It might appear that today is an inappropriate time to ask this question. The Russia-Ukraine conflict is underway, and commentators are clearly divided based on how long they think the conflict and the collateral effects of this would last.

However, from the point of view of investing, two things are important to remember. Firstly, markets have always overreacted to geopolitical risks and this time is no different. Markets tend to linearly project today into the future. And secondly, justifying the market’s projection, one notes that geopolitics is unfortunately the most intangible aspect of the investment process that investors have no control over. The focus of investing therefore falls back on the framework and the drivers at hand, for when the storm passes by.

Depreciation continues to be overplayed as a factor in exports

India’s export market share gain in goods have been poor. While the common and loudest refrain one gets to hear when it comes to export growth is currency depreciation. Time and again numbers tell us that export market shares are related to non-currency factors, than anything else.

Over the last 25 years, China’s global export market share grew by 12%, while its currency (Yuan) appreciated by 22% during this period. During the same period, the currencies of Vietnam (Dong) and India (Rupee) depreciated by 110% and 108% respectively. But Vietnam was able to garner an additional market share of 1.5%, while India gained only 1%. To throw another country in the mix, the Indonesian currency (Rupiah) depreciated by around 515%, with barely any increase in its goods export market share. The above should be decent ground to establish that currency depreciation is not one of the key reasons behind export growth; and that it is non-currency factors that are at play.

India lags on its manufacturing exports

Refined petroleum fuel and Gems/jewellery account for nearly 25% of India’s exports. Chemicals, vehicles, and pharma account for the next 15%. However, when compared with the world, while India is among the top 10 in Agri exports, it really lags in manufacturing. Manufacturing is a crucial segment as it accounts for more than 70% of global goods exports.

Again, a China comparison gives one the magnitude of the market. Over the last 10 years, China gained 8% global market share in manufacturing and stood at 20% in 2020. India’s market share dropped 10bps during this period and stood at 3.1%.

Manufacturing, machinery, prefab, and travel goods are the segments that experienced the most export share gains for China. As China attempts to move up the value chain into electronics, IC, and AI, alongside the China+1 narrative; these are clear areas India would have space to address. In addition to the sectors like agriculture, chemicals, electronics & automotive that India has gained market share in, manufacturing-services (full-service manufacturing) is a segment where India’s market share is extremely low.

Moving to services exports, India is close to China on market share. India has a market share of 4.1% as of 2020, compared to 5.6% for China. The last 15 years have seen India gain 2.1% market share, compared to 2.7% for China. While computer, telecommunication and business services are the key strong sectors for India under services exports, construction and goods-related services are the largest two segments for China. China’s construction-services account for 26% of global market share and goods-related services account for nearly 13%.

India needs to start with joining the global supply chains

India has fared well by participating in the value chain for services but lags in manufacturing value chains. Studies show that China’s significant jump in export performance, compared to India, has been driven by a focussed drive to specialise at a large scale, especially in network products. Note here that network products are those where the production happens across the global value chain, operated by MNCs. This segment alone accounts for nearly 40% of global manufacturing exports.

Parts/components (P&C) and assembled end products (AED) are two key subsegments of network products, of which AEP has largely driven growth in the segment. Asia’s share of world exports in network products rose to 51% in 2018 from around 37% seen in 2000, with electrical machinery (10%) and vehicles (8%) accounting for the highest market shares. India’s share in network products is low at 10%, up from 5% in 2000. It is interesting to note here that during the same period, Vietnam increased its share of network products eight times and China increased its share by 20%.

China +1 is a positive, but India would have to fight its way through

The narrative of China+1 is certainly a positive for India, but India would have to fight its way through. To start with, India’s export basket with 58% goods and 42% services is very dissimilar to that of China’s, with 90% and 10%. The east Asian economies of Malaysia, Thailand, Indonesia, Bangladesh, and Vietnam have very similar export baskets to that of China and are better positioned to take up the opportunity. Therefore, while India has the domestic market share and manpower to absorb a part of China+1, but its dissimilar export market share stands in the way.

Surveys show that 58% of businesses in China have their target customers in China and therefore would look to position operations as close to China as possible. Comparative advantage studies show an edge for Malaysia / Vietnam in electronics, Thailand for Automobiles/packaged food, Indonesia for Machinery / petrochemicals, and Singapore for semiconductors / biopharma.

PLI a step in the right direction

The philosophy of the production linked incentive (PLI) scheme to tariff finished goods and not on imports is very important. The PLI scheme now covers 14 sectors with a committed outlay of Rs.2.6tr. This could potentially add 4% of GDP on average every year in new sales and 0.3-0.5% to annual GDP growth between 2023-27.

India needs to continue its momentum on reforms and to aid manufacturing competitiveness, India would need to focus on land reforms / land banks, develop transportation and shipping lines and retrain its work force with skilling India as the government’s no.1 priority. In all this, the government should help maintain a stable exchange rate. Bond inclusion would be an added boost and would bring borrowing costs lower, a positive for Indian manufacturing.

Disclaimer: The above article is published with the intent of sharing information to the reader. The contents of the article should not be construed as an investment advice. Figital Technologies Private Limited takes no responsibility and assumes no liability for any error/omission or accuracy of the information. The views and opinions expressed in this article are solely that of the author. This is not an offer to sell or a solicitation to buy/sell any investment product.