A self-reliant economy, popularly known as ‘Atmanrbhar Bharat’ is the fulcrum of India’s foreign trade strategy post the pandemic. There needs a constant evaluation on the economics front to assess the success of the label. The rebranding of ‘Make in India’ to Atmanirbhar at the time of growing tension between India and China has garnered success in domestic politics.

However, India’s contribution to the world merchandise is mere 1.67 percent and the trading strategy has to focus on creating a strong economic framework that would boost industrial production.

India’s union budget: Push to infrastructure

The Union Budget 2021 tabled by the Finance Minister Nirmala Sitharaman has received a mixed response - a big push to infrastructure and health hopes to bring the growth rate to 6.8 percent after facing a negative growth rate of 7 percent in the last quarter. Most of the exporters have welcomed the rationalization of domestic duties to boost production. India’s trade deficit in the month of January contracted USD 14.75 billion as the exports grew in the pharmaceutical and engineering sector by 5.37 percent on a Y-o-Y basis.  

During the lockdown period, the exports were plunging according to the data released by the Reserve Bank of India (RBI) for the period April to November 2020, the overall export stood at a figure of USD 348.92 billion with a negative growth of (-)12.65 percent. However, the crisis provides an opportunity and trade strategy developed at this juncture is vital in shaping the post-pandemic economy.

India is expected to contribute 15 percent of global growth by financial year 2026, according to the latest report at UBS Securities. Although there are efforts to boost manufacturing through the production-linked incentive scheme, to integrate with the global economy, India must increase the contribution to the global value chain by 20-30 percent.  There is a need to move beyond the ‘self-reliance’ label to a more strategic plan for accelerating export capacity.

The budget in an aim to increase the domestic production has revised the custom duties upwards on various auto components and electronics. This would effectively make the electronic components expensive for the consumers. The rationale of the revised duties is to incentivize domestic producers and make imports especially from China unattractive. The trade strategy seems to be fairly simple, the supporters believe the developed economies adopt a mercantilist behaviour to promote local production, the opponents are more skeptical about ‘inward-looking’ policies. 

Dip in world trade

The fall in trade during the COVID was not specific to India, world merchandise trade volume increased 11.6 percent in the third quarter of 2020 and exports increased by 13.8 percent. Exports from North America and Europe increased the most with growing online retail platforms. In contrast, the service sector contracted by 30 percent in the second quarter of 2020 - the steepest decline since the financial crisis. As far as the Indian economy is concerned, projections state that the economy is officially set to contract by 7.7 percent in Financial Year 2021 and the effect of the pandemic has severely affected the foreign trade on the emerging economies.

The value of the service sector imports in India is USD 85 billion as compared to exports that are valued at USD 147.6 billion. Thus, making a total trade surplus of USD 5.2 billion for the period April to December 2021, as compared to a trade deficit of USD 64.09 billion for 2019-20. From the export category, other cereals, oil meals, iron ore, and cereals recorded the highest export growth this year. Petroleum products, leather, coffee, oil seeds witnessed a negative export growth under the merchandise category. The fall in imports was majorly contributed by transport equipment (-32.05 percent), minerals (-24.42 percent), petroleum crude products(-10.06 percent).

The export value of services as of November 2020 was estimated to be USD 17.31 billion and the import value of USD 10.32 billion. As compared to last year, the export of services registered a negative growth rate of 5.09 percent, however, there was a substantial fall in the import of services in dollar terms of -11.79 percent making a favourable trade balance. It would be erroneous to consider the trade surplus as a testimony of success for the ‘Atmanirbhar Bharat’. Imports falling more than exports can deteriorate the overall trade performance. 

The overall figures might be encouraging; decoding the monthly data shows some deviation from the surplus number. As the Indian economy is getting unlocked and  monthly export figures are moving into a positive zone, however, last month imports increased 7.56 percent, widening the trade deficit to USD 15.44 billion-all time high in the past 25 months. Moreover, in the past 15 out of 18 months, the exports have been negative indicating the pre-pandemic time has not seen much of exports. 

Dependence on self-reliant economy

The impact of a self-reliant economy still remains unclear as it is almost impossible for India to maintain a sustainable trade surplus. In an idealistic situation, this would adversely affect the terms of trade and eventually make the domestic products expensive. However, the full implementation of self-reliance faces realistic obstacles on a geo-political angle. Despite having political differences, the EU and Australia have signed trade agreements with China.

While the nations are preparing to actively trade with Beijing in order to revive their COVID hit economy, India has officially closed doors to be in agreement with China. America is the largest export destination for India followed by China, and they contribute to 26 percent of India's total goods trade during the period April to November 2020. Surprisingly, the ‘vocal for local’ has not materialized due to implicit trade dependency with China. India’s import from China has come down to USD 38.2 billion yet remains the largest import source followed by the US with USD 16.14 billion during the same period. 

The festive season and easing the lockdown has increased the demand for China-made products despite a political message to avoid Chinese products. Similarly, the exports to the US have come down to USD 31.35 billion and faced a sharp decline of 17.2 percent with the EU (excluding the UK).  

The export story during the pandemic narrates a deeper fissure that relates to high trading costs, poor infrastructure, and inadequate flow of credit to boost the exports. With growing anti-China sentiments, the US looking for an alternate supply chain to China, India could offer the potential investment hotspot. However, in absolute terms, Vietnam with a vibrant trade with the US with an export value of USD 72.7 billion has outpaced India. 

Holding the momentum during the occurrence of export resurgence is the only road to recovery by meeting external demand. India left with only a few multilateral trade agreements will be a disadvantage to reap the collective benefits of trade. At this crossroad of inability to cut off China or completely utilize trade advantage would inevitably compromise the recovery of the Indian economy. 

The global economy contraction also bears multiple implications on India’s economic health. Being Asia’s third-largest economy, India has been criticized by the US, China, and the EU for rising trade barriers and restrictive investment policies at the World Trade Organization’s (WTO) Trade Policy Review. India’s tariff has been on a rise for both agriculture and non-agriculture products. The average tariff on agriculture products increased to 36.5 percent and non-agriculture products to 11.1 percent for the year 2021.

Creating bottlenecks for trade would lead to retaliatory effects and giving undue advantage for Vietnam, Malaysia, Indonesia and Bangladesh. The complaints are not limited to international agencies; even exporters in India blame the spike in shipping costs and reduction in government benefits have made them less competitive. 

India must identify the comparative advantage and capitalize on labor-intensive industries with a focus on repairing trade ties by boosting industrial capacity. The solution has to be structural to have a sustainable impact on export performance. 

(The writer is the founder of Econfinity, an online research platform on economic and finance policies. The views are personal. She can be reached at manjari.balu12@gmail.com)

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Figures are based on April to November data released by RBI. Date on December is an estimation