Letting the Elephant Dance: Unlocking India’s US$500 Billion Export Opportunity

Executive Summary

India’s post-1991 export surge has lost momentum, reflecting a policy tilt towards protectionism, weaker participation in global value chains (GVCs), and a persistently appreciated Real Effective Exchange Rate (REER). Against this backdrop, the paper proceeds to make five distinct contributions. First, using a Poisson Pseudo Maximum Likelihood (PPML) gravity model estimated on a multi-country, Harmonized System (HS)-level pooled cross-section time series dataset, it quantifies India’s unrealised merchandise export potential at approximately US$516 billion in 2022. The estimation is conducted at the product partner level and incorporates exporter applied tariffs, bilateral exchange rate terms, and standard structural controls. Exporter-side tariffs, defined as those levied by a country on its own imports, raise input costs and act as an implicit tax on export competitiveness, distinguishing this approach from specifications that focus on destination market tariffs. Exchange rate terms capture bilateral currency movements affecting price competitiveness, such that an appreciation of the exporter’s currency, or a depreciation of the importer’s currency, is associated with weaker exports. Second, it localises this gap geographically in East Asia and key neighbouring economies, including China, Pakistan, and Bangladesh, while contrasting corridors of overperformance, such as the Netherlands and the United Arab Emirates (UAE). Third, it identifies, at the product level, areas of strength and weakness that can be leveraged or addressed, particularly in thin-margin, labour-intensive segments. Fourth, it links policy and macroeconomic mechanisms to outcomes, including the reversal of tariff liberalisation, the proliferation of quality control orders (QCOs) that raise input costs, and a persistently appreciated real effective exchange rate (REER), reinforced by strong services receipts and rising remittances. Fifth, using a historically observed export employment elasticity of around 0.3, it translates the trade shortfall into labour market implications, implying a loss of roughly 20 to 24 million formal sector jobs. Finally, it proposes a feasible, workable, sequenced reform path to restore export momentum.

Export Performance and Trends: Successes and Shortcomings

Following the 1991 liberalisation, India’s engagement with the global economy deepened significantly. Its share of global exports of goods and services rose manifold from 0.79% in 2001 to 2.56% in 2024, driven by a more than doubling of the export-to-GDP ratio. However, a Mandeng product mapping presents a mixed but revealing picture: “Rising Stars” such as pharmaceuticals, mineral fuels, organic chemicals, iron and steel products, and electrical machinery, where India gained share in expanding global markets, sit alongside “Missed Opportunities” in gems and jewellery, knitted garments, and leather, and “Retreats”, reflecting declining market share in slow-growing sectors such as the traditional agrarian and low-value sectors. This trend shows, on the one hand, India’s ability to grow in several dynamic sectors. On the other hand, competitiveness in many labour-intensive segments has proved difficult, where exchange rate and input cost pressures act as binding constraints.

Furthermore, a Mandeng-type spatial assessment shows that, since 1991, India has considerably widened its export geography, with stronger penetration in regions where it previously had limited presence, such as Latin America and the Caribbean, the Middle East and North Africa, Sub-Saharan Africa, and fast-growing areas such as East Asia and the Pacific. In South Asia, too, India has increased its export presence faster than the pace of world import demand, although the increase has not been very high, and this picture may have changed in more recent years, with India losing export share. At the same time, India has also expanded its presence in Europe and Central Asia, as well as North America, even though these regions have become relatively less central in world import demand. Overall, the pattern points to diversification towards a broader set of regional markets rather than mere withdrawal, although a wider geographic reach in itself does not necessarily imply deep integration into advanced manufacturing value chains.

Explaining India’s Export Performance

Global value chains and East Asia: As is known, GVCs function as conduits that amplify trade volumes, facilitate knowledge diffusion, and encourage diversification. India’s backward integration in GVCs, measured as foreign value added in exports, peaked around 2012 before declining to about 17% by 2020, leaving it behind peers and competitors such as Vietnam and Thailand. Drawing the contrast with East Asia is illuminating and offers a clear counterpoint, as long-standing, state-driven, export-oriented policies have anchored their firms deeply within component trade networks. The absence of such policy direction in India, and the resulting slowdown in GVC integration, coincided with weaker goods export growth and a gradual loss of market share in mid-technology, thin-margin sectors, reducing competitiveness in scale-dependent manufacturing.

The import–export nexus and protection reversal: The Lerner symmetry theorem states that an import tariff functions much like an export tax. This principle is clearly exhibited in our gravity models, which show that a decline in a country’s exports is correlated with an increase in its tariffs. The pre-reform period of India is a case that corroborates this hypothesis. Tariffs kept falling from extremely high pre-1991 levels to single-digit rates by 2010. India’s exports expanded with greater diversification during the same period. However, this trend has reversed since then. Due to rising simple average Most Favoured Nation (MFN) rates through 2022, alongside a proliferation of other protectionist barriers such as QCOs, both the input and transaction costs have increased. This, in turn, has reduced the volume, variety, and quality of imports, constraining firms’ productivity and export potential, and creating a meaningful structural handicap for industries engaged in exporting thin-margin, scale-sensitive products.

