Needed: A smarter activist trade policy
As global giants embark on a trade war, pygmies in global trade like India may either get crushed or, if they play smartly, be able to increase their market share
The 1991 liberalisation and subsequent reforms gave a major boost to the Indian economy for about two decades. But have now run their course. The global economic landscape has become more difficult. India must now engage the world with a more active, smart trade policy. India is now the world’s sixth largest economy but remains a small player — pygmy — in global trade. It must integrate more globally to make the next leap forward to becoming the world’s third largest economy. Shrinking back to protectionism — as others are doing — is not the answer at our stage of development.
India liberalised in 1991 and since then its trade ratio of goods and services (to GDP) has risen enormously to around 40 per cent today (from 17 per cent in 1991). India’s presence in global trade has also enhanced, with Indian share in global merchandise exports accounting for 1.7 per cent today as against 0.6 per cent in early 1990s and share in imports rising to 2.2 per cent (2016) from 0.6 per cent (1991). India’s global exports share is much lower when compared with other export-oriented economies like China (13.2 per cent), South Korea (3.1 per cent), Mexico (2.3 per cent) and Singapore (2.1 per cent). Exports played a key role in their quest to become manufacturing nations. Merchandise exports account for 19 per cent of GDP in China, 35 per cent in South Korea, 15 per cent in Bangladesh as against 11 per cent for India.
India has also seen a significant shift in this period in the composition of exports. Service exports jumped from 30 per cent to 40 per cent in the period from 2003-08 but have plateaued at that level. Within manufacturing exports also India has lost share in textiles, leather, gems and jewellery but has gained ground in more capitalintensive sectors such as auto, auto parts, engineering goods, electronics and pharmaceuticals. There is also a shift in our export markets towards Africa and Asia and much lower market share in Europe.
India’s exports have witnessed a devastating slump in the recent years – with some sign of recovery this year. Share of exports (goods and services) in India’s GDP that accounted for almost 25 per cent during 2011-13 was affected by the global economic slowdown and fell sharply to 19 per cent by 2017. What explains this sharp slowdown? Recent studies attribute at least half of the slowdown to the global slowdown and the sharp appreciation of the exchange rate of around 20 per cent in the period 201417. The remainder is explained by temporary disruptions attributable to demonetisation and GST implementation. With the real exchange depreciating and the effects of the temporary shocks dissipating exports are seeing some recovery.
But these will not be enough to get India back to the kind of export led growth that drove the high GDP growth in the period 2003-08. India will need
a more strategic approach — especially with rising protectionism around the world. Given that India ranks at a low of 20 amongst the top exporting nations in the world, with a share of mere 1.7 per cent in global exports, there is a need to assess if India needs to change its market strategy and better align it with the current dynamics of global trade.
An analysis of the top 20 import markets of the world, (matrix above) reveals that India is amongst the top five exporters only in one market, that is, UAE, and amongst the top 10 exporters in three more markets namely the USA, Hong Kong and Turkey. India has more than 5 per cent of market share only in UAE (6.9 per cent share in 2016). It has 2-3 per cent market share in four markets — Turkey, USA, Hong Kong and Singapore. It can now use this platform to build bigger exports share in these markets.
India has only a 1 per cent share in six markets – the UK, South Korea, Italy, Mexico, Belgium and Spain. In all other top 20 markets, India has less than 1 per cent market share. Clearly, there is a potential to increase India’s share of exports in all these top 20 markets. Some improvement can be made in China and UK markets, which are India’s top export destinations but we have not been able to garner a significant market share in these countries. China has begun to lower tariffs on some Indian products and the UK post-Brexit maybe more conducive to trade arrangements with countries like India.
Germany is another top export destination for India, but India has a mere 0.8 per cent share in Germany’s overall imports. Clearly, there is a room to enhance exports in this market. Likewise, there is a lot of catching up to do in all other top 20 import markets, as these neither figure in India’s top ten export destinations nor does India have a reasonable market share in these countries. India exports can also increase in parts of the world which we have neglected. For example, India provides only 0.1 per cent worth of goods out of Latin America’s total imports of $800 billion.
As global giants begin a trade war with each other, pygmies in global trade like India may either get crushed or be able to take advantage and increase their market share if they play it smartly. India needs a much more aggressive market strategy to enhance its exports share in the world, especially by understanding the import dynamics of each of these markets. A more competitive exchange rate policy and improving logistics along with better regional trade arrangements can help India reach $1 trillion of exports of goods and services by 2025 even in a more difficult global trade environment.
No harm trying as the autarchic approach will surely fail us in our quest to become the world’s third largest economy by 2025.