The past year has seen increasingly important and concerning trade developments that have now made it imperative for the Narendra Modi government to place the commerce ministry at the forefront of its economic policy, at least for a while.
The Ministry of Finance is the linchpin of the country’s economic policy. As the collector and distributor of government funds and the main economic policymaker, the ministry’s position of prominence never really goes away. But we are in a phase where international trade concerns are having larger economic ramifications, and so the commerce ministry should assume, for some time, pole position in economic policy.
Should Prime Minister Modi decide to shift his focus toward the Ministry of Commerce, it is important that he stresses the difference between agility and skittishness. There’s a lot happening in India’s trade relations with countries around the world, some beyond immediate control and others resulting directly from India’s actions.
Many of these developments require quick action on our part, but that shouldn’t encourage knee-jerk reactions, which the commerce ministry has indulged in recent times.
Also read: Stable economy, unstable deals—How Modi govt’s well-intended sudden bans hurt India globally
India’s export growth story
The biggest concern for India right now is the decline in both merchandise exports and imports over the past eight months. Falling exports are largely due to the global economic slowdown, but they disproportionately affect Indian MSME exporters.
However, falling merchandise imports at a time when India’s growth is expected to be a tepid 6-6.5 percent means there’s something worrying happening with manufacturing and consumption—the two dominant sectors in Indian non-oil imports.
A major driver of India’s exports last year was the petroleum sector. First, Europe and the US came out of the pandemic raring to go, buoyed by ample economic support by their respective governments. This drove sustained triple-digit growth in India’s petroleum exports in 2021-22. A lot of this blistering growth was due to the low base of 2020-21, but in absolute terms too, it was significantly in excess of pre-pandemic levels.
Then, in 2022, as India took advantage of relatively cheap Russian crude oil imports, it processed this oil and exported petroleum products to Europe and other countries that had decided to impose sanctions on Russia. So, India saw another year of high double-digit growth in its petroleum exports for most of 2022-23 as well.
The combination of post-pandemic European exuberance and buoyant petroleum exports meant that India’s overall monthly export growth averaged 41 percent between April 2021 and September 2022.
Since then, however, as the European engine of growth has stuttered—the European Commission expects 0.8 percent growth in 2023 and 1.6 percent in 2024—so too has India’s merchandise export growth story, contracting for 10 out of the last 12 months—consecutively for the last seven.
With about 60 percent of India’s merchandise exports accounted for by MSMEs, this fall in overall exports isn’t a problem limited to just a few big firms—as is the case in several other countries—but one that directly affects thousands, if not lakhs of smaller companies.
Also read: India’s quantum jump in defence exports is high on rhetoric and low on substance
India isn’t devoid of blame
Now, of course, much of this decline is because of what is happening in Europe and is therefore largely out of India’s control. But a part of it has to do with India’s own medium-term trade policy.
In 2020, India decided not to join the Regional Comprehensive Economic Partnership (RCEP), an Asian economic grouping. At the time, this was viewed as a good move because joining the RCEP would apparently have allowed China to flood Indian markets with its goods routed through various other partner countries.
It’s another matter that India’s imports from China have ballooned from $65 billion in 2019-20 to $98.5 billion in 2022-23, or that China’s share in India’s imports has grown from around 13 percent in 2019-20 to 15 percent in 2023-24 so far.
What was relatively ignored was what India could gain on the export side. The RCEP has allowed its member countries to look inwards for their supplies, which is now hurting India.
An analysis of trade data by economists Radhika Pandey and Pramod Sinha found that Asia’s share in India’s export destinations has fallen from 47 percent in 2019-20 to 38 percent in 2023-24 so far. This fall has been made up for by an increasing share of US and Europe among India’s export destinations.
Long story short, what’s happening is that Europe is making up a larger share of Indian exports, while Asia’s share is declining. The problem for India, however, is that Europe’s economy is expected to struggle for the next few years while Asia is expected to drive global growth. At the heart of this was a deliberate step by India to look West rather than East in its trade policies.
If the Indian government remains convinced about not joining the RCEP, it must have strategic reasons, which is fine. But it must nevertheless address the ongoing outcomes of such a decision, and that’s where agility in policymaking comes in.
Also read: India’s ‘big domestic market’ is a big lie. Look beyond—see what China, Japan have done
Discard the slow elephant
Export incentives directed at Asian markets could help here, or a further diversification towards Africa and South American countries so that Europe’s share again falls—at least until its economy remains in low gear. A quick pivot is important and the slow Indian elephant trope needs to be discarded.
Now, coming to imports. The decline in both oil and non-oil imports is a matter that should be occupying a large part of the government’s attention. Reduced imports due to increasing self-sufficiency—meaning we are creating our own demand and supply—should ideally result in higher economic growth than the government’s estimated 6.5 percent.
If growth is middling, and both oil and non-oil imports are decreasing even in absolute terms, then it means there’s something worrying going on in the economy, especially in manufacturing and consumption.
Finally, we come to geo-political issues. With Saudi Arabia and Russia extending their oil production cuts—by 1 million and 300,000 barrels per day, respectively, to push oil prices higher—the price of oil has been hovering in the $88-$92 barrel range. Supply disruptions from an extended Israel-Hamas war could push this up further.
Costlier oil is a direct problem for India and has ripple effects that permeate the economy. It hurts government finances, pushes up inflation, devalues the rupee, impacts the current account deficit, depletes foreign exchange reserves, dents corporate profitability, and can really pinch Indian pockets.
India is a big and attractive market for oil, and deft energy deals can leverage this to secure favourable oil prices. But this must be a priority, and not just something that happens on autopilot.
India’s agility will be best displayed if it can quickly pivot from exporting what a slowing Europe needs to exporting what a growing Asia wants. Imposing sudden export and import bans that leave trading partners flummoxed and irritated is not the way. This is an area that needs focussed attention.
Views are personal.
(Edited by Prashant)