What helped push the value to $400 billion for 2021-22? Will the high energy import bill offset some of the gains?
What helped push the value to $400 billion for 2021-22? Will the high energy import bill offset some of the gains?
The story so far: On March 21, the value of India’s outbound shipments in fiscal year 2021-22 reached US$400 billion, its highest level ever. By the end of the year this Thursday, another $10 billion worth of goods is expected to be shipped. This would result in growth of about 41% over pandemic-hit 2020-21, making it India’s fastest export growth rate since 2009-10.
How significant is meeting India’s $400 billion export target?
First, 2021-22 reflects the first time in several years that the country has met its export target, but for a broader context, India’s trendline in exports prior to the disruptions of COVID-19 was nowhere near as strong as this year’s performance . According to the Reserve Bank of India, outbound trade in goods had reached US$303.5 billion in 2017-18, rising to US$330.1 billion in 2018-19 before rising to US$313.4 billion in 2019-20 declined as the numbers dented slightly due to the strict national lockdowns in the final week of this fiscal year. While higher commodity and oil prices helped boost the value of exports, with petroleum product exports rising over 141%, some of India’s industrial sectors also shone. Exports of machinery, for example, rose 46.5% to $100 billion for the first time, although chemicals, cotton yarn, handwoven products and the garment industry did well. India has managed to meet its export target despite supply disruptions due to the pandemic, challenging shipping container shortages and rising freight rates. Part of this could also be explained by the fact that the world has shifted its global sourcing preferences to diversify its dependence on China following the outbreak of the COVID-19 virus. Australia, which is in the midst of a pitched trade war with China, has given way to India and has increased its exports by 94% so far this year. Shipments to the US are also up 47%. India would hope to consolidate those gains and establish itself as a credible alternative to China, although it may face stiff competition from Asian rivals like Vietnam and Bangladesh in some sectors.
What about imports and the trade deficit?
Although exports could rise by nearly $120 billion this year, India’s imports have risen to record levels and could end up nearly $200 billion above 2020-21 import figures of $393.6 billion. The trade deficit for the year could be around $190 billion, significantly higher than the $102 billion recorded in the pandemic year. The monthly trade deficit has skyrocketed recently, hitting a record $22.9 billion in November 2021, with imports gaining more momentum than exports.
What are the risk factors for Indian exports in the coming year?
Although India’s direct trade with Russia is not significant at around 1% of its trade basket, the conflict between Ukraine and Russia could create some more opportunities for exports of Indian agricultural products, particularly crops such as wheat and corn. However, this would be offset by a sharp increase in India’s energy import bill, as well as a rise in the cost of importing edible oils such as sunflower oil, production of which is dominated by the two warring nations. India imports 80% of its oil and demand is likely to increase as the economic recovery gathers momentum, assuming the pandemic doesn’t flare up again. This could result in a term-of-trade shock with widening trade and current account deficits and continued pressure on the rupee, even if monetary tightening in developed markets could suck dollars out of emerging markets. RBI Governor Shaktikanta Das has pointed out that, unlike the taper tantrum of 2013, the country’s foreign exchange reserves are resilient and can fund higher current account deficits if needed. However, most economists expect the rupee to weaken in 2022-23, which in turn could be a small boon for exporters.
While high shipping rates, container shortages and the realignment of trade routes around the Black Sea will pose challenges, timely action on the policy front could help create more export opportunities. Firstly, a speedy conclusion of free trade agreements being negotiated with countries such as the UK, Australia and Canada could facilitate market access in these large markets. Second, exporters are awaiting a long-overdue foreign trade policy overhaul for 2015-20, which has now been extended to include the first few months of 2022-23. Third, a parliamentary committee has called on the government to include special economic zones and sectors such as pharmaceuticals, steel and chemicals in the RoDTEP (Remission of Duties and Taxes on Export Products) program, which finally started last year after a significant delay. These could help offset some of the larger tectonic shifts in trade patterns due to the European crisis, including a solidification of the COVID-induced inward shift in nations’ stances on globalization.
