How badly will the global downturn affect Indian exports?

The half-yearly estimates for the year 2008-09 do not show disturbing signs. Exports grew by a robust 30.8 % during April-September 2008. But the rate of growth for September itself was a much lower 10.4 %. There are reports that growth is low in October as well. This is plausible since the effects of the global financial crisis have started taking root from September onward.

The current year began on an encouraging note for Indian exports. The depreciating rupee increased the competitiveness of several segments. Indeed, the first few months of the current year saw exports growing rapidly. A growth rate of 35.3 % during April-August 2008 was far higher than the rate of 19.3 % achieved during the same period last year. The high growth raised expectations of exports reaching the target of US$200 billion in 2008-09. However, such a possibility appears remote now.

The outlook for world trade is gloomy. The International Monetary Fund (IMF) expects world trade growth (in volume) to decline to 4.9 % in 2008 from 7.2 % in 2007. The forecast for 2009 is an even lower 4.1 %.

Export-oriented Asian economies linked closely to the US and Europe are struggling. Japan, Korea, Taiwan, Hong Kong and Singapore figure prominently on this list. Almost all these economies have slipped into recession. Growth has begun slowing in China as well. Chinese GDP growth is forecast at 9.7 % in 2008. Other export-oriented economies from the region?Malaysia, Indonesia and Thailand?are also expected to face growth deceleration.

Indian exports, naturally, cannot remain unaffected in a situation where external demand is dwindling globally. Europe and North America currently account for 35% of India?s manufactured exports. Indian exports to the European and North American markets were growing at brisk rates during the early months of the year. Much of this pace is expected to slow down in the coming months. Asia absorbs 53.5 % of India?s exports. Worries about Indian exports would have been much less had the Asian outlook been brighter. But if the financial contagion spreads into Asia then the following year might see India?s export growth dropping sharply.

As a region, within Asia, West Asia, led by the United Arab Emirates (UAE) and Saudi Arabia, has 20.5% share in Indian exports. West Asia is followed by Northeast Asia (14.5%), ASEAN (12.4%) and South Asia (5.3%). In Northeast Asia, China is the main destination for Indian exports. Singapore is the biggest market in ASEAN. Sri Lanka and Bangladesh account for largest Indian exports to South Asia.

Can Asia make up the losses suffered by Indian exports in Western markets? In the coming couple of quarters, the West Asian markets should remain steady. India?s main exports to the region are petroleum products. There might be some compression in market share due to lower prices of oil products. Otherwise, the prospects appear stable. In Northeast Asia, China holds the key. With other major economies from the region in recession, Chinese demand for Indian exports has assumed significance. In ASEAN, the prospects do not appear encouraging with Singapore in recession. The India-ASEAN Free Trade Agreement (FTA) expected to come into force from January 1, 2009 might provide some stimulus to new trade. In South Asia, Sri Lanka and Bangladesh are yet to feel the adverse impacts of the crisis. But these are unlikely to make a major difference to India?s exports.

In the medium term, however, Indian exports have to rely largely on Asian markets. The imbalances in Western markets will take long to correct. It is clear that no single economy, including China, can shepherd the rest of the flock to safety. Asia must collectively respond to the downturn. The initiative must come from India, China, Japan and Korea backed by ASEAN. The key to recovery is big projects. These will generate both internal and external demand. Low-cost exports from India and the region will get a boost. Till that happens, India?s export prospects look rather pessimistic.

The author is a visiting research fellow at the Institute of South Asian Studies in the National University of Singapore. These are his personal views