India's recent rupee depreciation has failed to deliver a strong export rebound because the country's 'missing middle' — mid-technology and intermediate goods — is not responding to currency signals, according to a report released on Friday, 4 September by HSBC Global Investment Research. The firm argues that targeted trade deals and reduced export tariffs are the most credible path to closing this structural gap.

The Missing Middle Problem

The HSBC report identifies a sharp divergence in how different export categories have reacted to the weaker rupee. High-tech exports — including machinery and electronics — have responded positively to the currency's decline. Low-tech goods showed a modest uptick. But mid-tech categories, encompassing textiles, footwear, and plastics, registered only negligible improvement.

This uneven response is structurally significant. Mid-tech and intermediate goods are typically the engine of broad-based export growth in emerging economies, and their absence from India's export recovery leaves the trade balance disproportionately exposed to external shocks.

Tariff Barriers and the Inverted Duty Problem

'India's exports face a larger tariff than its peers, especially so for its mid-tech exports. Further, higher import duties tend to create an inverted duty structure domestically for several intermediate goods, discouraging manufacturing,' the HSBC report stated.

An inverted duty structure — where the tax on raw materials or components exceeds that on finished imports — effectively penalises domestic producers of intermediate goods, making it cheaper to import the final product than to manufacture it locally. The report noted that intermediate goods exports are gradually being squeezed out, even as final goods shipments rise. 'India is exporting more finished products, but often with more imported components — mobile phones are a good example,' it said.

Trade Deals as a Potential Fix

The research firm pointed to a cluster of ongoing and recently concluded trade agreements as a potential lever. If deals including the EU trade agreement, the UK-India Comprehensive Economic Partnership Agreement (CEPA), and others are executed swiftly and extended to additional regions, both import and export tariffs could come down materially, the report said.

This comes amid a broader push by New Delhi to diversify its trade relationships, with negotiations underway across multiple geographies. Faster implementation, the report implies, is as important as the deals themselves.

The J-Curve and Why It Has Not Kicked In

The rupee has weakened sharply over the past 18 months, a move that in theory should improve the trade balance through what economists call the 'J-curve' effect — an initial worsening followed by a gradual improvement as exporters respond to improved price competitiveness. The HSBC report acknowledged this dynamic but noted that exports have not risen enough to narrow the trade gap, attributing the shortfall directly to mid-tech weakness.

India has historically grown faster than its export markets, producing a persistent trade deficit that becomes a source of vulnerability when foreign capital inflows are insufficient to fund it. Raising export competitiveness — through currency, tariffs, or both — is therefore not merely a growth objective but a macroeconomic stability concern.

What Needs to Happen Next

The report's implicit prescription is a two-track approach: accelerate trade deal implementation to reduce external tariff barriers, and rationalise the domestic duty structure to eliminate the inverted duty problem for intermediate goods. Without both, the benefits of a weaker rupee risk remaining concentrated in high-tech segments that account for a relatively narrow share of employment and supply-chain depth.

Whether New Delhi moves decisively on tariff rationalisation — a politically sensitive area given its implications for domestic industry protection — will determine how quickly India's export recovery broadens beyond its current narrow base.