Merchandise export from India is undergoing a paradigm change. Engineering products recorded exports worth an estimated $60.15 billion in 2010-2011, higher by 84.8 per cent over the previous year.
This is likely to surpass software exports, expected to touch $59.35 bn.
Analysts believe engineering exports would soon dominate the country's foreign trade, thanks to a conscious policy shift towards building strength and capitalising on critical industries such as engineering and chemicals.
This is in addition to incentivising these industries to venture into uncharted territories having growth potential and demand for made-in-India goods.
Engineering exports, comprising machinery, iron and steel, among other items, have grown from $33.7 bn (2007-08), $40 bn (2008-09) and $32.55 bn (2009-10), to $60.15 bn in 2010-2011.
Software exports, which follow the calendar year, have risen from $31.7 bn (2007), $40.9 bn (2008), $47.5 bn (2009) and $50 bn (2010), to $59.35 bn in 2011.
"Over the past 10 years, the share of the engineering sector has nearly doubled, from 14 to 27 per cent of merchandise exports. Still, our global share in engineering exports is barely 0.8 per cent. That's not the case in software services, where we are the globally dominant exporter.
Hence, the potential upside to exporting engineering goods is immense. With relatively low cost and skilled labour, and manufacturing and design capabilities, the sector can grow its exports rapidly.
In fact, in the case of auto-components, which caters to both domestic and foreign supply chains, the exports far exceed domestic sales," said Ajit Ranade, chief economist, Aditya Birla Group.
In the first half of 2010-11, all major engineering exports like machinery, iron and steel registered high growth, with transport equipment, primary and semi-finished iron and steel, non-ferrous metals and manufactures of metals registering whopping growth of 61.8 per cent, 65 per cent, 61.5 per cent, and 40.3 per cent, respectively, according to the Economic Survey of 2010-2011.
"Engineering exports have grown at a much higher rate compared to software ones, which have grown at less than 20 per cent.
The change is partially due to diversification into new regions where software is not such a large component, and partly due to the increasing competitiveness of many types of Indian firms.
Software exports should also revive as advanced countries recover," said Ashima Goyal, professor at Mumbai-based Indira Gandhi Institute of Development Research (IGIDR).
Cheer & hope
Last week, commerce and industry minister Anand Sharma brought out a strategy paper to achieve exports worth $500 bn by 2013-2014, something which had already been mentioned in the Indian economy outlook report by the World Bank, Asian Development Bank and the International Monetary Fund.
The government has also set sector-wise targets, giving greater thrust on high technology exports such as engineering, electronics, automobiles, drugs and pharmaceuticals, computer and software-based smart engineering, green technology products and aerospace.
It targets exporting engineering goods worth $125 bn by 2013-14. Similarly, it targets $80 bn for petroleum exports ($42.45 bn in 2010-11), $17 bn for electronic goods by 2013-14 ($7.38 bn in 2010-11), $19 bn for basic chemicals and so on.
Exporters feel diversification of products as well as markets, coupled with a change in their marketing strategies and exploring newer pastures to sell their products, has paid off.
"Around 30 per cent of our products are now going to new markets such as Latin America, and Africa. Traditional markets such as the US and Europe are also coming back slowly.
The accumulation of both has helped us tremendously. We have also done product diversification and increased the basket of export," said Aman Chadha, chairman, Engineering Export Promotion Council (EEPC).
Since the government has offered incentives to venture into new markets, exporters have diversified the reach of their products to markets like Brazil, Malaysia, Indonesia and Africa, said R Maitra, executive director, EEPC.
However, exporters insist on extending the duty entitlement passbook scheme, to expire in June this year, to sustain such growth rates. But, the government is not likely to extend it further.
Petroleum
Another interesting trend to have emerged is that of petroleum products. Exports of petroleum, oil and lubricants reached $42.45 bn, up 50.6 per cent. On the other hand, imports have topped $101.7 bn, up 16.7 per cent over 2009-10. While oil prices hit the roof during 2010-2011, the proportionate rise in oil imports was not much.
"Oil imports have not risen as much as the increase in prices, which was substantial during the period. This means the growth in volumes was not much, which may be due to sluggish industrial activity," said Sonal Varma, economist, Nomura India.
Analysts also believe the growth in refining capacities to be the main reason behind the rise in petroleum exports. The installed refining capacity is expected to rise to 240 million tonnes a year by March 2012, as against 188 mtpa currently.
"There is some setoff but refinery exports cannot totally neutralise our crude oil imports, as we are ourselves large net consumers of petroleum products. But, refinery products are a value addition and, therefore, one way of partially countering large crude imports.
But, we need to continue looking for other ways, such as improving energy efficiency and developing alternative energy sources," said Goyal of IGIDR.
According to official estimates, India's largest trading partner is United Arab Emirates, accounting for a little more than 10 per cent of total exports, followed by China (9.3 per cent), USA (7.6 per cent), Saudi Arabia (4.5 per cent) and Germany (3 per cent).
"All the bilateral trade agreements India signed recently are expected to boost its trade significantly. China is also emerging as a major market and the share of Asian countries would cross 55 per cent soon," said Ajay Sahai, director general, Federation of Indian Export Organisations.
Ranade of Aditya Birla said the share of exports to Asia, including and West Asia, had increased from 36 per cent.
Rupee shifts
On the rupee front, exporters are more or less adjusted to exchange rate volatility and it is not likely to pose a major challenge.
"Exporters are in a better position now to handle exchange rate volatility. The rupee had been more or less range-bound. During the last financial year, we significantly underperformed our competitors, which did not get reflected in the real effective exchange rate (REER).
Moreover, we had considerable trade diversification, which helped in north Asia. However, in Europe, despite a moribund market, we got quite a fair share of their auto components and chemicals market," said Abheek Barua, chief economist with HDFC Bank.
The rupee was expected to remain strong in 2011-2012, on the back of robust fundamentals, high rate and growth differentials setting the stage for capital flows into the country and attendant rupee appreciation, said Nomura in a note.
"The rupee had been more or less stable in 2010-11. It ended at Rs 44.5 a dollar in March. We have not seen much appreciation in 2010-2011 as (had been) in 2006-07," said Varma.
According to the Economic Survey, there has been a distinct divergence between the movements of six-currency and 36-currency REER indices during 2010-11, according to the Reserve Bank of India.
It said that while the six-currency REER was above the base level by 16-20 per cent, reflecting high inflation, the 36-currency REER remained at the base level or below, which meant inflation was on the same lines or below the level of its trading countries amongst developing economies.
