India’s exports look up amidst US-China trade war

As fears of the US-China trade war becoming full-blown took hold, India’s exports started to look up in the first quarter of 2018-19, reflecting recovering GDP growth. This has opened up the possibility of India getting back on to a high export growth trajectory.

The US-China trade war is cause for worry as it could pull down the reviving global trade after years of slow growth. At the same time, it has opened up a window of opportunity for some countries, including India.

There are some low-hanging fruits, like export of cotton and soya beans to China, which were largely imported from the US. India can also step up exports of textiles and leather to the US, some of which used to go from China. These have to be worked upon as challenges are many, but they can be converted into opportunity.

India’s share in world merchandise exports at the moment is a mere 2%. There is scope to step it up to 5% over the next 4-5 years if some reforms are carried out. Enthused by the good showing of exports, a 20% growth in May and 18% in June, the Ministry of Commerce is working on a strategy in consultation with the Federation of Indian Exporter Organisations (FIEO) to sustain a 20% growth in merchandise exports growth so to achieve $400 billion in annual exports in two years.

After clocking near double-digit growth, India’s exports touched $300 billion in 2017-18, following negative growth in the previous year at $275 billion in 2016-17. India’s exports had not been doing well after it touched $313 billion in 2013-14. That was due to global recession. In recent months, it has shown an upward trend. If there are problems now, they are from within and not external. They needs to be tackled immediately to ensure India does not miss the bus yet again.

The problem is not that severe in services exports, which has been growing steadily in double digits to touch $192 billion in 2017-18. One of the reasons why India needs to push merchandise exports is the widening trade deficit, which is expected to be close to $200 billion this fiscal. This is because of higher oil, gold and electronics imports.

The depreciating rupee, though good for some exports, is aggravating the situation as oil imports become more expensive. Also, the rupee depreciation is due to a weak macroeconomic situation, which could get worse if the trade war turns into a currency war as well.

One realisation that is sinking into government is that it needs to do some handholding for traditional export sectors, which were hit by demonetisation and the hastily implemented GST.

Sectors like textiles, handlooms, handicrafts, leather, gems and jewellery are yet to pick up. Aware of this problem, the government has expedited GST refunds so that they are not starved of working capital. These sectors are mostly in informal sectors, small and medium industries. Nearly 45% of India’s merchandise exports came from small and medium industries.

The government has lately held drives to release GST refunds quickly and some Rs 43,000 crore has been refunded in recent months. This has come in handy for small and medium industries, which were starved of working capital.

The government is also seriously looking at reintroducing duty drawback scheme for GST to facilitate MSMEs. With the rollout of GST, the popular duty drawback scheme, which was earlier available for excise and countervailing duties as well, were withdrawn. Duty drawback is now available only for customs. It is expected that duty drawback, which is a sort of refund of taxes paid on intermediary items that go into making of export items, will be reintroduced by October. This will ensure that their money does not get stuck in government, making it difficult for MSMEs to rotate money in business.

Potential markets

New markets like Africa and Latin America offer huge potential for Indian textiles, handicrafts, handlooms, gems and jewellery, leather and farm products. The US and China, too, have attraction for Indian handicrafts and handlooms but these sectors need to become more competitive.

Farm exports, which are now at $40 billion, could be easily stepped up to $100 billion in a short period. Job-creating food-processing industries will have to get a further boost. India’s farm produce is perhaps cheapest in the world, and with a record food grain production of 275 million tonnes and a record horticulture produce of 375 million tonnes last year, there is huge export opportunity. With a good monsoon, farm production is expected to go up further. Higher farm exports will help to boost farmers’ incomes as well.

McKinsey is of the view that restrictive tariffs as a result of trade war might not hurt India. That is encouraging, though rising global commodity prices might have some impact.

India has already benefitted in the area of cotton exports as it has signed contracts to ship 5,00,000 bales of cotton to China in a rare advance deal after Beijing imposed 25% retaliatory tariff on US cotton. The ‘Make in India’ initiative comes in handy to step up export of manufactured goods to China and the US.

World Trade Organisation reports indicate that global trade grew by 4.7% in 2017, the highest since 2011. It was 1.8% in 2016. The trade war may have some impact in 2019, but it could also be a good thing for certain markets in Asia, including India, as companies look for alternative markets beyond US and China.

Thus, there appears to be more positives than negatives for India, but when two giants fight, those around them will have some worries, too.

(The writer is a senior Delhi-based journalist)