India’s exports recovered after Covid. But here’s how Modi’s government can achieve a $5 trillion economy

The Ministry of Trade and Industry recently announced that India has reached its goods export target of $400 billion in the current fiscal year. Despite Covid-related disruptions, such a steady export growth performance has propelled India’s economic recovery, averaging nearly $30 billion over the past 12 months. Exports grew at a healthy average pace of nearly 65 percent in FY22. While India’s exports have recovered in FY22, accounting for almost 12.3 percent of GDP from 10.8 percent in FY21, the share of exports in India’s GDP has fallen from almost 17 percent in FY12 to a consistent 12 percent over the past decade currently. Going forward, India’s export strategy requires a systematic approach to address supply-side issues plaguing the export sector.

But first some facts. The World Bank report (2018) on logistics costs in India put them at 14 percent of GDP, six percent higher than in most advanced economies in the world. However, India is targeting a reduction to less than 10 per cent, which alone can result in savings of almost Rs 10 lakh crores. One of the main reasons for these higher costs is slow cargo traffic in the ports. According to Economic opinion poll In 2021-22, the average turnaround time for cargo in Indian ports is 2.6 days, much slower than the global average of 1 day (recorded in 2020). While domestic policies such as the Narendra Modi government’s Production Linked Incentive (PLI) program, Remissions of Dutys and Taxes on Exported Products (RoDTEP) and the long-awaited foreign trade policy are aimed at boosting the export competitiveness of India’s manufactured goods, there is an immediate need to address some critical issues for long-term holistic growth of our exports.

Also read: Robust logistics is the launch pad for a $5 trillion economy. States must strengthen supply chains

Accelerate projects, become independent

First and foremost is the need to accelerate the PM Gati Shakti-National Masterplan for Multimodal Connectivity, which aims to advance multimodal synergies by bringing together 16 ministries, including the Ministry of Railways and the Ministry of Road Transport and Motorways, for integrated planning and Implementation of infrastructure projects. Templates from Japan, Germany, Korea and Australia can provide some insights. Creating a single-window transactional platform for onboarding logistics service providers (LSPs) – carriers, warehousing providers, carriers, customs brokers, certification and regulatory authorities – and bringing them together under one roof is the need of the hour. Simplification of documentation for export/import, a one-stop shop for information for vendors, regulators, clearances, etc., and full digital clearances on the platform help to significantly reduce logistics costs.

Secondly, India can also think of creating a sea freight index. China’s Shanghai Containerized Freight Index (SCFI) gives a good sense of trade and business as most spot rates are in the range of the SFCI. Freights in India from different lines tend to fluctuate significantly due to demand/supply and lack of availability of information. Sea freight is a critical component of export costs. They have experienced a massive surge in the recent past, making certain regions inaccessible to Indian exporters.

Third, India should take massive steps to achieve self-sufficiency in shipping containers. Almost all shipping containers used today are imported from China. By the time these containers reach the Indian coast, they cost around 40 percent more due to rising costs such as ocean freight, duties, customs brokerage fees, other taxes and other expenses. This became even more evident during the Covid pandemic, when container shortages led to higher sea freight – up to 300 percent in certain regions. China’s monopoly in this field has further aggravated the situation. It might about 90 percent of the world’s shipping containers. China International Marine Containers (CIMC) is the largest container manufacturer with a market share of 40 percent. The government and private actors can collectively aim to manufacture shipping containers in India under the Atmanirbhar Bharat Abhiyan to boost exports and reduce costs for Indian exporters.

Also read: Why Indians must reconcile that food prices will remain high this year

Look at the government infrastructure, the technology

Fourth, expanding government infrastructure will be key to boosting exports. Every state needs to understand its export opportunities and develop the right infrastructure. For a country like India, which is vast and geographically diverse (with coastal states benefiting more than landlocked ones), such bottlenecks need to be addressed at a regional level with central government support and oversight. It is an important step to boost exports at the national level. In this respect, the NITI Aayog Export Preparedness Index (EPI) 2021 is an important strategy document. His emphasis on a state-tailored approach deserves serious consideration.

Fifth, digitization is now the way forward to compete with the global players. However, it brings its own complexities. Different shipping companies around the world have chosen different supply chain platforms like TradeLens or the MSC via Wave BL platform. The banking system is not yet ready to streamline with any of these platforms. This needs to be addressed to ensure the currency of transactions. The digitization/acceleration of the issuance process of incentive systems such as the PLI or the RoDTEP is also an important step towards boosting exports.

Sixth, many exporters also believe that India should consider reducing its monopoly on coastal transport. Currently it does not allow foreign liners for internal/coastal transport – ie within the country. Dependence only on the local is a major bottleneck. Last but not least, the optimization of the current modal mix (road 60 percent, rail 31 percent, water percent) according to international benchmarks (road 25 to 30 percent, 50 to 55 percent rail, 20 to 25 percent water) should be accelerated.

India’s share of world merchandise exports is a meager 1.6 percent and a focused long-term supply-side strategy, with its effective execution, is needed to facilitate exports from India. With more political support, India’s dream of becoming an export hub is very much achievable and will be a major milestone in itself as we move towards a $5Tn economy.

Prachi Priya is an economist from Mumbai and Aniruddha Ghosh (Twitter: @ani_econ) is a PhD student at Johns Hopkins University. Views are personal.

(Edited by Humra Laeeq)

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