce. This will help stimulate domestic demand and generate a multiplier effect. For comparison, India is on course to become the third-largest economy in the coming years. However, its share in global merchandise exports, according to the World Trade Organization data, was just 1.8 per cent in 2023. The comparable levels for the US and China were 8.5 and 14.2 per cent, respectively. The target for India should be to increase its share of global merchandise exports to a comparable level. In 2023-24, India’s merchandise exports declined 3.09 per cent.

India will need to thoroughly review its trade policy to attain higher sustainable export growth. It has high tariffs, which hampers the export competitiveness of domestic manufacturers, especially micro, small, and medium enterprises. Further, India is not part of any significant regional or preferential trade agreements, which would have reduced input costs and helped India become part of the global value chain. India decided to stay away from the Regional Comprehensive Economic Partnership (RCEP) — a significant trade agreement in one of the world’s most dynamic regions — primarily due to concerns over China’s dominance. However, it has not helped reduce dependence on Chinese imports. Although India has signed free-trade agreements with individual countries, it may not help it integrate into global value chains. Further, India must prepare for increasing concerns about climate. Measures like the European Carbon Border Adjustment Mechanism (CBAM) could significantly increase restrictions for Indian exports.

On the services side, India has done well over the years and efforts should be made to sustain the momentum. India is the seventh-largest exporter of services and has shown greater resilience amid global uncertainty. In fact, India’s services sector has evolved from mere outsourcing to developing capabilities and research centres. As recent research by economists at the Reserve Bank of India highlighted, compared to 2015-16, the number of global capability centres in India increased by 60 per cent in 2022-23, highlighting India as a favoured destination for multinational companies. However, despite the strength, services exports registered a three-year low growth rate of 4.9 per cent in 2023-24 and this deceleration must be studied carefully.

To boost services exports, India must invest in human capital. Since services rely heavily on skilled personnel, significant investment in basic and advanced education, professional training, and research and development is essential. Additionally, diversifying services export destinations will help. The US and Canada account for more than half of India’s services exports, making the country vulnerable to economic fluctuations. At a broader policy level, India must aim to substantially increase its merchandise export share in the coming years and make interventions accordingly. Given the geopolitical conditions, multinational corporations are looking to diversify away from China, and this presents an opportunity for India to attract investment and expand its manufacturing base, which will also increase India’s export competitiveness.