India’s Export Challenge: What Holds Us Back and How to Break Through

India is one of the world’s largest economies, yet its share of global exports has hovered around just 2%. The Foreign Trade Policy (FTP) 2015-20 set an ambitious goal of doubling India’s export potential to $900 billion and pushing that global share to 3.5%. Why has this been so hard to achieve? The answer lies in a mix of forces: some beyond India’s control and many rooted in problems at home.

External Roadblocks: What the World Throws at Indian Exporters

Not all the obstacles are of India’s making. Several global forces work against Indian exporters, often in ways that are difficult to counter through domestic policy alone.

Slowing Global Demand

When the world economy slows down, buying power contracts everywhere. IMF projections have repeatedly noted significant contractions in global growth. Fewer orders from abroad directly translates into lower export volumes for Indian businesses, no matter how competitive their products are.

Non-Tariff Barriers from Importing Nations

Countries do not always use tariffs to restrict imports. Instead, they impose strict quality, safety, and environmental standards that can effectively block goods from entering their markets. These are called non-tariff barriers (NTBs). A well-known example is the European Union’s phytosanitary restrictions (rules related to plant health and pest control) on Indian mangoes. Even though Indian mangoes are globally popular, EU safety standards have at times blocked their entry entirely.

Trade Tensions and Protectionism

The escalating trade disputes between major economies, particularly the USA and China, have created a climate of uncertainty in global markets. When the two largest trading nations impose retaliatory tariffs on each other, supply chains get disrupted and third countries like India face unpredictable demand shifts.

Making matters worse, the United States withdrew India’s Generalised System of Preferences (GSP) status. Under GSP (a programme where developed countries grant lower or zero import duties to developing nations), many Indian goods entered the US at preferential rates. Losing this benefit made Indian exports more expensive in what is one of India’s largest export destinations, directly hitting competitiveness.

Trade Agreements That Work Against India

India has signed several Free Trade Agreements (FTAs) and Preferential Trade Agreements (PTAs), but many of them have ended up benefiting the partner nations more than India. The India-ASEAN FTA is a telling case. It hurt Indian exports of oil palm and textiles because of fierce competition from Indonesia (in palm oil) and Vietnam (in textiles), both of which have lower production costs. Most of India’s trade agreements also suffer from limited product coverage, meaning they open markets only for a narrow range of goods.

India’s cautious approach to joining major trade blocs also carries a cost. The decision not to join RCEP (Regional Comprehensive Economic Partnership, a mega trade agreement covering 15 Asia-Pacific nations) reflected genuine concerns about cheap imports flooding the domestic market, especially from China. But staying out also means Indian exporters miss the opportunity to plug into regional supply chains, making it harder to participate in global value chains (the process where different stages of production happen across multiple countries).

Geopolitical Uncertainty and Neighbourhood Competition

Events like Brexit (the UK’s exit from the EU), macroeconomic stress in various economies, and shifting alliances keep the global trading environment volatile. On top of this, India faces growing competition from neighbouring countries that offer cheaper labour and more favourable export policies. Countries like Vietnam and Bangladesh have become serious rivals in sectors like textiles, pulling away orders that might otherwise have come to India.

Internal Weaknesses: Problems India Must Fix at Home

The external environment is tough, but many of India’s biggest export barriers are self-inflicted. These are structural weaknesses in the domestic economy that raise costs, reduce competitiveness, and prevent Indian businesses from scaling up.

A Dangerously Narrow Export Basket

India’s exports are heavily concentrated in a small number of product categories. The top 20 export categories alone account for 78% of total exports. This means that when global demand dips for even a few of these categories, the overall export numbers take a heavy hit. A more diversified basket would spread the risk and capture opportunities across a wider range of markets.

Exporting Raw Materials Instead of Finished Goods

India continues to ship out raw materials and semi-processed goods when it could be exporting far more valuable finished products. A striking example: India is a major exporter of cotton yarn but imports technical textiles (high-performance fabrics used in industries, medicine, and infrastructure). This pattern means India captures only a small slice of the value chain, leaving the higher profits to countries that process the raw materials into finished goods.

Poor Logistics Infrastructure

Getting goods from a factory in India to a foreign buyer costs more and takes longer than it should. In the World Bank’s Logistics Performance Index (LPI) 2018, India ranked 44th, behind China (26th) and Vietnam (39th). Inadequate warehousing, congested ports, slow customs procedures, and limited multimodal transport links all add up, pushing transport costs higher and making Indian goods less price-competitive.

The Inverted Duty Problem

One of India’s most self-defeating policy mistakes is the inverted duty structure. This occurs when import duties on raw materials and intermediate goods are higher than duties on finished goods. The result is perverse: it becomes cheaper to import a finished product from abroad than to manufacture it in India using imported raw materials. Domestic manufacturers face inflated input costs, which undermines their ability to compete both at home and in export markets.

