Why India needs to step up its manufactured goods exports

India’s non-oil imports are rising once again. And, as the economy continues to expand, so will these imports, both in value and volume. For the moment, rising imports pose no threat of rapidly eroding the country’s foreign exchange reserves. That’s mostly because global crude oil prices are benign, India pays a lot less for importing petroleum crude now than a year ago. However, that comfort can disappear quickly and raises concern, even though India will not face a crisis like in 2013 when both crude oil and gold prices were high.

One, if crude oil prices were to suddenly flare, it will push up India’s import bill. The country imports about three-fourth of its crude petroleum. There is no knowing when oil prices will rise again. In fact, just as suddenly as it drifted down, it can move up, triggered by changes in geo-politics.

Second is India’s insatiable demand for gold. Ever since the government eased curbs on import of gold, there has been a rise in quantity of the metal coming in through official sources. Lower global and domestic prices of gold can act as a demand accelerator, pushing up total value of the precious metal imported to record levels seen in the past.

Third, a rapid economic recovery can lead to spurt in imports of other high value items such as iron and steel and machinery. A revival in import of these items is already visible.

Petroleum crude and products together with gold account for almost 40 per cent of India’s import bill. Mobile phones is another fast rising item of import, currently accounting for a little more than three per cent of total imports by value. The government forecasts that India’s economy will 8-8.5 per cent in 2015-16 and so, we are staring at a prospect of imports rising faster in the coming months.

Significantly, India’s exports lags imports by a big margin. India imported goods worth $412 billion between April 2014 and February 2015 and exported goods worth $287 billion during the same period. To some extent, the lag in exports is due to very slow economic recovery in many parts of the world. But, it is also due to the composition of our export basket. The appreciation of the rupee too is said to have hurt exports.

Refined petroleum products are the largest items of exports from India, accounting for a little under 20 per cent in value terms. The impact of softer petroleum prices can be seen here, export earnings from this commodity declined 50 per cent in February alone.

But beyond that, India’s export basket has not seen much diversification over the years. Gems and jewellery continue to be mainstay of India’s exports, accounting for about 13 per cent in value terms between April 2014 and January 2015. Garments, fabrics and yarn too have a large contribution. Many other items of export are inputs for a final product that is to be made in the importing country – such as ores. Unlike finished goods, items that are basic or intermediate goods fetch a lot less. 

It is then not surprising that the difference between value of imports and exports is widening. India imports about 45 per cent more than it exports at present. This essentially means that the country has to earn foreign exchange through other means to pay for its imports.

Luckily for India, there is a strong information technology industry that exports software and provide technology support to the world, and a large population of non-resident Indians who send a part of their earnings home. The information technology industry earned about $51 billion between April and December 2014 while the NRIs sent home about $48 billion during the same period. Together they helped pay for much of the country’s imports.

But even that is not sufficient. Earnings from export of goods and software together with earnings from other services provided to foreigners and remittances from non-residents fall short of spending on imports. This uncovered gap is known as current account deficit or CAD. So the government depends on foreign exchange coming in as capital inflow in form of foreign direct investment and foreign portfolio investment to pay for imports. That is why despite substantial inflows into the country, the foreign exchange reserves pile is rising slowly.

Ideally, a country should be able to earn enough from export of goods, services and remittances to pay for its imports instead of depending on portfolio inflows. Foreign portfolio investment do not always stay invested in the country – they withdraw their money when political and economic risks rise. That makes it a volatile source of fund. In India’s case, merchandise, and particularly manufactured goods exports have been lagging. As the Economic Survey of 2014-15 points out, India’s manufactured goods exports as a ratio of GDP have been stagnating at 10 per cent for four years, and need a boost. It is here that the “Make in India” campaign can bring about a substantial change. Both domestic and foreign investors will invest only if they see value in making India a manufacturing base.

The Make in India campaign can not only increase industrialisation level of a country, an absolute must for development of the nation, it will also create more jobs and result in goods that can be exported. Thus, Make in India has to be about both making for consumers in India and overseas. The government is moving to make doing business in India easier. It has also announced steps to make exports and imports easier. It’s now up to the industry to raise the bar and make high quality goods at competitive rates that find markets not just in India but overseas too.