The recent revival of India's export prospects appears to be one of the few silver linings in a week where, despite the good performance of the IIP (index of industrial production), the soon-to-be-announced budget is sure to throw up new concerns about the sustainability of our public expenditure/debt and fiscal deficits.
Exports were up in January for the third consecutive month, recording 11.5 per cent year-on-year growth. Earlier they had fallen for 13 straight months and dipped as much as 39 per cent in May 2009, before the trend reversed in November with 18.2 per cent growth and in December with 9.3 per cent growth.
The Commerce Ministry has projected a continuance of this trend, at least in the near future, which will help reduce further India's balance of trade deficit for FY 2009-10.
The latest surge in export is led by commodities, chemicals and manufactured goods, and exports from the info-tech SEZs, in particular, have been stellar. However, certain sectors are still underperforming, especially the labour-intensive sectors; prospects remain weak for engineering goods, textiles, jute, carpets, handicrafts and leather owing to below-par demand from G3 countries.
Look East policy
The Government's focus on diversifying export markets in the past decade has borne fruit insofar as the share of India's trade with non-US and non-EU markets have shrunk in favour of Asia and Africa.
This financial year, India has imported nearly 38 per cent of its global imports from Japan, China, and ASEAN; its exports to these countries accounted for around 23 per cent of its global exports. Clearly, in particular vis-à-vis imports, East Asian countries are emerging as significant trade partners.
Can India hope to commensurately increase its exports to the region too?
And, more importantly, to what extent can the newly signed/proposed FTAs help Indian exporters increase their market share?
It is notable that while India's export performance has improved in the past few years, the region is still an under-performer for Indian exports. Hence, the potential for further improvement is very real.
The dynamics of India's historical trade relations with its eastern neighbours must also be factored in while attempting to realistically assess future prospects.
India has had longstanding trade and civilisational relations with Southeast Asian countries, having been an important trade hub since ancient times. Strategically located on the great maritime route connecting the East and West, India provided a convenient meeting ground for merchants from the world over.
Historic trade deficit
However, even in pre-colonial times India ran a trade deficit with the countries to its east, and this was balanced and converted to surplus with its trade with West Asian nations and Western Europe.
In his book Global Economy in the Asian Age (1998), Andre Gunder Frank provides a comprehensive analysis of global trade during 1400-1800 A.D. He notes that in the pre-colonial era, the balance of trade (settled through the flow of silver or gold) was generally in Southeast Asia's favour and this was settled by an outflow of silver that India obtained from its trade with West Asia and Europe.
Furthermore, the composition of India's trade with its eastern partners was very different from its trade basket with the countries to its west, as the former was largely commodity-based.
Until the 18th century, exports from India to East Asia comprised mainly rice, sugar, cotton/silk textiles, ceramics, diamonds, iron and steel products and shipping services, while imports were more varied and included Indonesian spices, pepper, various kinds of woods, Chinese silk, tea, cinnamon, teak, rubies, gold, and non-precious metals such as tin, copper and vermillion.
Since the 1990s, driven by the production networks in East Asia, India's trade basket with the region incorporated manufactured products and industrial machinery.
However, exports continue to be dominated by low-value-added items in these industrial product groups. Exports to the region (ex-Singapore) mainly comprise processed mineral oils and ores, slag, ash and chemicals while imports are high-technology, high-value-added industrial capital goods and intermediate manufacturing inputs.
It is inconceivable, therefore, that without a drastic change in India's exports to very-high-value-added goods, its trade balance with the region will turn positive anytime soon. The negotiated CECAs should be realistically treated to help Indian industry plug into the East Asian industrial production network and supply chain.
Source : Business Line