India’s merchandise exports seem to have silently crossed the Rubicon. It is surging at a pace never seen before. After growing 82 per cent in July, they grew 44 per cent in August and have expanded 54 per cent in the five months during April-July to $ 134.5 billion.

This kind of growth is unprecedented in the country’s trade history and rivals only the export hay days in countries of east Asia and south-east Asia. What is remarkable is that such highs are being scaled even as major export markets of the US and Europe are supposed to be shrinking. What explains this growth? Could it be that the data overstate the reality? Is it a splash in the pan? Or, are exports being over-invoiced as a channel to bring in money stashed abroad? Export surge has raised many questions, but there are just a few possible answers yet.

New winners

One explanation is being offered by the commerce ministry and export organisations such as FIEO. According to them, growth comes from export diversification. Export data of past three years support such a conten­tion. There has been a transformation of sorts of the export basket and markets. This has been a gradual change but has gathered pace ironically in the past three years even as world trade faced stormy weather in the wake of the downturn.

India’s merchandise exports are no longer exclusively dependent on the performance of traditional sectors such as textiles, leather goods, handicraft, carpets, tea, coffee, ores and primary products. (See chart). There is a strong manufacturing thrust to exports. The export basket now has new winners such as refined petroleum products, cars and two-wheelers, machinery, electricals and electronics, chemicals and pharmaceuticals.

“These new additions to export basket are also among the products that are showing high growth. Emergence of new products have more than compensated for the relative slack in traditional items such as textiles, leat­her, tea, coffee, marine products and gems and jewellery and primary goods”, explains director of Indian Institute of Foreign Trade KT Chacko.

He should know for he has had a ringside view of India’s international trade for years as a former director-general of foreign trade and executive director of India Trade Promotion Organisation (ITPO).

Asia rising

In addition to a new-look export basket, the direction of exports too has undergone a U-turn. “Exports now look east, not west”, says long-time serving director general of apex exporters’ body FIEO Ajay Sahai. What this means is that exports are now increasingly headed towards the growth markets of Asia. Developing and fast growing Asia today accounts for a share of more than half the total Indian exports. (See chart). Since exports are going into growth markets of Asia, Latin America and Africa, they are expanding at a fast pace regardless of the slump in India’s traditional big markets of North America and Europe.

“Just look at Columbia”, says Sahai. “A lot of exports are now going into that once-unexplored market”. Europe and the US are no longer India’s biggest trade partners. China, the UAE (Dubai), ASEAN and even South Asian neighbours Bangladesh are the new export markets.

Big boys play

There is yet another big change that is driving the export growth, points out a Central Board of Excise and Customs (CBEC) official who does not wish to be named. Big corporate players have substituted for small-scale exporters at the frontline of exports. The single biggest exporter today is Reliance Industries (RIL). RIL alone exported $ 29.3 billion of refined petroleum products last year and along with other refiners such as Essar put India on petro-products export map with total exports exceeding $ 40 billion.

“Like in oil refining, we surely have built major manufacturing capacities in recent years in auto components, small cars, two-wheelers and the like which are today leading exports from the front”, said Chacko.

In addition to big industries, MNCs too are a major contributor to the recent export growth. MNC parents are increasingly using their Indian subsidiaries as part of their global production chain.

While policies and policy-makers stay focussed on promotion of exports from traditional labour-intensive sectors, the real export transformation has been largely missed. The CBEC official quoted above cited the recent policy changes on DEPB (duty entitlement passbook) scheme and duty drawback for exports as an example of the past mindset and approach to exports. The policy changes reduces the incentives especially for sectors like petroleum products, cars and engineering goods which are responsible for the present export boom.

Conflicting signals

The untold story of export diversification, fascinating as it may be, does not, however, fully explain the recent export surge. Every one is not convinced that the diversification is either significant or of lasting impact. Experts including Prime Minister’s Economic Advisory Council chairman C Rangarajan see conflicting signals coming from export data and those on industrial production. As Rangarajan has pointed out, the drop in industrial production growth in July to 3.3 per cent,the slowest in two years, because of a 15.2 per cent decline in machinery sector does not match with the surge in engineering goods exports.

