The adverse trade environment last year that resulted in a 5 per cent decline in India’s merchandise exports in FY24 is expected to ease this year and the subsequent year. However, geopolitical tensions and policy uncertainty could limit the scope of trade recovery, the Economic Survey 2023-24 said.
While export growth is expected to improve in several economies as external demand for goods picks up, “food and energy prices could again spike” due to geopolitical events and climate disturbances, the survey said, adding that restrictive trade practices increasingly adopted by many countries are leading to higher prices because supply chains have become increasingly complex.
International trade has contributed to India’s economic growth as rising services exports despite a decline in merchandise imports has cushioned the overall trade deficit from $121.6 billion in FY23 to $78.1 billion in FY24 and improved India’s current account deficit (CAD), the survey noted.
‘Challenging phase of uncertainty’
The survey said that global trade is going through a particularly challenging phase of uncertainty and there is increased efforts by the US to de-risk and de-couple from China. But China’s overwhelming dominance in the supply of processed critical minerals and materials for energy transition renders a true decoupling between the two nations “neither easy nor likely”, it added.
“In 2023, Mexico became the largest goods trade partner of the US, surpassing China and Canada, with a total trade of $798 billion. Vietnam’s trade with China and the US has recently seen an increase. US imports from Vietnam doubled from $46 billion in 2017 to $114 billion in 2023. During the same time, Vietnam’s imports from China rose from $58 billion to $111 billion,” the survey said.
Other key instances of decoupling and de-risking are European economies shifting their energy imports from Russia to Norway and the US, the survey said. The EU’s pipeline gas imports from Russia declined from 150.2 billion cubic meters in 2021 to 42.9 billion cubic meters in 2023, it said.
“While the US and China are gradually decreasing their reliance on global markets, this does not seem true for the rest of the world. Research by the Bank for International Settlement (BIS) shows that despite its policies, the US remains reliant on Chinese inputs. The rise in trade through Mexico and Vietnam results from Chinese firms re-routing their supply through these countries (or by locating themselves in these countries),” the survey said.
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Trade diversion from China
While India “may not be an immediate beneficiary of the trade diversion from China”, it has witnessed a substantial increase in its electronic exports over time as India’s electronic exports to the US have transitioned from a trade deficit of $0.6 billion in FY17 to a trade surplus of $8.7 billion in FY24, underscoring a significant increase in value addition, the survey said.
The survey stated that the companies are increasingly moving away from China but over 90 per cent of manufacturers in North America surveyed by the Boston Consulting Group in 2023 moved some or all of their production to other countries like Mexico, Thailand, and Vietnam.
“The appeal of India lies in its large domestic consumer market, which makes it attractive for companies to set up operations there. In the electronics sector, there is a focus on smartphone manufacturing and assembly,” the survey said.
Red Sea crisis pushing freight rates
The trade diversion from the Red Sea and around the Cape of Good Hope has added ten days to Asia-Europe journeys while also increasing fuel costs, the survey said. Although global shipping costs returned to pre-pandemic levels by the middle of last year, container shipping rates have “risen again”, it said.
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“Extended detours around the Cape of Good Hope have led to a significant surge in ocean freight rates, reaching up to $10,000 per 40-foot container. Moreover, the Suez Canal Authority has declared a 5-15 per cent hike in transit fees for ships passing through the Panama Canal,” the survey said.
Amidst these prevailing geopolitical dynamics, India is expected to benefit from its strong trade relations across countries, the survey said.
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