India’s excessive dependence on agricultural and resource-based exports could lead to greater challenges in achieving high growth rate, argues Aakanksha Shrawan (Indian Institute of Technology, Delhi). Here she argues why the Indian economy needs to diversify to more high-technology and innovation-intensive exports that will lead to higher export earnings and, thus, fuelling faster GDP growth for India.

According to a recent report by Bloomberg Economics that ranked 10 nations across Asia by their future export potential, India came in first place, followed by Indonesia and Vietnam. In another recent report, the Confederation of Indian Industries (CII) shortlisted 31 export items which, if targeted strategically, could improve India’s export position. This list included items such as cyclic hydrocarbons, motor cars, motor vehicles, and electrical apparatus and argued that the manufacturing of these items requires the use of high, if not complex, technologies along with a moderately high investment of Research and Development (R&D).

Both these observations by different institutions reaffirm the fact that it is high time that India unleashed its export potential, and that such an aim can be achieved if India’s export basket was characterised with a greater share of high technology-intensity goods than at present. A diversification of exports will tacitly imply greater investment in technological know-how by the government thus leading to a spur in innovation. A greater technological base will reduce our dependence on high-technology imports and help make India’s exports more competitive and technologically sound. According to EXPORT-IMPORT (EXIM) bank, for example, India’s high-technology imports grew around 40 per cent during 2007-2011 against global imports that grew at 20 per cent during the same period.

Unfortunately, India’s excessive dependence on agricultural exports doesn’t help in its attempt to improve its international export position. Primary products (cotton, bovine meat, rice, etc.,) or naturally-based resources (precious stones and iron etc.,) still account for around 40 per cent of the Indian export basket.  Although the government through its Agriculture Export Policy (2018) is looking to double its exports from $30 billion to $60 billion there still remain many policy challenges. High Minimum Support Prices offered by the government negatively affects the competitiveness of Indian agricultural exports which, coupled with depressed international prices of food items such as sugar and food grains, lead to fluctuations in export earnings. Despite being the second-largest producer of agricultural products, such products only contributed around 2 per cent to Indian GDP in 2016.

Additionally, factoring in the exponential depletion of groundwater aquifers brings out the grave urgency to shift to more water-efficient crops or, more pragmatically, to shift to more technologically or innovatively-driven exports. In their paper titled “Temporal variation in export and import of virtual water through popular crop and livestock products by India”, SreeVidhya and Elango provide an interesting perspective on Indian exports using the concept of Virtual Water, which is defined as the amount of water ‘embedded’ in a product (Allan, 2011) or, in other words, the amount of water used directly or indirectly in the production of that good. During 2006-2016, while India imported 237 trillion litres of virtual water, it exported almost twice the quantity – around 497 trillion litres. A strategic shift in our exports towards high technology-intensive products which mostly depend on human skills and R&D will result in significant water savings.

A look at the bilateral Trade Costs Dataset prepared by UNESCAP (United Nations Economic and Social Commission for Asia and the Pacific) and the World Bank (which calculates bilateral trade costs for more than 180 countries in agricultural and manufacturing sectors) shows India’s growing exports in agriculture despite rising trading costs in the sector. For example, China imported at least $1 billion worth of agricultural exports from India in 2013. The bilateral costs of exporting agricultural exports for India to China displayed a growth rate of 3.19 per cent in 2013 from -1.31 per cent in the previous year. In contrast, for the manufacturing sector, the corresponding figure was -9.31 per cent in 2013 against 2.75 per cent in 2012. In other words, costs incurred while exporting should also be a major determinant of deciding the constituents of Indian exports.

But everything is not so bleak. In spite of a mammoth share of primary and resource-based commodities in India’s export basket, a green shoot has been observed. There is a slight but steady shift in the Indian export basket from low to medium-low technological exports. India is already on the path of transition from exporting primary commodities to low and medium-low technology products such as rubber and plastic products. In comparison to its peers, however, India’s hi-tech exports are way too less. Vietnam (which has a similar GDP per capita as India) had 10.45 per cent of its exports of high-technology nature in 2009 with the corresponding figure for India at 9.61 per cent. In 2017, this figure for India was at 7.35 per cent whereas Vietnam’s high-technology exports, as a proportion of manufactured exports, were 41.41 per cent in the same year.  Vietnam is also one of the few countries which has maintained its trade volumes since the escalation of the US-China trade war, which for most of the countries, has proved detrimental.

Standard economic theory has shown that nations that depend on exports of primary commodities for their exports earnings experience declining terms of trade or, in other words, they need to export greater volumes to import the same quantity from other nations. Along with the quantity and the constituents of exports, the sophistication of exports has also found to be crucial for economic growth. In the current backdrop of depressed food prices, disputes regarding subsidies offered by the Indian government and high import duties, the government should seriously take the counsel of CII into account and strategically foray into skill and innovation-intensive exports to realise its export-potential.

This article gives the views of the author, and not the position of the South Asia @ LSE blog, nor of the London School of Economics. Featured Image: Macro Photo of Circuit Board. Credit: Alexandre Debiève, Unsplash.