India & Exports: Can the Govt Prioritise the Service Industry To Bolster Trade?

The next union budget must have provisions to help India promote a service-driven export model in the near future.

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With the sun setting in on 2022, India’s state of economy continues to be blemished with areas of concern.

A few pointers on the public finance context in India’s macro-fiscal position are worth highlighting: The government’s disinvestment targets have not been met for successive years now, the Union government’s debt to GDP levels have gone up, the trade deficit is uncomfortably high, domestic private investment has remained low and India is facing one of its worst ‘job-famines’ while state finances, in general, have been bad.


Steady Rise in India’s Exports & Breeding Ground for Investments

There are a few positive signs as well ie, on the macroeconomics of India’s open economy.

At a time when the world economy may appear to move towards a deep contraction-recessionary spiral, India’s trade account despite an increasing aggregate deficit, is seeing its overall exports gradually rising.

More Free Trade Agreements (FTAs) with (bilateral) countries maybe on the horizon that may help expand India’s trade possibilities in the future (without being part of some key plurilateral trading networks like RCEP etc)

India has also assumed the G20 Presidency for the G20 summit planned in 2023 and the Modi Government is leaving no stone unturned to utilise this as an opportunity to aggressively advertise ‘Brand India’ and project the nation as a favourable destination for economic investment and growth.

But, how does India’s overall trade position look like at this point? And, in what areas can the upcoming budget and the government’s fiscal policy play a role in enhancing trade expansion, especially in context to services where India’s competitive and comparative trade advantage is more clearly established?


On Budgetary Role

As the Modi government prepares to announce its last full-year budget for the financial year 2023-24 in a month’s time, heading into the 2024 Lok Sabha elections, there is increased speculation on the direction of government’s fiscal priorities. The increased border tension with China at the LAC may trigger the government to even consider a higher military expenditure outlay.

So far, in past two budgets, despite the fall in revenue-based expenditure on critical schemes like MGNREGA, the government’s ‘pro-growth’ vision has witnessed a steep rise in Capex-based funding to develop infrastructural capacity and increased logistical connectivity while aiming to crowd in private investment opportunities through schemes like Performance Linked Incentive (PLI), National Infrastructure Pipeline (NPI) etc.

The results of these schemes’ outcomes have been mixed.

Whatever the base of the budget’s goal might be, one area where the government must seek to prioritise its fiscal policy direction this year (like the previous ones) is in managing/driving better proportioned export-linked incentives for maximising India’s trade-to-GDP ratio which has grown significantly over last few years and decades.

This author has earlier analysed India’s multi-aligned trade outlook under Modi government and the recent patterns in India’s trade partnerships.

Here, with a brief introduction to India’s commodity-services-based export-import levels as studied by our Centre’s InfoSphere research team, it would be interesting to deliberate on how the potential for ‘export-driven growth’ may be maximised, particularly in services where India’s current comparative advantage is more clear both from cost competitiveness and skill premium point of view.


Introduction to India’s Trade X-M Basket

India’s major export revenue in commodities comes from a diverse range of petroleum, metals and engineering products, and the countries that India exports the most are USA (in services) and China.

On services, India’s done well over the last few decades particularly in areas of ICT, travel, financial, banking, insurance, tertiary health services etc.

If we review India and other Like-Minded developing countries (LMDCs) complex economic position, as done by the Economic Complexity Index, you will see India’s position to be only bettered by China and Thailand.

For context, Economic Complexity Index is an index which looks at a country’s economy from a more holistic point of view and includes parameters like income inequality and greenhouse emissions along with observed economic growth.

Slowly by steadily, India's overall economic performance may have improved even though growth has been low, however, our macro-export position hasn’t been the most dominant.

From our research team’s analysis (see details here), we found that 1% increase in metals exports alone would increase India’s GDP by 0.43%. For paper-based goods exports, the increase in the GDP would be by 0.66%. More trade in commodities is good for growth and for the labor-intensive manufacturing base employment (a point many policy economists have argued for but has seen limited success in actual data.)

On services, however, where India’s actual competitive advantage lies, the nation’s share in commercial service-based exports has been 4.1%. One of the major reasons for this rapid rise has been the ICT (Information Communication Technology) revolution seen since the mid 1990s which gave rapid growth to technology and logistics for rapid communication.

However, even though MNC-based investments allowed ICT to grow and export more from an urban-biased growth model, other services like travel and macro-finance either decreased or remained stagnant in their weighted relevance.


On Imports

On the side of imports, India’s dependence on crude oil and precious stones imports has often made India’s current account deficit (and trade imbalance) to remain large for its macroeconomic appetite.

For India, the imports were increasing steadily till 2012. However, post that, it has seen a gradual decline. To understand better, we would have to look at imports of specific goods.

So, what kind of a policy shift backed by the fiscal priorities of the Finance Ministry aid a more dominant position for India’s export-linked trade policy?

The future growth and export-performance growth depend on:

a) the nature and extent of diversification seen across destinations, products, technology, and services

b) composition of an export basket measured by overall technological content, quality, sophistication; and

c) complexity of export-import baskets given the disintegrated nature of supply chains.

India needs to focus on further increasing its exporting capacity like it did in pharma with the export of generic medications, and in case of automotive manufacturing parts. Also, India’s growth source has been anchored by the rise of its service sector (from exports or in terms of generating better employment). More emphasis on service-based exports is a good step in aligning India’s competitive advantage with trade too.

More Fund Allocation Needed in Service Sectors

A positive step in this direction can be put forward by the Union Budget’s outlay for increasing expenditure on plans or schemes that can help realise this not only for ICT but other key service-based areas like education, healthcare, outsourcing-based service delivery products, travel, and finance to mention a few.

Direct tax-based incentives too may help while reducing indirect GST tax rates (or, provide temporal tax holidays) for firms demonstrating greater export potential. Technological impetus to start-ups that are doing well on trade may have a fiscal lever added too for support.


Any effort by the Modi government to spend solely on PR, or advertise ‘Brand India’ through popular media backed rhetoric for its G20 Presidency or to become a force to reckon in trade during 2023 may fall woefully short without sufficient fiscal policy support, and while, the government’s fiscal space and capacity may be ‘weak’ and ‘limited’ at this point, it may be possible to utilise existing programs/schemes to be tweaked in the necessary direction of continued support for expanding trade potential-especially in services where the possibility of trade account growth is higher.

(Deepanshu Mohan is associate professor of economics and director, Centre for New Economics Studies (CNES), Jindal School of Liberal Arts and Humanities, OP Jindal Global University. Aniruddh Bhaskaran, Hemang Sharma, Soumya Marri, Malhaar Kasodekar, Bilquis Calcuttawala, are all members of the CNES InfoSphere team and working as research analysts with CNES.)

(At The Quint, we are answerable only to our audience. Play an active role in shaping our journalism by becoming a member. Because the truth is worth it.)

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Topics:  Economy   Modi Government   India exports 

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