By Dr. Anand Kulkarni
For India to be the global economic powerhouse that it tantalisingly promises to be, exports will be key. While India has a large and increasingly dynamic domestic market, exports are critical for addressing long standing balance of payments constraints, fostering specialisation, critical mass and productivity, as well as accessing leading edge customers abroad. Quantity and quality matter in the export game. (Pradhan 2010, Hye and Lau 2015, Mehrara et al 2014, Debnath et al 2014, Anand et al 2015).
India on the global stage: Merchandise Exports
On a global scale, India is a relatively small player. India’s share of total world merchandise exports was 0.6% in 1995 rising to 1.7% by 2014, despite recording the second strongest compound annual growth rate of the BRIC countries. Clearly this growth is coming from a low base. China’s rise is astonishing, accounting for 12.4% of the world’s merchandise exports, more than four times its share in 1995. To gain some perspective total merchandise exports in China was $ U.S 2.3 billion in 2014, compared to India’s $U.S 17.5 million. Thus, India’s exports were only 14% of China’s.
India’s somewhat export strengths lie in labour and resource intensive industries, drawing on comparative advantages of large population, and availability of natural resources. India’s global share of exports remains small in all other categories as table one shows. What is interesting and concerning is that a 30.9% compound annual growth rate in medium-skilled exports (table 2) between 1995 and 2014 translates only into an increase in global share of these exports from 0.2% to 0.9%.
It is questionable whether India can provide mass employment for its large, young and aspirational population without a stronger manufacturing base, including exporting. This is apart from the externalities and multiplier effects generally associated with manufacturing, and its capacity to lead global value chains.
Table 1 : Global Export Shares by Country (%): 1995 and 2014
|Merchandise||Manufacturing||High Skilled and Technology Intensive||Medium Skilled and Technology Intensive||Low skilled and Technology Intensive||Labour and resource intensive|
Source: UNCTADSTAT 2015 accessed August 17 2015. This classification comes from UNCTAD and is based on the degree of value added in manufactures. Thus higher skilled and technology intensive industries for example refer to aircraft, advanced machinery etc.
Table 2: Compound Annual Growth of Exports (CAGR) 1995-2014 (%)
|Merchandise||Manufacturing||High Skill and Technology Intensive||Medium Skill and Technology Intensive||Low Skill and Technology Intensive||Labour and resource Intensive|
Source UNCTADSTAT 2015 Author Calculations from data accessed on August 17 2015
China has been growing in all categories, where it now accounts for sizeable shares in world trade. Seemingly, China is defying traditional notions of comparative advantage by combining relatively low wages and labour intensive advantages with increasing innovation and skills. It has more than 17% of world’s exports in the high skill and technology intensive category. However, there is a “sting in the tail”. “China’s strong export performance has attracted much attention worldwide amid claims that China has become the factory of the world. China is not only a large exporter of low cost, low technology manufactures but also increasingly of sophisticated products. In a world of GVC’s (Global Value Chains) however aggregate export figures hide the role of intermediates sourced from abroad in final product. The export success of China largely reflects its assembly activities” (OECD 2013 page 44).
India’s Development Model
India’s development model and its legacy is at the heart of its export issues.
India did not pursue the traditional model of development which was characterised by progressive shifts from agriculture to manufacturing (first labour intensive) and then services. Following economic reforms in 1991, the Indian economy leapfrogged from agriculture to services (even though agriculture still consumes significant labour resources) while manufacturing has not been as strong as China and South Korea, for example. Mukherjee and Mukherjee contrast the Chinese and Indian models of development: Chinese policy makers liberalised agriculture in the 1980’s releasing labour to the manufacturing sectors unlike in India; China supported small-medium sized enterprises (SME’s) to grow and expand, while India reserved certain sectors for SME’s which meant little scale, limited competition and regulatory frameworks which have been biased against larger firms (e.g inflexible labour laws); and Chinese authorities welcomed Foreign Direct Investment in manufacturing in the 1970’s, focussing on export oriented investment, while India liberalised much later, and even then FDI was focussed on the domestic market (Mukherjee and Mukherjee 2015).
