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India’s exports have reached a historic high of $770 billion in 2022-23 – a huge 14% increase from $ 677 billion in 2021-22. Merchandise exports have increased by 6% from $ 422 billion to $ 447 billion during the year while service exports have gone up by a phenomenal 27% from $ 255 billion to $ 323 billion taking the service sector’s share in total exports from 37.6% in 2021-22 to 42% in 2022-23.

This looks impressive considering the dwindling trade scenario and challenging global economic conditions due to inflation, recession, high interest rates across countries and disruption of supply chain due to Russia-Ukraine conflict.

Emboldened, India has now laid out an ambitious target of $2 trillion overall exports annually by 2030 as the country makes a renewed push to become a top choice for companies shifting supply chains away from China. 

The new Foreign Trade Policy (FTP) 2023 released last month has aimed to increase the country's exports to $ 2 trillion by 2030. The policy proposes to shift from an incentives-based regime to a remission and entitlement-based one to achieve this goal.

As the world recovers from the pandemic and with limited resources at India’s disposal, it will be important for the country to identify its priorities for the near future to reach its target. Business sectors that are foundational in nature and can be scaled across the country and have mass impact on the ground should be prioritized in the quest to be a $5 trillion economy. Looking at India’s recent growth and the changing global economic scenario it would not be an over statement to look forward to higher export growth.

Indian goods and services exports have crossed the $ 770 billion-mark for the first time in 2022-23. In 2021-22, the country's goods and services exports touched an all-time high of $ 422 billion and $ 254 billion respectively, taking the total shipments to $ 676 billion. 

Service sector plays a major role

With increasing innovation in digital platforms India’s service exports have leapfrogged in recent years. The sector has played a big role in India’s robust export growth. The service sector now makes up for more than two-fifths of total exports, contributing more than 50% to India's GDP growth because of robust demand, rising investments, and growing exports. The share of the service sector’s exports in GDP was 8.1% in 2021-22 – up from 7.8% in the previous year. India has a dominant influence among the leading services export countries with its share in the global commercial services exports rising from 3.4% in 2019 to 4.1% in 2020.  With vast inoculation drive and pickup in global demand, India’s service sector exports showed a resilient spike of about 24% in 2021-22. The value of service exports for 2022-23 is estimated at an all time high $ 322.72 billion – an increase of 27% over the previous year.

In 2021-22, the top software companies reported an average revenue growth rate of more than 21% from manufacturing, financial, banking and insurance, communication, retail, life sciences, and healthcare segments. During 2021-22, the estimated exports of India’s software services have increased by 17.2% to $ 156.7 billion, of which computer services accounted for over two-thirds of the total software exports.

About three-fifths of total software service exports were from private limited enterprises and roughly 84% of all IT-enabled service exports were BPO services. The United States and Canada were the primary destinations for software exports with a 55.5% share followed by Europe (31%), Asia (6.5%), Australia and New Zealand (2.9%) in 2021-22. In actual terms, software exports to the USA and Canada were estimated at $ 86.9 billion in 2021-22 – up about 16% from $ 75.1 billion in the previous year.  Software exports to Europe increased over 20% from $ 40.3 billion to $ 48.6 billion during the period (Source: RBI). Exports surged in every major destination showcasing a positive growth trajectory due to an increased fiscal injection, expanding the overall service sector market.

Merchandise exports and widening CAD

India has shown remarkable resistance to the obstacles created by the pandemic in global trade and has achieved new heights in terms of merchandise export. Riding high on resurging global growth after two muted years of the Covid-19 pandemic, India achieved a record $ 447 billion merchandise exports in 2022-23, an all-time high for the country, comfortably higher than the five-year average of $ 300 billion before coronavirus struck.

The Make in India initiative, launched in 2014, has played a pivotal role in facilitating investments and promoting innovation, which has resulted in driving overall development, thereby making India a major hub for the manufacturing, innovation, and design. The Foreign Direct Investment (FDI) policy under this initiative aims to drive growth and promote exports from India. Within the ambit of this policy, the central government has approved 100% FDI under an automatic route in many sectors in order to give a thrust to Indian exports. Buoyed by petroleum products, engineering goods, gems and jewellery, organic and inorganic chemicals and others exports rose to a record $ 447 billion last year.

The rate of growth in imports, however, was faster compared to that of exports in 2022-23 leading to the widening of the trade deficit.  Overall imports increased by 17.4% in 2022-23 against a 13.8% rise in exports widening the current account deficit (CAD). Much of this was due to the rise in the import cost of crude oil due to supply chain disturbances. As India is largely dependent on imports for its crude requirements the price volatility of crude impacts its import bill greatly; crude accounted for more than a fourth of India’s import bill in 2021-22.

