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India’S Struggle With Exports To Europe Has An Important Lesson For Policy Makers

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India has a tendency to gain share in the US market during both economic downturns and upturns. However, India tends to gain share in the European market mainly during upturns. Why India is more sensitive towards EU (European Union) trade is due to its higher share of commoditised products, at up to 40% even in the downturn years, as against US which is slightly lower.

US and Europe, cumulatively accounting for one-third of India’s merchandise exports, have equally influenced growth of India’s exports in the past decade. Crisil, in its report titled ‘Rider in the storm’ analyses past 90 quarters of exports to the US and EU27, which suggests India has a tendency to gain share in the US market during both economic downturns and upturns. However, India tends to gain share in the European market mainly during upturns. Why India is more sensitive towards EU (European Union) trade is due to its higher share of commoditised products, at up to 40% even in the downturn years, as against US which is slightly lower. Commoditized products such as petroleum, dairy, petrochemicals, metals, gems and jewellery are more sensitive to economic downturns, compared with value added articles like computer hardware, textiles, automobiles and components, medical devices, etc.

With slower growth expected in GDP of both US and EU27 in 2023, exports from India are expected to be impacted in FY24. In the same period, exports of nearly Rs 2 lakh crore are likely to be supported by commissioning of PLI-linked capacity.

An analysis of past two fiscals reveals that PLI has provided support for Rs 1.9 lakh crore of exports during the initial stages of capacity commissioning. For example, for mobile phones India has been a net exporter for the past several years and over a period of time, the average export-to-import ratio has improved substantially and is likely to improve further due to a push from PLI. Ashwini Vaishnaw, Minister of Electronics and Information Technology in Feb 2023, said mobile exports from India will exceed $10 billion this year. Crisil expects mobile phones, telecom, IT hardware to aid 63% of the PLI-driven exports in FY24, while the remaining would be led by textiles, specialty steel, white goods, and food processing.
Multiple corporates in their interaction with CNBC-TV18 have highlighted the benefits of the PLI scheme. Blue Star is one such which recently said it has invested about Rs 156 crore in plant machinery through the PLI scheme and are expecting about Rs 73 crore by way of a PLI benefit. Further, NITI Aayog CEO interacted with CNBC-TV18 in February 2023 and said with the introduction of PLI schemes, there is a huge increase in investment in capex and Rs 800 Cr of incentives are already approved.

India’s top exported products include petrochemicals, petroleum, gems and jewellery, plastic and footwear, pharma, auto and components, textiles, metals, agri, meat and sea food. Of these, PLI has been launched for the latter six which is likely to propel incremental exports. Further, verticals such as electronics, which currently are not in the top 10, should get good support from the PLI scheme. PLI-driven exports are seen growing ~5% in FY24, compared with ~2% between FY21 and FY23.

Furthermore, in FY23, value-added verticals such as electronic components and computer hardware contributed to 33% of incremental exports to the US, where the PLI scheme provided a fillip to exports of these segments, particularly electronic components. Continuing with this trend, Crisil expects value-added exports and PLI to support incremental growth in exports to the US in FY4 as well.

In case of EU, recently, the exports of petroleum products to EU27 have increased due to the geopolitical crisis, which has made EU27 dependent on oil imported through the sea route. However, geopolitical developments could aid exports of key commodities to EU. The share of value-added products stands at nearly 35- 40% in case of EU compared with around 30% for other key nations, which puts India in a favourable position during a downturn. Furthermore, continued exports of petroleum products amid geopolitical uncertainties, as well as strong growth in exports of electronic components, medical devices and computer hardware given the PLI-driven policy push, will support incremental growth. However, the growth will be slower to EU than that of exports to the US, due to its relatively sharper slowdown in the GDP growth.

For India, new-age verticals such as consumer electronics and computer hardware saw sudden jump in FDI in past five fiscals. Meanwhile, traditional sectors such as petroleum products and machine tools saw lower FDI, suggesting India is expanding its manufacturing base of high-growth value-add verticals. The PLI scheme’s continued push across major sectors is likely to enhance India’s position as a trade partner with the US and EU, resulting in market share gains over the medium term.

Currently we are witnessing aggressive rate hikes by major central banks to fight inflation. Policy rates are at decadal highs across the advanced world. Slowing global growth is expected to put the brakes on India’s exports. Hence, policy makers have an important role to play here through their fiscal and monetary policy support to banking and financial sector. The full-blown impact of RBI’s tighter monetary policy, which typically plays out with a lag of 3-4 quarters, will show up in the coming months.



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