Pending Land and Labour Reforms

Two of the most critical reform areas remain unfinished. Land acquisition continues to be slow and contentious, discouraging large-scale investment in manufacturing. Meanwhile, India’s labour laws are among the most rigid in the world, making it costly and legally complex for firms to hire beyond certain workforce thresholds. This keeps Indian manufacturing trapped in a structure dominated by small-scale units that lack the size and efficiency needed to compete with large factories in China, Vietnam, or Bangladesh.

Low Value Addition in Agricultural Exports

India is a major agricultural producer, but a large share of agricultural exports leaves the country as raw or minimally processed commodities. The lack of a robust food processing industry means India earns far less per unit of agricultural export than it could. For example, exporting processed fruit juices or packaged spices generates several times more revenue than exporting raw fruit or whole spices.

Tightly Regulated Business Environment

India’s regulatory environment continues to burden businesses with compliance costs and delays. In the World Bank’s Doing Business rankings, India ranked 77th, compared to China at 46th and Vietnam at 69th. Red tape, complex approval processes, and unpredictable regulatory changes discourage firms from expanding their operations to the scale needed for global competitiveness.

Regional Concentration of Manufacturing

India’s export capacity is not spread evenly across the country. As the Economic Survey has highlighted, a few states contribute to the bulk of manufacturing output and exports, while vast regions have minimal industrial presence. This regional disparity means that the country is not using its full geographic and demographic potential to drive export growth.

The Foreign Trade Policy 2015-20: Streamlining the Export Framework

The FTP 2015-20 was designed to simplify, incentivise, and modernise India’s export ecosystem. Its key provisions addressed several of the barriers discussed above:

• Consolidated incentive schemes — Two new programmes replaced a confusing patchwork of older export schemes. MEIS (Merchandise Exports from India Scheme) covered goods exports, while SEIS (Services Exports from India Scheme) covered services. Both offered duty credit scrips (certificates that can be used to pay import duties) as incentives, with unified eligibility conditions that were far simpler than the old system.

• Branding campaigns for traditional strengths — The policy planned targeted marketing and branding efforts for sectors where India already has a strong global reputation, such as textiles, gems and jewellery, and spices, to boost their international visibility.

• Digital transformation of trade processes — Online filing of documents, digital inter-ministerial consultations, and simplification of approval processes were central to the policy. This shift toward e-governance aimed to reduce the time and cost involved in export procedures.

• E-commerce export incentives — Special incentives were created for e-commerce companies exporting products from sectors that generate significant employment. This recognised the growing role of digital platforms in connecting small Indian producers directly with global buyers.

• Targeted sectoral push — Within manufacturing, the policy identified priority sectors like engineering products, electronic goods, and textiles for strategic promotion. Within services, incentives were planned for tourism, hospitality, and education, potentially through project exports (large-scale service delivery contracts executed abroad by Indian companies).

The Way Forward: Measures to Transform India’s Export Performance

Fixing India’s export problem requires action on multiple fronts simultaneously. Here are the strategic interventions that can make a real difference:

• Diversify the export basket — India’s heavy reliance on a few product categories is a vulnerability. The government must actively promote new product lines and push manufacturers to move up the value chain, turning the current overdependence on agricultural commodities into an opportunity to build new export categories.

• Bet on sunrise industries — Sectors like food processing and footwear manufacturing offer the fastest returns because India already has the raw material base and the labour force. Initiatives like Sampada (now PMKSY, Pradhan Mantri Kisan Sampada Yojana, a scheme to develop the food processing infrastructure) can accelerate this shift.

• Adopt international quality standards — Many Indian goods get blocked at foreign borders not because of tariffs but because they fail to meet the importing country’s quality requirements. Building robust quality control systems aligned with international standards is essential to overcome non-tariff barriers.

• Overhaul logistics infrastructure — Programmes like Sagarmala (port-led development connecting coastal areas to hinterland through road, rail, and waterway links), Bharatmala (a national highway development programme), and the development of inland waterways and industrial corridors can dramatically reduce the cost and time of moving goods from factory to port.

• Improve ease of doing business — Cutting red tape, raising FDI limits, streamlining environmental clearances, and simplifying labour regulations would make manufacturing in India far less cumbersome. The goal is to make it as easy to set up and run a factory in India as it is in competing nations.

• Scale up services exports — India’s strength in IT and professional services is well established, but sectors like tourism, hospitality, education, and healthcare have massive untapped export potential. Services exports can be ramped up faster than manufacturing exports because they do not depend on physical supply chains and logistics, and they tend to generate higher returns.

• Revamp the SEZ framework — Special Economic Zones (designated areas with special tax and regulatory benefits to encourage exports) have underperformed their potential. Reviewing and updating the SEZ policy to ensure better utilisation of the land and tax incentives already allocated would unlock significant export capacity.

• Reform labour laws to enable scale — India’s current labour regulations effectively penalise firms for growing beyond certain sizes. Reforming these laws would allow businesses to scale up, invest in technology, and achieve the economies of scale (cost advantages that come from producing in large volumes) needed to compete with global manufacturing giants.