ECONOMIC SURVEY: (CHAPTER 3) GLOBAL ECONOMIC UNCERTAINTY & INDIA’S EXTERNAL SECTOR (PART 1) from Vajirao & Reddy Institute

ECONOMIC SURVEY: (CHAPTER 3)

GLOBAL ECONOMIC UNCERTAINTY & INDIA’S EXTERNAL SECTOR (PART 1)

• Geopolitical Conflicts and Economic Fragmentation: The world is experiencing growing uncertainty due to geopolitical conflicts, economic fragmentation, and climate events.
• 2024 Elections: Over half the world’s population participated in elections globally, causing further policy unpredictability and hindering growth.

• IMF Insights: The International Monetary Fund (IMF) suggests that higher uncertainty can reduce output growth by 0.4 to 1.3 percentage points.
• Economists' Views: Keynes and Tobin emphasize that uncertainty increases risk and capital costs, leading to higher borrower defaults and lower output and prices in advanced economies.

• Disruptions in Global Trade:
  • Red Sea Disruptions (Nov 2023): Conflicts in the Red Sea forced changes in global trade routes, increasing shipping costs and delivery times. This is significant for trade between Asia and Europe, as 40% of this trade passes through the region.
  • Hormuz Strait Conflicts: The Hormuz Strait, a crucial energy trade route (21% of global petroleum liquid consumption), has also seen disruptions, leading to higher energy prices.
  • Climate Change Impacts: Events like the drought in the Panama Canal jeopardize maritime trade, affecting 5% of global trade volumes that pass through this channel. These disruptions have led to uncertainty and a slowdown in international trade.

• Rise in Protectionism: Geopolitical shifts have led to a rise in protectionist policies and a reorganization of global supply chains.
• Friend-shoring and Near-shoring: Countries are trading more with geopolitically similar nations and geographically closer regions to reduce costs and enhance supply chain resilience.
• Trade Concentration: Global trade is becoming more concentrated with fewer but more significant trade relationships (e.g., China-Russia, US-China).

• Merchandise Trade: Global merchandise exports grew by 3.5% year-on-year (YoY) and imports by 3% in Q3 2024.
• Services Trade: Global services exports and imports grew by 7.9% and 6.7% YoY in Q3 2024.

• Developing Economies: Trade growth in developing nations had exceeded that of developed nations until Q3 of 2024.
• Reversal in Trend: In Q3 2024, developed economies saw positive trade growth, while East Asian economies, including major developing Asian countries, experienced negative growth.

• Overall Growth: Global trade is expected to exceed USD 33 trillion in 2024, breaking the 2022 record.
• Services Trade: Likely to grow by 7% YoY.
• Goods Trade: Projected to grow by 2% YoY, still below the 2022 peak.
• Expansion: Global trade is expected to grow by 3.3% or USD 1 trillion, with both goods and services contributing equally to this expansion.

• Increase in RTAs: The number of Regional Trade Agreements (RTAs) has risen sharply, from 22 in 1990 to 369 by August 2024.
• Benefits: These agreements promote free trade, encourage investment, and help reduce trading costs.

• Global Reduction: Over the past few decades, there has been a global reduction in border tariffs, especially with the World Trade Organization (WTO) promoting free trade and policy collaboration.
• India and China: Between 2000 and 2024, India reduced its average tariff rate on dutiable items from 48.9% to 17.3%, while China reduced tariffs from 16.4% to 8.3%.

• Agriculture: The Most Favoured Nation (MFN) and preferential tariffs decreased by approximately 3% between 2012-2022.
• Manufacturing: Preferential tariffs fell by 1%.
• Natural Resources: Also saw declines in tariffs during this period.

• Sector Protection: Sectors like agriculture and manufacturing are often shielded from foreign competition via tariffs.
• Raw Materials Access: Access to raw materials and intermediate goods is facilitated through low tariffs.
• WTO Compliance: India’s tariffs are designed in compliance with WTO rules and have evolved to rationalize tariffs and address inverted duty structures.

