Ajit Ranade: India needs more sectors to be reliable dollar earners

These critical imports feed India’s energy and food needs (edible oils) as well as downstream industries such as automobiles and electronics. Imported pharmaceutical ingredients and special minerals are needed for healthcare and the renewable revolution.

To pay for all these crucial imports in dollars, we need to earn enough foreign exchange consistently for the next decade. Which are our reliable dollar earners? The two strong dependable export items that have grown steadily are inward remittances (clocking $129 billion this year, the highest in the world) and software services (exceeding $200 billion). Both can be said to be de facto exports of skilled or semi-skilled labour.

This is India’s big competitive advantage. Sustaining this edge, especially in software, will need climbing the value ladder and confronting the challenge of artificial intelligence (AI), which threatens to eliminate most of the low-end coding work that was outsourced to India.

The rapid growth of Global Capability Centres (GCCs) catering to the world’s best corporations is a promising development, and soon there will be more than 3,000 such GCCs. Inward remittances have outpaced foreign direct investment and need to be encouraged.

They come from millions of workers who are at the lower end of the earning spectrum in Gulf countries and North America. The cost of remittances can be reduced in the same spirit as has been done for the unified payments interface (UPI). The UPI system is a great success thanks to a significant subsidy to keep it frictionless and free for the end user.

Beyond remittances and software services, engineering goods exports have clocked above $110 billion this year and have grown by 40% in the past six years. If this trend continues, it too would be a solid support to export earnings. In a report, Ajay Srivastava, founder of Global Trade Research Initiative, analysed the structural changes that have occurred in India’s export and import baskets over the past two decades.

There are some surprising new winners. An example is the growth in the export of mobile phones. From zero a few years ago, these have crossed $20 billion and are rising. This too can become a steady source of dollar revenue.

But unlike remittances and software services, the export of engineering goods and mobile phones has high import content. Likewise, one of India’s strongest dollar earning sectors, the export of diesel and petrol, which now accounts for a fifth of all merchandise exports, has a very high import component.

The net earning capacity of these exports is hence dwarfed by that of remittances and software. Similarly, a decade ago, India was the world’s leader in the export of polished diamonds, accounting for a 90% market share by volume. Here too, the net export is very low, since 90% of the cost is of imported uncut diamonds.

In the case of India’s petro-product exports, revenue is additionally impacted by the volatility of oil prices. As per Srivastava’s analysis, the share of polished diamonds, gold and other products has dropped from 16.9% in 2004 to just 7.5% in 2024. The share of textiles and clothing is down from 21.1% to 8%.

Clothing and garments were supposed to be India’s advantage due to their high labour intensity, but the performance has been dismal. Late starter Vietnam, along with Bangladesh and even Sri Lanka, has overtaken India. Garment exports, along with erstwhile labour-intensive sectors like footwear and leather products, are anyway at risk of being disrupted by automation.

The recent stagnation in Bangladesh’s garment industry is a warning sign. Even in labour-intensive diamond polishing, the gloomy fate of the diamond bourse in Surat is a sobering reminder of the impact of competition from other suppliers and changing tastes of global consumers.

One growing sub-sector is that of service exports that involve undertaking turn-key projects and winning global tenders. These too are basically the export of India’s talent based on human capital and a direct consequence of nurturing India’s education infrastructure.

Project exports, which are a combination of services and goods involving customized fabrication, can get tangled in long-winded tax disputes. It is important that tax policy does not kill this goose.

Another promising area of value-added exports is of tourism services, which are also employment intensive. Spain gets 85 million foreign tourists and Thailand gets 29 million, compared to India’s 9 million. Not even 0.1% of China’s outbound tourists come to India, surely a huge opportunity.

India can double foreign tourist arrivals with appropriate promotion, branding, sectoral policy support and infrastructure. There are other untapped opportunities in agricultural products, but these have to be balanced against the growing domestic needs of nutrition and cattle feed.

That said, paying for unavoidable and growing imports of education is a big area of concern. These are expected to drain the economy of $70 billion and more. India should become a net exporter of educational services instead.