The Trade Landscape is changing structurally to India's advantage
India's export landscape has witnessed significant structural changes in recent years, with the addition of high-tech manufactured goods, chemicals, and electronics to its product basket. This shift reflects India's growing integration into global value chains (GVCs) and its emergence as a market leader in various sectors. These developments have implications for exchange rate sensitivity and the overall health of the Indian economy.
Research indicates that as India's export basket diversifies towards high-value goods, the sensitivity of exports to real effective exchange rates declines. Between 1994 and 2007, exchange rate sensitivity stood at 2.5, but it significantly dropped to 0.6 during the period of 2008-2022. This trend can be attributed to the rising integration with GVCs and the increased share of high-value goods in the export mix. The reduced exchange rate sensitivity provides stability and resilience to India's export sector.
To strengthen downstream linkages and integrate India into downstream GVCs, the production-linked incentive (PLI) scheme has been introduced. While some criticism suggests that manufacturers may focus on low-value assembly units rather than higher-value manufacturing plants, experiences from countries like China and Vietnam demonstrate that such assembly units initially generate employment and build backward linkages, eventually leading to higher value creation and sophistication in production.
India's services exports have undergone a transformation, moving beyond cost-cutting back-end services to upstream, high-value-added services in sectors such as law, IT, and management. These services have demonstrated a low vulnerability to global income fluctuations and exhibited a reduced correlation with the GDP growth of countries like the US and Canada. This diversification in services exports enhances India's resilience and opens avenues for further integration into manufacturing GVCs.
In addition to tangible goods, India's integration into manufacturing GVCs can be bolstered through the export of intangible services. Activities like supply chain know-how, brand management, and design contribute substantial value to GVCs. Firms specializing in these pre- and post-production services make significant value additions and can help India further penetrate manufacturing GVCs, fostering economic growth and development.
India's evolving trade basket, characterized by the inclusion of high-value goods and a shift towards upstream services, reflects the country's growing integration into GVCs. These structural changes have led to reduced exchange rate sensitivity, enhanced resilience in services exports, and the potential for increased integration into manufacturing GVCs. To fully realize these opportunities, a balanced approach is required, encouraging both high-value manufacturing and the export of services to maximize India's economic potential in the global arena.
Kautilya, IBS Mumbai.