Exchange Rate Policy and Export Growth

India’s managed float is primarily geared towards maintaining price and exchange rate stability rather than promoting exports directly. The real effective exchange rate (REER) of the rupee has tended to appreciate, driven by pressures associated with strong services exports and sustained remittance inflows. As a result, India faces a continual competitiveness challenge, particularly in low-complexity product categories with thin price margins. Note that these exchange rate pressures are structural and long-term, and are not negated by the rupee’s depreciation in 2025-26, which is driven by shocks like the Middle East war and US tariff measures.

Does Booming Services Trade Penalise Merchandise Exports?

India’s breakthrough in the information and communication technology (ICT) services sector has delivered large foreign exchange (FX) inflows and secured a substantial, even double-digit, share of the global market. This naturally raises an important question: Does this success generate Dutch disease-like pressures on exports of physical goods, especially manufactured products? Estimates suggest that, even in the absence of other frictions, the services boom alone would lead to an appreciation of the real exchange rate by a few percentage points, driven by FX inflows and rising prices of non-tradables. When this is layered onto the International Monetary Fund (IMF)-assessed REER gaps, it implies an effective real appreciation that weighs on the competitiveness of non-oil goods exports through 2024. The adverse impact is most pronounced in precisely those sectors where margins are thin, products are labour-intensive, and markets are buyer-driven. This is not to imply the services boom needs to be weakened or constrained, but to have complementary policies to prevent collateral damage. This can be achieved by reducing transaction costs, ensuring access to cheaper inputs, and effectively managing the macroeconomy that avoids sustained or entrenched overvaluation.

The Missing Billions: Model Estimates and Employment Implications

Using a PPML gravity model with standard structural variables such as GDP of origin and destination, distance, and controls including demographic factors, contiguity, language, and colonial ties, augmented by exporter-applied tariffs, bilateral currency terms, and crisis dummies, the preferred estimates indicate that actual goods exports in 2022 are less than the model-predicted levels by approximately US$516 billion. India’s immediate neighbours, China, Pakistan, and Bangladesh, together account for roughly half the gap of this unrealised potential. Additional underperformance is observed with countries like Japan, the Russian Federation, Germany, the United Kingdom, Israel, and France. Conversely, India has outperformed benchmarks in several markets, including the Netherlands, the UAE, Nepal, Togo, Belgium, South Africa, Mozambique, Oman, Vietnam, and Sri Lanka, which offer useful case studies of what has worked better.

Policy Directions

The main takeaway is that India can significantly expand its goods exports without compromising the gains made in the services sector through tariff rationalisation, stricter standards discipline, high-ambition free trade agreements, and a more export-conducive macroeconomic environment. A practical, time-bound policy sequence emerges from these diagnostics:

• Rationalise tariffs and standards: A white paper on trade policy that sets out a clear and time-bound roadmap for aligning tariffs with leading Asian peers should be published. The paper should focus on minimising tariff dispersion, eliminating tariff inversions, and ensuring that QCO is firmly tied to transparent safety and quality objectives. Protections for a few products related to food security and core technology, and the like, must be clearly and transparently explained. The broader architecture of openness must be maintained.
• Sign high-ambition market-access agreements: FTAs with individual countries, as well as trading blocks, should be signed and deepened to establish a predictable, rules-based framework. This would help mitigate the deficiencies and fragmentation of an increasingly inward-looking global trading order. FTAs serve as instruments of structured openness, preserving access to key markets and embedding trade within stable institutional arrangements. These agreements can provide clarity on rules of origin, support mutual recognition of standards, and help anchor efficiency-seeking foreign direct investment (FDI) and integration into GVCs. The logic of this approach also supports considering pathways to participation in mega-regional multilateral frameworks such as the Regional Comprehensive Economic Partnership (RCEP) and the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP). In this context, a major step was taken in January 2026, when India and the EU signed an FTA that had been nearly twenty years in the making.
• Focus on an export-enabling macroeconomic environment and trade facilitation: Steps should be taken to avoid entrenching REER overvaluation while preserving macroeconomic stability. Duty-free and predictable imported-input pipelines should be institutionalised, paying close attention to low-margin sectors (especially Micro, Small, and Medium-sized Enterprises [MSMEs]).
• Execute a neighbourhood and East Asia pivot: Normalisation and corridor building with China, Pakistan, and Bangladesh, where modelled gaps in trade potential are the largest, should be prioritised, while leveraging overperformance platforms (the Netherlands and the UAE) for extending trade in their respective vicinities. More generally, a pivot to East Asia is long overdue.