One of the key highlights this fortnight on the macro front was the annual jamboree of the IMF-World Bank. Discussions focused on the transitions unfolding in the global economy and need for ‘policy upgrades’ to respond to them. While deliberations on China’s growth model, Fed lift off and lower commodity prices have been well documented, an interesting takeaway was a call for ‘policy upgrades’ both at the individual country level and collectively at the international level to address these transitions. As IMF chief Christine Lagarde stated, these ‘policy upgrades’ should include advanced economies giving due consideration to spillover risks, emerging economies addressing debt build-up and a restart of the stalling engine of global trade.
My previous column (FE, October 7, goo.gl/EQiDCr) analysed the impact of the transition in the China growth model moving away from investments and exports to services and consumption, where we concluded that India was relatively less impacted but given that it is a capital dependent economy, there remains no room for complacency. Today, we look at the evolving global trade dynamics given that it is one of the ‘policy upgrades’ that officials are focusing on as most of the growth downgrades have been due to lower external demand.
Interestingly, just prior to the IMF-WB meetings, the World Trade Organization cut its growth estimate for world merchandise trade volume from 3.3% to 2.8% in 2015, which, if realized, would mark the fourth consecutive year in which annual trade growth has fallen below 3%. As stated by WTO, it would also be the fourth year where trade has grown at roughly the same rate as world GDP, rather than twice as fast, as was the case in the 1990s and early 2000s. This then leads to the debate whether the trade slowdown is cyclical or structural.
Taking a quick look at that, with EM exports being in the red for the last 9-10 months, there has been a lot of discussion whether the contraction is all cyclical or if there is a structural element to it as well. Recent studies indicate that apart from a cyclical element of lower global demand impacting trade, there is a structural element—a breakdown in global value chains (GVC), i.e., trade in intermediate goods that serve as inputs for subsequent re-exports. As stated by the IMF, this is reflected in declining elasticity of world trade with respect to GDP which is currently at 0.7 versus 1.5 during 2001-2007 and a high of 2.2 between1986-2000.
While acknowledging that exports have not hitherto been India’s key growth driver, India’s merchandise exports have been in the red for nearly 10 months, with the decline steeper than its Asian counterparts (September exports are down 24%). While part of this is attributed to commodity-linked exports (oil, metal, ores and food), the contraction is broad-based, impacting non-commodity sector such as engineering goods, textiles and gems & jewellery. On a destination basis, while exports to the US and Europe have held up, there has been a deceleration in exports to Asia and the Middle East.
While Indian exports play a smaller role in the global value chain, the weakness in global trade appears to be primarily driven by lower commodity prices and subdued global demand. The trade data suggests that Indian exporters are finding it difficult to gain market share in an environment where the rupee has held up relatively better than its peers in a world with significant global excess capacity. Key to note is that the overall trade deficit picture remains benign as 17% fall in exports so far this fiscal is accompanied with a 14% fall in imports, resulting in a narrowing of the trade deficit.
So, what are the potential ‘policy upgrades’ needed on the export front? Apart from the conventional approaches to improving the ease of doing business in terms of better infrastructure, taxation policy, labour etc, the focus should be on:
n the Make-in-India initiative, especially given India’s advantage in terms of democracy, demography, and demand, whereby the country develops manufacturing capabilities to cater to domestic as well as international demand; however, given the slowdown in the global economy, one should be cognisant of the need to not focus on sectors seeing a build-up of excess capacity,
* addressing the skills gap to help consolidate service exports,
* and, last but not the least, a re-look at the country’s policies on regional trade agreements, especially with the signing of the Trans-Pacific Partnership (TPP). Interestingly, a Peterson study by Fred Bergsten indicates that if China and the rest of APEC join at the second stage of a TPP that continues to exclude India, India would lose $50 billion annually. But if it joins, the gains would be very significant, around $500 billion a year! India faces critical choices, and its decisions would have far reaching consequences on its trade linkages with the world economy.
The author is former chief economist, Citigroup India, now based in the US