India’s exports may now have risen eleven months in a row but the recent loss in momentum is worrying. Exports have decelerated two months in a row, to 4.4% y-o-y in June and 3.9% in July from 8.3% in May. And, when seasonally adjusted month-on-month, they have fallen for the fifth straight month. Economists at Nomura point out export volumes in July (ex-oil) contracted year-on-year. While the appreciating rupee is certainly a factor that needs to be addressed, economists at HSBC argue exchange rates explain less than 20% of weakness in exports while domestic bottlenecks explain half the slowdown and the balance third is explained by global growth. Also, the currency matters more for services than for goods—the rupee has gained 1.4% against the dollar in the last two years whereas the Bangladeshi taka has lost 3.7%, and the Chinese renminbi has depreciated by 4.2%.
To be sure, the rollout of the GST could have disrupted the manufacturing sector both in June and July, given the de-stocking and supply-chain disruptions that took place. However, once the transition to the new system is complete, the benefit of input-tax credit should help manufacturers. In the meanwhile, the other factors responsible for the slowdown in exports need to be looked at. One big pain point that analysts draw attention to is pharmaceuticals, a key driver of exports—the sector de-grew 5.4% in July y-o-y after contracting 2.3% in June. Indian drug firms are grappling with serious regulatory issues in the US, relating to quality control, and need to sort these out quickly. The more serious issue, especially in labour-intensive export categories, relates to high wage costs and rigid labour laws, both of which have made India uncompetitive vis-a-vis peer economies. In this context, given that 60% of Indian exporters are small-scale producers, which tend to be labour-intensive, bringing in new legislation such as a minimum wage will make things worse. Poor infrastructure—the high cost of electricity, for instance—has also handicapped exporters. Again, as economists at HSBC observe, the relative low ranking of India in the ‘ease of doing business’ surveys signals Indian businesses are at a relative disadvantage. Much higher interest costs are another factor, especially for smaller firms that borrow in the informal market.
Although world trade volumes are forecast to grow at 4% in 2017 versus 2.3% in 2016, India’s competitors, and not just China, are doing much better. Indeed, the space opened up with higher wages in China, forcing it to vacate part of labour-intensive exports like garments and leather & footwear, is being taken up by other countries—between 2010-16, for instance, Bangladesh’s total exports grew by 82%, Vietnam’s 145% versus a mere 17% for India. Over the past three years, India has ceded share not just in manufactured goods such as textile yarns, but also in primary exports such as food and raw materials. After rising in the early 2000s, India’s share in world exports has stagnated at rather low levels over the last few years. As such, a $300 billion target for exports now looks difficult—and this would be lower than the $318.6 billion achieved in 2013-14 and the $316.5 billion in 2014-15.