How to shore up India’s poor trade show

The decline comes when India’s external imbalances are worsening, and adds to the headaches for North Block and Mint Street. Officials in charge of maintaining India’s macroeconomic stability in the central bank and the government will have to deal with another stress factor from now on, further complicating the policy choices.

The data shows that exports declined by 16.7 per cent year on year in October. Exports growth had fallen to nearly 5 per cent year-on-year in September.

The exports setback reflects the softening of global demand, as the world stares at an economic downturn, if not recession.

Oil exports, a major category, fell 11 per cent year on year. Non-petroleum exports fell 17 per cent. The decline was broad-based across categories.

September and October tend to be tricky always, as the timing of holidays and festivities that depends on the Hindu lunar calendar tends to add noise to the data on the economy.

But that may not be the sole factor at work this year. Merchandise exports have been falling, in both value and volume, since June – despite the rupee’s depreciation. Falling 30 per cent in the four months between June and October, they’re now at about the same level as before the pandemic.

Among non-oil exports, in a downswing since June, the largest decline is in the categories of textiles, agriculture products and gems and jewellery. Mobile handsets, drugs and pharma are also contracting. These high-skill export categories had been leading the exports buoyancy until June.

The exception in the trend is the exports of services, which rose about 6 per cent between June and October, not nearly enough to narrow the trade deficit which was $27 bn in October. It has been at around this level for the last three months. Imports contracting in the months of September and October have not helped narrow it.

Investment goods imports are performing better than consumer goods imports. Within consumer goods, textiles have fallen much more than electronics.

Overall, the weakening trade performance has implications for macroeconomic stability and the rupee, which has depreciated 9% this year, and would certainly have weakened more had the Reserve Bank of India not been spending dollars hectically from the foreign currency reserves to defend it. The pressure on the rupee is due to the dollar strengthening (the dollar index has gained 11% since January) and the widening external imbalances.

The large trade deficit doesn’t help narrow the current account deficit, which was around 4.5 per cent of GDP for the September quarter, well above the 2 per cent level regarded as sustainable for India.

Mint SnapView has been arguing that the current account deficit reflects the fall in savings in the economy. To correct it, higher interest rates and a weaker rupee would be the right strategy as that would encourage dollar inflows into the economy and exports resurgence (doesn’t mean global demand conditions will cease to be one of the key drivers). But this strategy needs political buy-in, given low interest rates and cheap credit is an ideological and political plank. The RBI will have to get New Delhi on board, something it has not shown an inclination for so far, as the value of the rupee, especially strength, is seen by political parties as central to sense of national pride and aspirations.

But as the central banks in advance economies continue to raise interest rates to fight high inflation, the differentials between returns on dollar investments in those countries and in India will narrow, triggering capital outflows from here, adding to the pressure on the balance of payments and the rupee.

Second, building and sustaining strong exports growth requires policy attention focused on achieving export competitiveness. Merely compensating firms for the high costs in the economy, which erode export competitiveness, such as through the Production Linked Incentives schemes and other fiscal subsidies, will not be enough.

Unless India makes its import tariffs predictable and low, and reverses the policy of the last couple of years of raising customs duties to offer protection to uncompetitive firms, and that too on an ad hoc basis, India will not be able to capture substantive shares in global value chains.

Finally, weak exports mean slower GDP growth — which in turn has implications for jobs creation and livelihoods and incomes growth — as domestic demand will not be able to compensate for the loss of global demand.