• Industrial Policy Design: Tariffs can play a critical role in industrial policy, especially in helping new industries take off.
• Historical Examples: Nations like the US and Germany used tariffs to develop their industries during the Industrial Revolution.
• Industrialization Process: Friedrich List emphasized that less developed nations should use tariffs to protect their industries as they developed.

• Resilience and Recovery: India's trade has been strong, overcoming global economic challenges. Despite a drop in FY20 due to the pandemic, exports bounced back in FY22 and FY23, setting new records.
• FY25 Performance: In FY25 (April-December), exports reached USD 602.6 billion, growing 6% compared to the previous year. Imports during the same period grew by 6.9%, totaling USD 682.2 billion.

• Increase in Deficit: The trade deficit increased to USD 79.5 billion (April-December 2024) due to higher imports.

• Non-Petroleum Exports: Grew by 7.1%, with strong performance in sectors like pharmaceuticals, electronics, and engineering goods.
• Agricultural Exports: Limited due to rising prices in commodities like cereals and pulses.
• Merchandise Imports: Non-oil, non-gold imports grew, showing strong domestic consumption. Items like machine tools, electronics, and transport equipment led the growth.

• Global Position: India is the 6th-largest textile exporter in the world, contributing 2.3% to GDP and 12% to total exports. The sector employs over 45 million people.
• Export Performance: In 2023, India’s textile exports reached USD 34 billion, with apparel making up 42% of this, followed by raw materials and finished goods.

• Major Markets: Europe and the US, accounting for 66% of apparel exports.
• Competition: India faces strong competition from countries like China, Bangladesh, and Vietnam.

• High Costs and Complex Procedures: Competitors like China and Vietnam have lower costs due to vertical integration, while India's complex value chains and regulations raise costs.
• Trade Agreements: Often favor competitors, reducing tariffs for them but not for India’s textile products.

• Shift to Man-Made Fibres (MMF): This shift offers India a chance to diversify and capture a larger market share, as MMF makes up 77% of global fibre consumption.
• Vertical Integration and R&D: Improving vertical integration and R&D can enhance India's competitiveness in the MMF market.

• Schemes and Missions: The government has introduced the PLI scheme (?10,683 crore) to boost production and the National Technical Textiles Mission (NTTM) (?1,480 crore) for innovation in MMF-based textiles.
• PM-MITRA Parks: Aim to provide world-class infrastructure to attract foreign investment.

• FTAs: Agreements like UAE-India CEPA have reduced tariffs on Indian textiles, improving market access.

• Sustainability and Eco-Friendly Textiles: The global shift towards sustainability offers India an opportunity, especially with a focus on sustainable sourcing driven by EU regulations.

• Evolution of Export Strategy: India’s export strategy has evolved significantly, with the country diversifying into new markets and products.
• New Products: From 1994 to 2022, India added many new products to its export basket and became a market leader in several cases.
• Examples: India is now the leading exporter of shipping vessels, with almost 33% of the global market share. India has also expanded into the export of iron and steel alloys.

• Noteworthy Performance: India’s export performance in the first eight months of FY25 has been strong despite challenging global conditions.
• New Markets: India has expanded its presence in new markets compared to the same period in the previous year (April-November 2023).

• Categories of New Markets:
  • Absolutely New Markets: Where no exports were observed in the same period of FY24.
  • New Markets with Export Share of 0-0.1%: This category saw growth greater than 25%.
  • Promising Markets with Export Share of 0.1-1%: Markets that saw exports grow by over 25% and reached over 1% of the total market share.

• Key Products:
  • Optical Items: Exported to 14 new markets with a value of USD 16.6 million.
  • Cranes, Lifts, and Winches: Exported to 12 new markets with a value of USD 23.1 million.
  • Office Equipment & Medical-Scientific Instruments: Exports worth USD 62.7 million, expanding to nine new markets.

• Reduced Risks: India's proactive export diversification reduces risks related to market volatility.
• Sustainable Economic Growth: This strategy ensures sustainable economic growth while mitigating risks from fluctuations in specific regions or markets.