Rupee to the rescue

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: and financial sector stronger than those of the US, EU growth is set to remain above US growth for the next year or so.

India is well positioned to benefit from these structural shifts. The share of India’s exports going to the EU, US and Japan now represent about one-third of total exports from about one half only five years ago. At the same time, the share of Indian exports going to the EU remains above 20%. In addition, India’s exports are becoming more sophisticated, and capital goods exports are increasing: the share of pharmaceuticals, chemicals, cars and trucks or electronics is increasing while the share of consumer goods such as textile or jewelry is falling. In the three months to February 2008, average export growth in India was 24% against 19% in China which may well reflect China’s greater exposure to the US and to consumer goods markets.

But an emerging market-driven global growth also has consequences for global food and energy prices. According to the IMF, emerging markets account for more than 90% of the increase in consumption of oil products and metals and 80% of the increase in consumption of grains since 2002. Global growth driven by emerging markets could see more upside to raw material and energy prices, even from current levels.

And while India exports many raw materials for instance, iron ore, rice, or jute, on balance it is still a net importer of commodities and raw materials. In FY07, for instance, net imports of commodities represented more than 7 percentage points of GDP. This means global commodities prices have a significant impact on Indian domestic demand. When food and energy prices rise, Indian households have less income to spend on discretionary items.

India’s domestic demand is also likely to be affected by a higher cost of credit. Credit growth slowed down in India during FY08, and after the January 2008 policy review, a number of commercial banks cut their lending rates. But for the past nine months, global markets have been through a re-pricing of risk. For borrowers across the world, the cost of credit on international markets has gone up. Against this backdrop, Indian banks could find it difficult to expand credit while maintaining low lending rates.