Exports share of GDP reached its lowest in Q3 as sector waits for manufacturing to fully fire up


With an 18.6 percent share of India’s Gross Domestic Product, the third quarter (October-December) of 2020-21 saw the contribution of exports to economic growth drop to its lowest in the current financial year. Analysts and exporters say that this is not expected to improve in the next quarter, given the poor performance of outbound trade in the current quarter.

The COVID-19 pandemic has seen export growth severely falter due to multiple national and regional lockdowns. As a result, exports commanded a 21.1 percent share of GDP in the preceding second quarter and a 20.5 percent share in the first quarter. But with the manufacturing sector still under stress, export of finished goods has been slow to take off in the current quarter as well.

According to the GDP data released on February 26, manufacturing grew by 1.6 percent in the third quarter. Manufacturing had contracted by a major 35 percent in the first quarter, but had significantly recovered to just a 1.5 percent contraction in the second quarter. The slow pace of recovery seen in the latest data has been attributed to particular challenges in select areas of the economy.

Economists particularly point to the low pace of overall industrial growth. The Index of Industrial Production rose 1.6 percent in December, up from the 1.9 percent fall in November and is not expected to do any better in January. “With the core infrastructure industries having grown in only three months namely September, December and January, overall industrial growth in January 2021 would barely manage to slip into positive territory,” Devendra Kumar Pant, Chief Economist at India Ratings, said.

On the other hand, merchandise exports rose 6.2 percent in January, after recording just a 0.1 percent rise in December, signalling a nascent recovery following the COVID-19 shocks. But a liquidity crisis leaves exporters worried over not being able to take advantage of global orders during the ongoing quarter, considered prime export season across a large number of industries.

Lack of liquidity

The sector is most worried about the Rs 25,000-30,000 crore worth of tax refund under the erstwhile Merchandise Exports from India Scheme (MEIS) they are yet to receive, even as they wait for clarity on its successor tax benefit scheme.

 Crucial export sectors such as engineering goods, chemicals, leather and leather goods, heavy industries and key micro, small and medium enterprises (MSME) run sectors such as handicraft and carpet exports would see their business being majorly hit in the January-March quarter, considered to be a prime export season, according to the apex exporters body, Federation of Indian Export Organisations (FIEO).

“In its absence, we are not in a position to calculate the amount of capital we will have for investing into the sourcing, processing and exporting of goods. As a result, many exporters are unable to take up orders from abroad,” a senior functionary of an export promotion council said.

Exporters have also urged the government to notify the tax refund rates for the Remission of Duties and Taxes on Exported Products (RoDTEP) scheme as soon as possible. Live from January 1, 2021, the scheme aims to refund to exporters the embedded duties and taxes such as VAT on fuel used in transportation, Mandi tax and Duty on electricity used during manufacturing that are not refunded so far. While the government has clarified that the rebate would be claimed as a percentage of the Freight on Board value of exports, it is yet to bring out the specific refund rates.