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India should leverage emerging markets to meet export target of $2 trillion

India should leverage emerging markets to meet export target of $2 trillion

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By Sara Joy   | Srejita Nandy  Oct 13, 2022 7:15:00 AM IST (Published)

Notwithstanding the fact that India is the second largest trading partner of Africa, the volume of trade remains modest when compared to its largest trading partner, China. India accounted for around 6 percent of Africa’s imports in 2021, while China accounted for almost 20 percent. This remains in line with India’s modest global share of world merchandise exports which stood at 1.8 percent in 2021 as compared to China, which surpassed 15 percent.

India’s exports to Africa have reached its highest level of US$ 37.9 billion in 2021, making it the second-largest import source for the region.

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Mineral fuels and oils (mainly refined petroleum) accounted for 19.1 percent of total exports to Africa, followed by vehicles (10.4 percent), pharmaceuticals (10.3 percent) and cereals (8.5 percent), reflecting a mix of essential and consumer goods. India was also the second largest export destination for Africa, accounting for 6.3 percent of the continent’s global exports.
Notwithstanding the fact that India is the second largest trading partner of Africa, the volume of trade remains modest when compared to its largest trading partner, China. India accounted for around 6 percent of Africa’s imports in 2021, while China accounted for almost 20 percent. This remains in line with India’s modest global share of world merchandise exports which stood at 1.8 percent in 2021 as compared to China, which surpassed 15 percent. China’s exports to Africa stood at US$ 148 billion in 2021 and remains well diversified with manufactured products like electrical equipment, machinery, vehicles, plastics and iron and steel and articles accounting for over 45 percent of its exports to Africa.
Machinery and mechanical appliances supplied by India accounted for 3.9 percent of Africa’s imports and electrical machinery and equipment accounted for 3 percent, whereas those supplied by China accounted for 27.3 percent and 24.8 percent respectively, in 2021. While products such as machinery and electronics accounted for 6.1 percent and 4.8 percent of India’s global exports, its share in global exports were marginal at 1 percent and 0.5 percent. Present government policies have been trying to increase manufacturing sector share globally to overcome the existing trade deficit India has in these sectors.
Also, India’s exports to Africa remains concentrated in a few countries with South Africa, Nigeria, Egypt, Togo, and Kenya accounting for 50.7 percent of India’s exports to the continent implying a need to expand the export markets across other countries of the continent. India needs to increase its manufacturing exports to African countries leveraging the opportunity offered by the African Continental Free Trade Area (AfCFTA) agreement launched on January 1, 2021, offering a market of US$ 3 trillion.
Infrastructure financing accounts for a substantial amount of Africa’s public debt and these loans are mainly financed by foreign creditors leading to burgeoning external debt in the region. It poses financial risk to investors especially in countries with high political risks or countries vulnerable to foreign exchange risks. Of the 54 African countries, 29 countries are classified as at high risk of debt distress by the IMF and seven countries remain in debt distress, with average general government gross debt to GDP ratio at 68 percent higher than pre-pandemic level of 62 percent.
Focusing on alternative solutions such as local currency financing or countertrade arrangements to finance goods as well as project exports could therefore be explored, especially in case of resource intensive countries to support future repayments and assist low-income countries to achieve their development goals.
Africa could emerge as a sustainable supplier for a range of essential commodities for India. India’s major imports from Africa in 2021 included mineral fuels (mainly crude, coal and natural gas) accounting for 47.8 percent of India’s imports, followed by precious stones and metals (mainly gold) (25.4 percent share). Besides these, Africa also supplied copper and copper articles, inorganic chemicals, edible fruit and nuts, fertilisers, plastering materials and cement, edible vegetables and roots, and oilseeds together accounting for 20 percent of India’s total imports from Africa.
Another area of particular interest to India could be the Pan-African Payments and Settlements System, a centralised payment and settlement infrastructure for intra-African trade payments, jointly-developed by the African Union and the African Export-Import Bank. It aims to facilitate trade and other economic activities among African countries through a common simple, low-cost and risk-controlled payment clearing and settlement system. An agreement could be signed between the Reserve Bank of India and the African Union, aligning with the “International Trade Settlement in Indian Rupees” and initiating a joint payment mechanism with PAPSS to facilitate rupee trade with India to ensure supply of critical imports as well as facilitate exports to African countries which are currently short of foreign exchange reserves or are fiscally constrained to undertake imports from India.
The trade finance gap in Africa remains at USD 82 billion in 2019 with 40 percent of Africa’s trade remaining bank intermediated as compared to 80 percent globally. Regulatory restrictions and higher compliance costs have been the major constraints cited for the retreat of international confirming banks from Africa, resulting in reduced trade finance availability, especially for SMEs.
Credit enhancement mechanisms including risk participation and transaction guarantee agreements supporting Indian commercial banks could provide necessary liquidity thereby boosting exports to Africa. Moreover, a dedicated credit line to finance trade with Africa routed through development finance institutions, as a part of enhancing India’s engagements with Africa and supporting the AfCFTA, could ensure sustainable supply as well as South-South solidarity.
Africa remains an important region for the Indian Development Assistance Scheme (IDEAS) which provides concessional Lines of Credit (LOCs) for infrastructure development and capacity building in the recipient developing countries. Africa accounts for 40 percent of the total LOCs extended over the years, highest beneficiary after Asia. Under a tightened global financial environment, India’s traditional human capacity development approach could be supplemented by a policy supporting higher “Make in India” manufactured goods exports to Africa. India needs to leverage its goodwill to tap the export opportunities in the emerging markets of Africa to achieve its export targets of US$ 2 trillion by 2030.
The authors are economists with India Exim Bank. Views are personal.
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