Program of incentives linked to exports and production, analyzed
In services exports, India ranks almost on par with China and ranks one place behind them, in seventh place, in the world, vastly outperforming the rest of the developing world and ranking near the top of a list dominated by advanced Western countries. The only developing Asian country whose service exports account for such a large share of merchandise exports is the Philippines, which also has a thriving, but much smaller, IT/BPO industry.
At the turn of the 21st century, the late Dewang Mehta, then director of the National Association of Software and Services Companies (NASSCOM), asserted that one day India’s service exports will exceed Saudi Arabia’s oil exports.
This happened in 2020-21 for the first time ever – $134 billion in Indian IT/BPO exports out of $210 billion in total services exports, compared to $114 billion in Saudi oil exports, driven by lower oil prices during Covid. Given the volatility in the price of oil, it’s a knife that cuts both ways, but the opportunity is still notable.
As with merchandise exports, services exports have also begun to sustain their performance above a major threshold, surpassing $20 billion per month in each of the past four months; it has exceeded $20 billion only twice in history. This momentum indicates the ability to maintain an annual pace of $240-250 billion or more.
Summary and Wishlist
India’s exports have undergone a drastic change over the past decade and a half. Barely ten years ago, our exports were those of a pre-industrial society. The main value-added industrial goods were refined petroleum and iron/steel, neither of which are tertiary goods.
India’s export basket only made a decisive shift towards industrial goods and raw materials from its traditional pre-industrial basket in the 2010s. lagging behind China and Southeast Asia, which aggressively focused on high labor input but low to medium value-added industrial-scale production from the 1980s and 1990 or before.
During the 2010s, there was much criticism that Indian exports had not grown much. This is true, as traditional mainstays have lost their competitiveness even as new secondary/tertiary items have begun to develop. As a result, the composition of exports has changed dramatically.
Previously, a significant portion of India’s exports included items it had been exporting for centuries – textiles, gems/jewellery, traditional handicrafts, foods and spices. However, it has moved decisively towards industrial goods since the mid-2010s.
In 2021-2022, India’s industrial capacity generated enough excess production to significantly increase exports. With a new round of investment gaining momentum, this is set to continue over the next few years, accelerated by huge infrastructure investments in recent years.
With the PLI program, India’s exports are set to increase significantly due to the concerted focus on large volumes and growth industries for consumer goods that can rapidly accelerate India’s exports. India over the next few years. Shifting just a few percentages of the volume of these exports to India translates into several hundred billion additional exports.
While some of the statements about export intent – for example, electronics exports of over $200 billion – seem outlandish, it’s basically a matter of gaining a few percentage points of share. of the total market, and achievable with good policy execution. Asia’s major export-oriented economies each export $200 billion or more in this sector.
The fact that exports are now dominated by secondary goods and processed raw materials (chemicals, refined oil) is due to an economic structure which reinforces secondary capacities, but which lacks the manufacturing base to produce tertiary and consumer goods in volume. As a result, we export excess secondary production instead of consuming it to produce finished goods. The PLI program focuses on this aspect.
To conclude with a wish list for the government:
Explicitly focus on the transition to exports of industrial and tertiary consumer goods
Maintain strong collaboration between industry and research in electronics/computing LIP programs – it has the highest potential for short-term impact due to the sheer size of the export industry
Consider extending the EV battery PLI capacity requirement to more than 5 GWh minimum, or directing incentives towards higher capacity; , the Tesla Gigafactory Arizona being 37 GWh
(In the next part, India’s imports and trade balance will be analyzed, along with the impact of the PLI on exports and imports.)