As India’s merchandise exports limp back to normalcy, two of its key rivals in global markets have surged ahead with greater vigour, beating the Covid-19 blues. While China has pipped India in scripting a resurgence in exports to the US and the EU (excluding the UK), New Delhi’s largest shipment destinations that account for a third of its overseas despatches, Vietnam outpaced even China in the recovery.
This suggests India’s export contraction may have been accentuated by factors other than just a Covid-induced demand slowdown, mainly in the West. Forget China, in absolute term, even Vietnam has now beaten India in exports to the EU, having already surpassed it in supplies to the US in 2018.
Between January and November 2020, while India’s shipment to the US shrank 13.3% on year to $46.3 billion, China’s dropped by only 5.8% to $393.6 billion despite a trade war and growing criticism of Beijing’s mishandling of the Coronavirus outbreak. Vietnam’s exports to the US, in fact, rose by as much as 20% to $72.7 billion, according to the US government data. India’s exports to all destinations were down by 16% until November last calendar year.
Similarly, India’s exports to the EU (excluding the UK) witnessed a steep 17.2% decline to 30.6 billion euros in the January-November period, showed the official data with the EU. However, China’s shipment to the 27-member block rose by 4.3% to 350 billion euros during this period and Vietnam’s fell only marginally by 0.5% to 31.9 billion euros. A recent free trade agreement between Hanoi and Brussels may further tilt the balance in favour of Vietnam in the coming years.
India’s inherent structural bottlenecks, including high logistics costs, unimpressive trade infrastructure, container shortage and inadequate flow of cheaper credit, seem to have just exacerbated the Covid-induced stress in its export sector. Its exports have risen only for a second time in 10 months in December, that, too, by just 0.1%.
As FE had reported in October, India had emerged as the worst performer among key developing economies in Asia in exports in the aftermath of the Covid-19 outbreak, trailing not just the usual stars China and South Korea but also Vietnam, Indonesia, Malaysia and even Bangladesh.
To be sure, India imposed a much more stringent lockdown (from March 25 until it was eased gradually from June) than any of these nations. A domestic demand compression battered its imports much harder than its exports. Consequently, import-sensitive export segments, too, saw a sharp drop. Also, India was among the last set of nations where the pandemic spread its tentacles, which means it should be among the last to stage a rebound. To that extent, the contraction in its exports is understandable.
However, what signals a deeper fissure in India’s export resurgence story is the loss of momentum since the 6.1% expansion in September, the first since February. Its outbound shipments faltered by 5.1% in October and 8.7% in November before recording the marginal rise last month.
Exporters have complained that a combination of a spike in shipping costs, the rupee appreciation and a huge cut in government benefits has eroded their competitiveness. The allocation under the Merchandise Exports from India Scheme (MEIS) for the first three quarters of this fiscal was reduced to less than 40% of last year’s total.
The rupee was “over-valued” by 21% vis-à-vis a basket of 36 export-sensitive currencies in November, although it was lower than 23% in October, according to the RBI’s real effective exchange rate index.
The government and the central bank have stepped in to boost liquidity for cash-strapped firms. But export credit dropped by 2.3% year-on-year as of November 20, even though overall priority sector lending rose by 8.9%.
The Centre has rolled out a scheme from January 1, 2021, to reimburse various embedded taxes on inputs consumed in exports and replace the MEIS (the latter is considered by some wings of the government to be an inefficient programme that only drains the exchequer). But the extent of benefits under the proposed RoDTEP scheme is yet to be worked out.