India Ratings and Research (Ind-Ra) expects Indian exports to show a gradual improvement over the next two to three years, driven by the combination of a pick-up in global demand and global players seeking to diversify supply chains while reducing reliance on China. Certain segments of pharmaceuticals, textiles, auto ancillary and chemicals are already benefitting from this trend, giving companies the confidence to embark on capacity expansions despite the risk of a possible slowdown in domestic demand. Given the predominant role played by China in global supply chains with its cost competitiveness and economies of scale, it however would remain a major supply hub for the foreseeable future while other Asian countries such as Vietnam, Taiwan, Indonesia, Bangladesh and India will be explored over a period of time. Policy measures facilitating large-scale manufacturing operations and encouraging them to move up the value chain would be required for Indian companies to benefit from this shift.

Pharmaceutical sector: Indian pharmaceuticals’ high dependence on China (around 70% of raw material import) is reflected through the ongoing raw materials (active pharmaceutical ingredients (APIs)/intermediates/key starting materials) supply disruptions during COVID-19 pandemic. This has been a cause of concern for global pharma companies including India’s. In this context, multi-national companies (MNCs) have started looking for an alternative to ensure smooth supplies. Ind-Ra believes India is a natural choice for them for a reliable, quality and stable supply of APIs as Indian companies have the largest number of USFDA approved API plants, strong chemistry skills and around 50% market share in drug master filings with USFDA. There has been increased enquiries from MNCs to Indian players as well. India is the third-largest pharmaceutical exporter and has gained some traction last year. API exports, which constitute higher volumes in the whole export bucket, increased by 14% yoy whereas the export of formulations improved 19.4% yoy in FY21. Indian pharmaceutical export is to the tune of USD24.4 billion while domestic consumption is around USD21 billion. Overall, India’s pharmaceutical exports increased 18.7% yoy in FY21; Ind-Ra’s coverage companies generate around 90% of their exports sales from formulations and rest are from APIs.

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Furthermore, the increased exports were followed by increased foreign direct investments. The agency expects pharma companies to incur maintenance capex till FY23 (but will incur elevated capex for API companies due to higher demand) as they are recalibrating their overall strategy while keeping their R&D expenses minimal due to challenging market conditions in the US. Subsequently, order enquiries and strategic tie-ups such as contract manufacturing have seen an upturn in the sector. At the same time, the government of India has introduced production-linked incentive scheme, with a total quantum of incentives of INR150 billion for the sector, to decrease India’s own dependence on China. While Indian API exports will rise in the near term, China will continue to be the market leader due to its cost competitiveness and economies of scale. 

Textiles: China has recalibrated its home textile strategy recently with more focus on domestic front along with increased cost, which is essentially driving global textile companies away from it. The share of India’s home textiles exports to the US market has increased for terry towels and bedsheets to 34% and 39.25% in 2020, respectively (2019: 31.91% and 36.74%), whereas for China it has fallen to 17.16% and 18.53% (2019: 18.69% and 24.86%). Overall, the home textile share in global market has increased. but India could not grab the market shares in apparel exports and lost the ground to other ASEAN nations. The agency opines that India may emerge as a preferred choice for home textiles owing to adequate raw material supply chain compared to China, but its apparel share in global exports will be significantly low compared to other ASEAN countries in terms of low-cost benefit and higher affinity to Chinese players enjoyed by the latter. Indian manufacturers to meet the pent-up demand in the short-run have increased either their capacity utilisation or outsourcing. Sustained growth in the order book may lead to additional dedicated export capex in the textile sector. 

Concurrently, US and various European countries have shown significant preference for the Environmental, Social, and (Corporate) Governance (ESG) compliance while sourcing their exports. Indian big garment exporters are fast progressing on meeting customer ESG expectations, whereas the exporters dealing in dyes and pigments will take longer to comply with the ESG norms due to the high associated cost. On the whole, Indian exporters have witnessed increased number of enquiries and inflated order books. A substantial amount of investment is needed in the man-made downstream operations to increase market share in global apparel trade. However, Indian textile players, which are already into man-made textiles, can draw more benefits than they are currently drawing, if the government can provide some financial aid and also if they can sign some trade agreements with large importers such as the US, the UK and European Union. 

Auto Ancillaries: Ind-Ra expects the auto ancillary sector to grow on account of increased domestic demand and global de-risking from China over the medium to long term. Indian exports either remained stable or slightly improved in 2019, while China had seen a contraction in its exports on account of certain trade restrictions. In 2020, while auto ancillary exports from India declined yoy, on account of the global slowdown in the auto industry, the country managed to sustain or marginally improve its import share with some of the key geographies. Meanwhile, India has seen an increase in the number of International purchasing offices, which are dedicated sourcing offices for global manufacturers. These India-based offices have witnessed increased order inquiries. The agency opines that while China shall remain the biggest global exporter of auto ancillary goods at least over the medium term, India could see traction as a safe alternative source to the global automotive companies. 

Domestic demand is expected to see an improvement in FY22 on yoy basis, although will be interrupted in 1QFY22 on account of the second covid wave. Domestic demand growth would be backed by the increasing preference for personal vehicles among the masses, due to increased perceived risk of infections from the public transport; the thrust on infrastructure and construction spending, which would aid the demand for commercial vehicles as well as the likely third consecutive year of healthy monsoons supporting rural demand.. There has been an increased focus on localisation by Indian automakers since 2018 to decrease their dependence on China. Still, almost a third of the domestic auto component industry turnover is derived from imports. The industry continues to rely on imports, especially for those parts which require more expertise to localise, such as electronic components. 

Subsequently, while the details are awaited, the agency believes the auto component sector could benefit from the production-linked incentive scheme of INR570 billion, which should aid cost competitiveness. The agency further believes while other Southeast Asian countries such as Vietnam, Indonesia and Thailand pose a challenge to Indian manufacturers, India can benefit from this current trend of de-risking, if manufacturers improve their focus on R&D investments and cost competitiveness.

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