India has, however, managed to keep its CAD under control despite uncertainty in international trade.  India’s current account deficit, which had widened to 3.3% of GDP in the first half of 2022-23 from 0.2% in the same period of 2021-22 on the back of a sharp increase in the merchandise trade deficit, has come down to 2.2% of GDP in the October-December quarter. Underlying the lower CAD in the third quarter of 2022-23 was a narrowing of merchandise trade deficit to $72.7 billion from $78.3 billion in Q2, coupled with robust services and private transfer receipts.

Direction of trade

In the last decade, India’s trade with the rest of the world has been buoyant, registering robust growth. While value of trade has increased considerably, the composition of trade basket and direction of trade has registered only marginal shifts. Indian export has continued with nearly the same markets and products.

Just five product groups, engineering, petro products, gems & jewellery, chemicals and drugs and pharmaceuticals accounting for more than three-fifths of India’s export basket. In fact, their share in the overall merchandise export has increased over years – up from 62.1% in 2016-17 to 64.6% in 2021-22.

And as a result, despite the recent buoyancy in trade, India has remained a marginal player in the global market. According to the World Trade Organisation (WTO) India’s share in global merchandise trade is only 1.8% and in global services, it is 4% in 2022.

India, the fastest growing major economy, has become the world’s fifth largest economy, displacing the UK to the sixth position but has yet remained near insignificant in global trade order. Economists argue that the failure to raise India’s share in the global trade basket is largely due to lack of a coherent export policy. It’s incoherent and contradictory. And it is revealing as Indian policymakers do not seem to believe that India can become a great trading nation. While they may hope we will be as rich as China one day, they don’t think we will export as China did and does.

One of the most important reasons for India’s failure to increase its share in global trade lies in its failure to reach newer markets. For ages, it's been the US, the UAE, China and a few European countries which account for the bulk of India’s external trade. Three countries, the US, UAE and China account for about a third of India’s external trade.

The US was India's biggest trading partner in 2022-23 too. The bilateral trade between India and the US has increased by 7.7% to $128.55 in 2022-23 as against $119.5 billion in 2021-22. It was $80.51 billion in 2020-21.

There is good news that increasing exports to markets such as Brazil, South Africa and Saudi Arabia are boosting the growth of the country's outbound shipments of late.

Commodity-wise too, just four product groups, engineering, petro products, gold & jewellery and organic /inorganic chemicals are accounting for the bulk of exports for years. Their share in India’s total merchandise exports was as high as 60%.

India gets a new trade partner in Russia

The world has been experiencing a huge change in geo-political template following the Russia-Ukraine conflict. The conflict has impacted the global supply chain severely and as a result, the GDP growth prospect, it has likewise influenced the trade destinations. Russia, which was not among the top 20 trade partners of India in the past, is suddenly set to become the fifth-biggest merchandise trade partner.

Indo-Russian bilateral trade hit a high of $35 billion in April-December 2022, with $32.8 billion contributed by imports, a five times jump from $6.5 billion in the same period of the previous year. Within imports, petroleum-related products accounted for as much as $27.7 billion, an eight times increase from $3.4 billion a year ago.

The rise in bilateral trade is directly linked to Russia's ongoing war with Ukraine. Russia's decision to offer crude oil at special rates to bypass economic sanctions of the West and India's readiness to accept it has made all the difference.

But if the bilateral trade has grown due to large imports of crude oil from Russia there is good news that of the 30 key product sectors, 17 exhibited positive export growth during April-January FY23, which is impressive looking at the current scenario," suggests the Federation of Indian Export Organisations.India and Russia are discussing a free trade agreement (FTA) that could deepen bilateral commercial ties that have flourished since war broke out in Ukraine. The FTA talks mark a step-up in economic relations between the two countries despite calls from Western countries for India to gradually distance itself from its dominant weapons supplier, Russia, over its February 2022 invasion of Ukraine.

India entered into a free trade agreement with Australia last December. The deal between the two countries will bolster trade ties and will help boost bilateral trade in goods and services to over $70 billion in the next five years, according to economic think tank GTRI. India is currently negotiating FTAs with the UK, European Union, Canada, and Israel.

Maybe, the free trade agreement with more countries will expand India’s export destinations, but that will not be enough. India has to increase its export preparedness, as Niti Aayog has been advocating, and raise competitiveness in the global sphere.