India’s export boom reflects structural changes in its trade basket and this surge is not just due to commodity price surges, favourable exchange rates and trade diversion from China. In this article, we discuss the shifting dynamics and implications of structural changes to India’s export basket. This topic is relevant for the IAS exam ‘Indian economy’ segment of GS paper III.
Expansion of India’s Export Basket
India added 628 new products to its export basket by 2022, in addition to the 3800 products since 1994.
- New products are concentrated in high-tech manufactured goods, chemicals, and electronics.
- There has been a steady growth of new products over the years.
Market Leadership in New Product Categories:
- India has become a market leader in certain new product categories, such as turbojets and defense technology.
- Expansion into new markets, including railcars and electrical energy.
Shift in Legacy Products and Export Growth Rates:
- Legacy products such as helicopters, arms and ammunition, and electrical machinery showed high growth rates.
- Exports of India’s top three products (petroleum, diamonds, and medicaments) continue to grow but their share is declining.
Impact of Change in Product Basket on Exchange Rate Sensitivity
- As the export basket shifts towards high-value goods, the sensitivity of exports to exchange rate fluctuations declines.
- Econometric estimates indicate a significant drop in exchange rate sensitivity after the global financial crisis.
- Higher value-added products have reduced the impact of a percentage appreciation in the rupee on exports.
Integration with Global Value Chains (GVCs)
- India’s rising integration with GVCs contributes to reduced sensitivity to exchange rates.
- Most of India’s GVC participation has been upstream, focusing on chemicals, machinery, and metals.
Importance of Downstream Linkages and the Production-Linked Incentive Scheme (PLI)
- Policies like the PLI scheme can develop downstream linkages and integrate India into downstream GVCs.
- Incentivizing global manufacturers to set up shop in India can strengthen downstream GVC integration.
Assembly Units, Value Addition, and Employment Generation
- Assembly units, while low in value addition, can generate employment for low-skilled workers.
- Assembly units can build backward linkages to domestic sectors, creating further value addition.
- Over time, firms may develop into producing more sophisticated components, leading to higher value creation.
Unbundling Services and India’s Performance in the Services Value Chain
- Services can also be unbundled into various processes, forming a global value chain in services.
- India’s services value chain has evolved from cost-cutting back-end services to upstream, high-value-added services.
- Growth in services exports demonstrates low vulnerability to changes in global income fluctuations.
Low Vulnerability of Services Exports to Global Income Fluctuations
- Services exports to the US and Canada show a low degree of correlation with GDP growth in these countries.
- India’s services exports exhibit market power and resilience to global income fluctuations.
Increasing Manufacturing GVC Integration through Exports of Services
- Exports of intangible services related to pre- and post-production activities can enhance India’s integration into manufacturing GVCs.
Structural Changes in India’s Export Basket [UPSC Notes]:- Download PDF Here
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