India traditionally pursued a domestic driven approach, based on protective barriers against imported inputs and investments. Despite liberalisation in the early 1990’s, the inverted duty structures (and other still remaining trade and investment barriers), which put tariffs high on intermediate inputs (but not on final goods) has constrained international competitiveness (Francis 2015). Weaknesses are also apparent in the overall business environment. India is ranked 130th out of 189 countries in the World Bank Doing Business Index 2016 (World Bank 2015).
There are some signs however that India is making a shift towards knowledge intensive goods in its export profile, even though it is not a major player on the world stage. Knowledge intensive industries hold a key to future prosperity and wealth. Such products command premium price and reputation on a global scale.
Table 3: Share of Merchandise Exports by skill category and by Country: 1995 and 2014 (%)
|Manufacturing/ Total Merchandise||High Skill and Technology Intensive /Total Merchandise||Medium Skilled and Technology Intensive /Total Merchandise||Low skilled and Technology Intensive/ Total Merchandise||Labour and resource Intensive /Total Merchandise|
Source: UNCTADSTAT 2015 Accessed August 17 2015
The high skill and technology intensive exports’ share of total goods exports grew from 12.2% in 1995 rising to 19.9%, or around one fifth of India’s total merchandise exports by 2014. The medium skill and technology intensive share has grown from 6.9% in 1995 to 11.5% in 2014, while there has been a very significant decline in the share of labour and resource intensive exports, whose share has fallen from 32.6% of merchandise exports in 1995 to 14.9% in 2014. Low skill and technology intensive export shares have grown marginally over the two decades. India appears to be making some shifts into areas that use the raw intellectual horsepower and attributes of its greatest asset- its people.
There are however warning signs about employment impacts, associated with poor performance in exports of labour intensive products (Krishna and Kumar 2015). This presents India with a dilemma about how to add value to its export base while maintaining and increasing employment levels on a mass scale. Can a shift to a more knowledge intensive orientation generate jobs for its young, aspirational population?
While a tentative sign of structural change is afoot, let us not get carried away. India’s export base is narrow both product and market wise, leaving it vulnerable to shifts in overseas consumer sentiment, any resurgent protectionism abroad, technological change, currency fluctuations and actions of competitor suppliers.
In 2014, India’s top 3 exports accounted for 31%, or virtually a third of India’s total exports. One product, Petroleum oils itself accounted for almost 20% of exports. This pattern has not changed markedly from 1995 when the top 3 products accounted for about 25% of India’s total exports.
Petroleum oil exports have risen dramatically, from being only 1.4% of India’s merchandise exports in 1995, to almost 20% two decades later. In 2014, India’s top 2 exports are primary products rather than knowledge intensive goods and services. However, it is the case that in 2014 there are four high skilled products in the top 20, and in 3rd, 4th and 6th positions: jewellery; pharmaceuticals; and aircraft and associated equipment respectively. This is driving the structural change towards some more knowledge intensive activities.
Further, there appears to be limited complementarity in India’s merchandise export composition i.e. no real evidence, with the possible exception of textiles, of clustering around complementary skills, industries and technologies. Thus, India’s export base appears to be fragmented.
By destination, we also find some interesting and complementary trends to the product analysis.
For merchandise exports, the top ten markets accounted for approximately 49% of India’s exports in 2014, with the top three markets alone accounting for more than 33% of all India’s merchandise exports. The U.S is the number one market for Indian merchandise exports and dominates all categories of skill.
Services are supposed to be India’s “Jewel in the crown”. In compound annual growth terms, India has grown faster than any of the BRIC countries that we consider.
Table 4 : Services Exports 2005 and 2014 ($U.Sm) and Compound Annual Growth Rate (CAGR) %
Source: UNCTAD STAT Accessed 26th August 2015
There is a popular belief that China is the manufacturing specialist and Indian the dominant services economy. Is this entirely the case?
Interestingly, China’s exports of services have been consistently higher than India’s. In raw terms, China’s exports of services in 2014 exceeded India’s in: insurance and pensions; Intellectual property; other business; Government services; goods related services; transport; travel; and construction services.
