The despondency over the consistent decline in India’s merchandise exports over the last 16 months has diverted attention from an important aspect of its trade performance during the last few years. This involves the much different trend growth pattern of merchandise exports during the first half (2010-2015) of the current decade. Analysing India’s current export stagnation in the background of this growth performance produces different insights on the stagnation.
Last year was one of the worst for Indian exports. Merchandise exports showed an unprecedented year-on-year decline of 17.2% during the year. The point to be noted though is that 2015 was one of worst merchandise export years for the entire Asian region. Regional merchandise exports declined by almost 8% during the year. While volume and value competitiveness imparted by excess capacity and a declining Yuan made Chinese exports decline the least, by around 3%, Japan’s merchandise export growth declined by more than 9%. The rout was pervasive among the rest of the export-oriented economies of Asia, be it the celebrated Asian ‘tigers’ (Hong Kong, Korea, Singapore, Taiwan), or the dynamic Southeast Asian economies (ASEAN), both of whose exports collectively declined by more than 10% during the year.
Statistics can be revealing at times. It is indeed so when one looks at the merchandise export growth rates of the Indian economy during the period 2010-2015—the first 5-6 years of the current decade—which are also the years after the bloodbath witnessed by the world economy in 2008 and 2009. During these years, Indian merchandise exports registered an annual average growth of 9.3%. This was higher than the corresponding export growth recorded for the period by all other major economies and regions of the world, except of course, China, whose merchandise exports grew by 10.4%. The statistically important point to note is India achieving the impressive growth of 9.3%, in spite of the inclusion of the ‘terrible’ year, 2015, in the period! Had its exports not taken such a huge hit during 2015—which, in fact, was only less worse than the fate suffered by major oil exporters like Russia, Saudi Arabia and United Arab Emirates—India’s merchandise export growth for the first half of the decade would not have been very different from that of China’s.
If this is the story with Indian exports during the first half of 2015, then the obvious point to be noted is that Indian exports did well during this period notwithstanding their historical global comparative disadvantages arising from structural constraints at home! India was one of the worst on the ‘doing business’ list during the last five years. While some improvements would have happened in domestic trade facilitation, they were clearly not sizable and decisive in making India’s merchandise exports grow by around 10% at a time, when world exports grew by only 3.8%!
The story of India’s merchandise exports becomes a wee bit clear upon looking at India’s merchandise imports. During the period 2010-2015, India’s imports grew by an annual average of 2.3%. More importantly, import growth was (-)5.0% and (-)0.5% during the years 2013 and 2014, before dipping to a remarkable low of (-)15.3% during 2015. In contrast, Indian exports recorded positive growth of 6.1% and 2.5% during 2013 and 2014, before joining the imports in plunging, from early last year.
How could exports record positive rates of growth in the years in which imports declined? The simple answer is many imports feed into exports with a lag. Positive import growth during the first three years of the decade contributed to similar growth in exports, primarily in refined petroleum products, jewellery, apparels and machinery. Import compression from 2013 onward, necessitated by the enlarging trade and current account deficits and fears of a brewing crisis on the external sector, began cutting the flow of imports that could have fed exports. Exports could hold up for a while with the imports that were in the pipeline. This explains their growing at positive rates during 2013 and 2014 even though import growth was negative in these years. From late 2014, however, export stagnation set in. Though import compressions were steadily relaxed, global demand wasn’t good enough to revive imports for perking up exports.
The financial ability of exporters to import for export is a crucial factor in the story. Trade finance, or bank credit extended to exporters, is the key instrument in this regard. A banking system well-flushed with capital and lending and borrowing at robust pace is important for extending generous trade finance enabling exporters to settle dues over a longer period of time. Indian banks have been ridding generosities rapidly over the last couple of years given the huge non-performing loans they have become saddled with. All categories of borrowers have been affected by the troubled state of Indian banks, including exporters, who have found it increasingly difficult to access generous trade finance. This has affected their abilities to buy imports and covering delayed payments from overseas sales with foreign buyers getting affected by exchange rate fluctuations impinging their abilities to pay on time.
It is important for import financing and imports to revive before merchandise exports can stage recoveries. This is clearly one of the important lessons coming out of the performance of Indian exports during the last few years. Without access to imports, India’s main merchandise export sectors won’t revive. More than cyclical global factors, it is domestic financing that needs to be looked at closely for checking the rut in exports.
The author is senior research fellow and research lead (trade and economic policy) at the Institute of South Asian Studies in the National University of Singapore. Email: firstname.lastname@example.org. Views are personal