India, endowed with abundant natural resources critical for production as well as cost effective work force, which is an ideal combination for manufacturing and exports and a few key challenges and improvement are holding India back from fully realizing its potential as a manufacturing giant like China. Despite being the 17th largest exporter globally, a significant portion of India’s merchandise exports consist of raw materials and low-technology goods, which offer limited value addition.
India’s merchandise exports crossed USD 400 bn mark in FY 21-22 and thereafter to USD 450 bn and then to USD 437 bn in FY 23-24. If we look at historical export data since 1993, it indicates a indicates higher growth when exports were incentivized. In fact, the CAGR growth rate was the highest of 17.3% between 2003-04 to 2013-14 period against 3.3% the decade after that.
However, a notable shift is underway, with services exports emerging as a major contributor to the country’s trade landscape.The services sector, driven by skilled professionals and cutting-edge technological advancements, has demonstrated sustained growth and resilience, positioning itself as a key pillar of India’s economic progress.
The rise in India’s services exports can be attributed to its strong presence in high-value sectors such as Information Technology (IT), software development, artificial intelligence, fintech, healthcare, and engineering. Indian professionals have carved a niche in these fields, making substantial contributions to the global economy. Additionally, remittances from overseas workers reached a record $107 billion in the fiscal year 2023-24, bolstering India’s foreign exchange reserves and mitigating the trade deficit.
In 2023-24, India’s total exports amounted to $776.68 billion, with services exports contributing $339.62 billion and merchandise exports accounting for $437.06 billion. Merchandise exports experienced a 3% decline in FY 2023-24, largely due to global supply chain disruptions. In contrast, services exports have shown consistent growth, achieving a compound annual growth rate (CAGR) of 8.4% over the past decade, significantly outpacing the 3.3% CAGR recorded for merchandise exports during the same period. If this trend persists, services exports are projected to surpass merchandise exports by 2028, with India’s overall exports potentially reaching $1.15 trillion by 2030.
The Enduring Importance of Merchandise Exports
Despite the impressive rise of services, merchandise exports remain vital to India’s economic framework. Manufacturing, which forms the backbone of merchandise exports, generates 4-5 times more employment than the services sector, making it indispensable for large-scale job creation. Additionally, a robust manufacturing sector stabilizes domestic prices, contributes significantly to GDP growth, strengthens foreign exchange reserves, and facilitates technological advancements.
However, India’s merchandise exports have remained relatively stagnant for years. Between 2011 and 2020, they hovered around $300 billion before experiencing a post-pandemic surge, crossing $400 billion in FY 2021-22. Nevertheless, the recent contraction of 3% in FY 2023-24 underscores the need for a conducive policy environment to enhance India’s global competitiveness in manufacturing and exports.
Strategies for Enhancing Merchandise Exports
To rejuvenate merchandise exports, India can take inspiration from China’s economic model, which has been instrumental in driving industrial expansion since the 1980s. Key focus areas include:
- Policy and Regulatory Reforms: Simplifying bureaucratic procedures, streamlining export policies, and introducing business-friendly regulations can attract investment and facilitate smooth operations for exporters.
- Infrastructure Development: Strengthening logistics, enhancing transportation networks, and developing industrial corridors can lower production costs and improve the efficiency of supply chains. China invested heavily in infrastructure, including transportation, logistics, and industrial parks, which facilitated large-scale manufacturing. India’s infrastructure development has been slower, impacting its manufacturing capabilities.
- Government Support and Incentives: Providing targeted tax breaks, export incentives, and financial assistance can help Indian manufacturers compete effectively in the global market.
- Lowering Cost of Inputs: Reducing taxation on raw materials and offering subsidies on essential inputs can make Indian products more price-competitive internationally. While India has a large and young labor force, China’s labor costs were initially lower, making it more attractive for manufacturing. However, as China’s labor costs have risen, India’s labor market remains competitive.
- Branding and Global Outreach: Launching a national branding initiative to position India as a premier manufacturing hub and actively engaging with multinational corporations (MNCs) to attract foreign investments can significantly boost exports.
- Lastly we also have to invest in R&D and technology to gain an edge. The current tariff by USA on China is also an opportunity and we have to strategically make our moves to strike a balance in getting more market access on one side and protection of our domestic industry on the other in sensitive sectors like agriculture.
The Role of Foreign Trade Policy (FTP) in Export Growth
The Foreign Trade Policy (FTP) serves as a crucial framework for setting and achieving export targets and serving as a vital tool for shaping India’s export landscape. However, it is concerning that we miss the targets set in FTP. India’s Foreign Trade Policy (FTP) serves as a roadmap for achieving ambitious export targets. The 2015-2020 FTP aimed to propel merchandise exports to $900 billion, but actual exports in 2019-20 stood at only $528.45 billion, meeting just 58.71% of the target. With the current target of $2 trillion in exports by 2030, achieving a 17.08% CAGR over the next six years demands strategic interventions, infrastructural improvements, and sector-specific incentives.
India’s Global Trade Position and Opportunities
India, with a GDP of $3.89 trillion, is the world’s fifth-largest economy, yet its share in global trade remains relatively modest. In 2023, world trade volume stood at $31 trillion, with services accounting for 25% of total trade. While services exports are growing at an accelerated pace, India’s merchandise exports must address challenges such as inadequate infrastructure, policy bottlenecks, and evolving global trade dynamics.
India must also capitalize on opportunities such as shifting global supply chains, trade tensions between major economies, and increased geopolitical interest in diversifying manufacturing bases. Strengthening domestic capabilities and offering competitive incentives can help India attract businesses relocating from China and other manufacturing hubs.
Conclusion: Striking a Balance for Sustainable Growth
India stands at a pivotal juncture where services exports are on track to overtake merchandise exports. While this transition underscores India’s evolving economic strengths, a balanced approach is essential to ensure long-term sustainability. The government must focus on strengthening the manufacturing sector through targeted reforms, incentivizing research and innovation, and fostering an enabling ecosystem for businesses.
By implementing forward-thinking strategies, India can position itself as a global leader in both services and manufacturing, ensuring robust economic growth, increased employment opportunities, and enhanced global trade competitiveness.
