Engineering goods in FY22 reached an all-time high of $112.1Bn, significantly surpassing the target set by the Indian government and recording a 46% growth. However, this year’s performance hasn’t been much impressive. Engineering exports growth in July remained positive but underwent the sharpest deceleration in the last four months of the current fiscal year.

Our analysis suggests this fall can be attributed to weak demand due to a slowdown in economic activities from the EU and China and a 15% export duty on steel exports. Moreover, in July 2022 alone, India’s iron and steel exports, which dominate the engineering goods basket, declined by 56.1% on a y-o-y basis. The rise in iron and steel commodity prices may have contributed to its 89% y-o-y growth in value in FY22.

Despite these economic situations, the Indian engineering export sector has tremendous potential to emerge as a global player and expand its market share internationally. Following are some emerging trends and recommendations that industry exporters can consider for their long-term strategies.

1. India as a Steel Export Hub:

India needs to invest heavily in capacity expansion and imitate big steel exporters like Japan and China, who import raw materials to make steel and export it overseas. Since India is rich in iron ore resources, it has an added advantage, allowing it to tap into markets to which China no longer caters. Moreover, post the US sanctions on Russia, leading Indian steel companies can capture the market share in Europe and the Middle East if they enhance their capacity utilization levels. They could also pitch for a more significant footprint in the US, where Russia and China are vital suppliers, opening many doors and helping India become a steel export hub.

2. Improve Value-addition Efforts:

From a consumer perspective, there has been a recent demand shift towards using more convenient and efficient equipment, for instance, kitchen gadgets like food processors. This presents Indian exporters with a huge opportunity to capitalize on the growing emphasis on convenience and rebrand their products to suit the requirements of consumers.

It is high time that India changes its basket composition, turns away from primary goods, and transitions toward complex value-added products. Focusing on emerging trends that will enable exporters to develop a foothold in new markets is a step in the right direction to increase the country’s exports of engineering goods.

3. Sectoral Diversification:

Besides diversifying geographies, India needs to branch out more sector-wise. One such segment that exporters could look into is the manufacturing of textile machines. For this, exporters would require robust government support, including a strong push from relevant schemes and policies. Also, the think tank needs to start investing heavily in R&D capabilities, build science and technology networks, digital innovation hubs, partner with large corporations, etc., to get the ball rolling.

4. Leverage Nearshoring/Onshoring Sentiment:

The US is the top importer of Indian engineering goods, which witnessed a 53% y-o-y growth in FY22, followed by UAE & China, recording a 74% and 11% rise, respectively. US businesses have a growing sentiment of nearshoring/onshoring to ensure customer proximity, product reliability, and bolster resilience. This will likely result in reduced future demand from the US for India’s current products. In addition, over-reliance on the US could cost India dearly, as has been the case with China during lockdowns. So, thinking of innovative ways to tap into newer markets and expand their reach would be an intelligent move for Indian exporters.

With a rich pool of skilled resources and government support, India can begin strategizing on building products that the US manufactures in the long term. This would cause the US to contemplate their ‘make or buy’ decision, where they would have to conduct a cost-benefit analysis to decide if they should manufacture engineering goods locally or import from India. Nevertheless, the time is ripe for India to leverage this growing market sentiment to embark on its innovation journey.

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