Similarly, Chacko points out that at a meagre 16 per cent share in India’s GDP, the manufacturing sector couldn’t be sustaining the dream run in exports for long, even if it is good till it lasts. “The manufacturing base needs to be stronger if the export thrust is to be maintained”, he says.

The commerce ministry, tasked with promoting exports, is itself pleasantly surprised, but it too maintains that export growth would moderate in the second half of the current year. The ministry had targeted exports to grow this financial year and the next by 25 per cent each. The growth during the first four months this year has turned out to be double the target.

Disaggregated export data is in public domain only up to December 2010. Provisional data compiled by the Kolkata-headquartered Director-General of Commercial Intelligence and Statistics from shipments monitored at ports and airports are up to May. These data, giving productwise and marketwise disaggregation, up to the first two months of the current financial year confirm the trends of export diversification.

During April-May 2011, total merchandise exports were valued at $ 51.632 billion, showing a hefty growth over $ 34.269 billion in the year ago period. From where did this growth come from? Petroleum products were the single largest at $ 10.441 billion in April-May 2011, nearly double of April-May 2010 level of $ 5.384 billion. Automobiles came next at almost $ 6 billion ($ 5.964 billion to be exact). This was more than double the automobile exports of $ 2.711 billion in April-May 2010. Gems and jewellery was next at $ 2.742 billion, but it was sharply down from last year’s $ 4.398 billion. The new story of Indian exports continued with machinery exports growing to $ 2.716 billion from $ 1.630 billion a year ago, electronics jumping to $ 1.849 billion from $ 442 million and pharmaceuticals expanding to $ 1.932 billion from $ 1.653 billion.

Surprise numbers

Each month for last three quarters, trade data have surprised policy makers. Not only have export growth numbers been well beyond best expectations of the commerce ministry, they have proved all forecasts wrong. The PMEAC also admitted this in its Economic Outlook 2011 report. Merchandise exports during 2010-11 were valued at $ 251 billion, surpassing the initial target of $ 200 billion and the revised target of $ 225 billion. For this year, PMEAC sees exports jumping to $ 331 billion, a growth of 30 per cent. The way exports are growing, it could prove to be an underestimation.

Black money

The reliability of the numbers apart, some people like the founder of B2B trade portal TradeIndia.com Bikky Khosla have also been wondering whether the export surge was an effect of Anna Hazare. In an article posted on the portal, Khosla wrote: “In the last few days I talked to a few exporters and they viewed that their growth is not really so high. So, is it black money, as claimed by some people, that is playing a hidden role in the recent growth in India’s export earnings? In a modus operandi of over-invoicing their exports, are some people who have stashed money abroad bringing the wealth back to the country in the name of exports?”

He further wrote: “Black money is pushing Indian exports – such a claim is more difficult than anything else to prove. But I feel the argument cannot totally be ignored, particularly in the post Baba Ramdev and Anna Hazare scenario and after the recent nationwide hullabaloo over black money, forcing the government to put renewed efforts to tighten the noose on money launderers.”

Right pricing

But exporters FC spoke to do not buy this view. FIEO’s Sahai, for instance, feels that it does not make sense for exporters to indulge in large-scale over-invoicing. His logic is as follows: Ad valorem duties and taxes on Indian exports in most overseas markets add up to a much higher amount than the export incentives in India. Over-invoicing would be a losing proposition.

At the same time, Sahai and even officials in the revenue department, agree that some of the export growth could be because of “right pricing” now compared to the under-pricing of exports in the past.

The government has acknowledged that the Global Financial Integrity report earlier this year that had estimated black money stashed away abroad by Indians at $ 462 billion had identified trade “mispricing” as the major channel of capital flight. The government had also said that it had detected mispricing of goods of Rs 33,784 crore in the past two years. Since the government has stepped up vigil on cross-border transfer pricing of goods, it is possible that transactions involving companies and their subsidies are now be right priced.

There are other simpler explanations such as the rising input costs of Indian exports, such as of petroleum crude and precious and base metals, which have contributed to higher unit value of exports. But there are no definitive conclusions yet and that is why organisations such as IIFT have ordered a detailed study into the new export phenomenon.