India’s services exports in 2005 and 2014 have been dominated by two sectors: Telecommunications, Computer and Information services; and other business services. These two sectors accounted for approximately 66% of India’s services exports in 2014 again highlighting the narrowness of India’s export base. It is only in three sectors that India’s exports exceeds China’s in 2014: Telecommunications, Computer and information services; personal and cultural services; and financial services
India’s share of global telecommunications, computer and information services was 12% in 2014, the highest of any BRIC countries.
Despite India being ranked number 1 in the world (out of 144 countries) on exports of communications, computer and services exports, according to the Global Innovation Index, it is ranked 74th on imports in this sector, and 115th and 117th on domestic ICT access and ICT usage respectively (Global Innovation Index 2015). Therefore, balancing domestic requirements with exporting is, and will be, a crucial challenge for India.
Table 5: Telecommunications, Computer and Information Services Exports ($m U.S) and share of global exports (%)
|2005||2104||Global Share of telecommunications, computer and information exports 2005||Global Share of telecommunications, computer and information services exports 2014|
Source: UNCTADSTAT 2015 accessed 26th August 2015
Section Two: Policy Implications and Ideas for the Future
To be fair, the Modi Government recognises the problem and has committed to lifting India’s share of total world exports from 2% to 3% by 2020 (Government of India 2015).
The Indian Foreign Trade Policy (FTP) Statement of 2015-2020 has a number of dimensions including: enhancing market access; upgrading product quality and product/service diversification; building key transport links internationally; enhancing the efficiency of India’s export and trading infrastructure; and enhancing India’s reputation abroad.
However, in our view there are five critical ingredients to success:
- Encouraging more businesses to take exporting up in a concerted way, either individually, or collectively through exports of manufacturing-services linked clusters
- Addressing vulnerability by broadening the export base – exporting more products and services, especially higher value ones
- Diversifying export destinations to reduce the reliance on few markets
- Taking a “whole of international” view which integrates trade, investment, research and people movements to facilitate ideas and knowledge connections globally;
- Dramatic improvement in the overall business environment
Anand R, Kochhar K and Mishra S 2015 Make In India: Which Exports Can Drive the Next Wave of Growth? IMF Working Paper WP/15/119
Cornell University, INSEAD and WIPO Global Innovation Index 2015 Fontainbleau, Ithaca Geneva
Debnath A, Laskar A, Bhattacharjee N and Mazmuder N 2014 Is India’s GDP Really Led by Export? A Further Examination Journal of Transnational Management 19:4 247-260
Francis S 2015 India’s Manufacturing Sector Export Performance during 1999-2013: A Focus On Missing Domestic Inter-sectoral Linkages. Institute for Studies in Industrial Development Working Paper 182
Government of India 2015 Foreign Trade Policy Statement 2015-2020
Hye Q and Lau W 2015 Trade Openness and Economic Growth: Empirical Evidence From India. Journal of Business Economics and Management 16:1 188-205
Krishna G and Kumar R 2015 Indian Exports Loss of Global Competitiveness. Economic and Political Weekly Vol L no 34 August 22
Mehrara M, Haghnejad A, Dehnavi J and Meghbodi F 2014 Dynamic Causal Relationships Among GDP, Exports and Foreign Direct Investment (FDI) in the Developing Countries. International Letters of Social and Humanistic Sciences Volume 14 pg 1-19
Mishra P 2011 The Dynamics of Relationships Between Export and Economic Growth in India. International Journal of Economic Sciences and Applied Research 4 (2) 53-70
OECD 2013 Interconnected Economies Benefitting from Global Value Chains
OECD.Stat 2015 Trade In Value Added stats.oecd.org/index.aspx
Pradhan N 2010 Exports and Economic Growth: An Examination of ELG Hypothesis For India: Reserve Bank of India Occasional Papers Vol 31 no 3 Winter
UNCTADSTAT 2015 International Trade in Goods and Services unctadstat.unctad.org/wds/ReportFolders
World Bank 2016 Doing Business Index
 Due to various changes in methodology for services exports that occurred in 2005 we use the period 2005 to 2014.
Dr Anand Kulkarni is Senior Manager, Planning and Research, at RMIT University, Australia