Crossing the $2 trn export barrier

  • Editors Speak
  • Sep 30,22
The Government of India has set a target of tripling annual exports to $2 trillion within five years to boost economic growth, increase the contribution of manufacturing sector to GDP and create jobs for the country's youth.
Crossing the $2 trn export barrier

The Government of India has set a target of tripling annual exports to $2 trillion within five years to boost economic growth, increase the contribution of manufacturing sector to GDP and create jobs for the country's youth. India's exports have been on a roll lately. While India's overall exports touched an all-time high of $ 669.65 billion in April-March 2021-22 (a jump of 34.5 per cent compared to FY21), merchandise exports witnessed whopping 44 per cent growth to $ 420 billion in FY22 from $ 292 billion in FY21. Main drivers for this growth were prolonged global commodity bull run, attempts by global firms to cut their import dependence away from China and a COVID-induced surge in demand for all kinds of goods.

At present, India's current account deficit is growing and could approach 3 per cent of GDP, which is expected to grow at 7.5 per cent in FY23. On the surface it appears that India has all key ingredients to achieve the export goal like a stable government, low-cost labour force and favorable geopolitical environment. However, the slowing global economic activity may derail this growth plan. To overcome the situation, India will have to sign free trade agreements with big developed countries, embrace the weakened Rupee and rejig its export basket. India needs to focus on exporting high-margin value-added products instead of low-value raw materials (such as cereals, mineral ores, cotton, steel, etc), which make major contribution to the export kitty today.

India's policy to protect and promote producers of raw materials is leading to high prices of inputs for domestic downstream manufacturers blurring their competitive-edge. For example, high-price local steel imposes cost inefficiencies on downstream industries; making it more cost-effective to import steel-intensive capital goods such as earthmovers, bulldozers, cranes, etc.

Logistics inefficiencies further disadvantage India's exports. Currently, the logistics costs in India are 13-14 per cent of the GDP, compared to 7-8 per cent in developed countries. The new National Logistics Policy, announced on September 17, 2022, aims to bring the logistics cost to single-digit as soon as possible. Consolidation of warehouses – a process already underway in India – is likely to improve the supply chain performance; thus reducing the logistics cost. Companies are also investing in automation to increase warehouse efficiency, creating more opportunities for material handling equipment suppliers. Driven by increase in the government’s infrastructure investment and capacity expansion by industries, India’s automated material handling market - valued at $ 1.354 billion in 2020 - is expected to reach $ 2.739 billion by 2026 at a CAGR of 12.7%.

On the business front, India's corporates continue to show remarkable growth. According to CRISIL Ratings, gross non-performing assets (GNPAs) of corporate segment is likely to fall below 2% next fiscal from a peak of 16% as on March 31, 2018. However, micro, small and medium enterprises (MSMEs) - who suffered the most during the pandemic - remain a concern area as GNPAs of the segment may rise to 10-11% by FY24 from 9.3% as on March 31, 2022. Policy makers will have to take steps to put the MSME sector back on track for boosting exports.

Wishing IPF readers a Happy Diwali!

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