By Pranjul Bhandari and Aayushi Chaudhary
Whether India’s exports are holding up, is an important question for several reasons. One, exports have become a ‘new’ and important driver of India’s growth. Will that continue? Two, India’s economic growth momentum seems to be stubbornly strong. Are exports playing an important role? The contribution of the exports sector to India’s GDP growth has risen in recent years. By March 2022, exports were 21% higher than pre-pandemic levels while private consumption was just 8% higher. The rise in exports also explain the entire improvement in India’s current account balance between FY19 and FY22.
Which sectors led to this dramatic rise in exports? To answer this, we need to study export volumes, product by product. But we do not get an official disaggregated series for ‘real’ goods and services exports. We only get ‘nominal’ data, which may not be the appropriate one to use given a lot of the change is based on price movements and not export volumes.
So we created the ‘real’ series ourselves, using nominal exports, relevant price indices and exchange rates. Our calculations are across sectors (such as textiles, software services, etc), and we aggregate up to get the overall ‘real’ (goods and services individually) series. We divide India’s export basket into four sub-components—high, medium and low technology goods exports, and services exports, respectively.
We find that real high-technology goods exports have grown the fastest over the last few years, alongside an impressive rise in real services exports, particularly IT exports. High-tech goods include electronics, engineering goods, pharmaceutical products, etc. Medium and low-tech exports have been much weaker, currently just about at pre-pandemic levels.
Real medium-tech exports have remained weak for much of the pandemic period, but have seen a sharp rise in gems and jewellery in recent months. Over and above gems and jewellery, this category includes chemicals (excluding pharmaceutical products), refined petroleum, etc.
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After rising in 2021, real low-tech exports have begun to inch lower since early 2022. This category includes food products, textiles, leather products, etc.
What are the recent trends in export growth? Recent data shows that overall real goods export growth is indeed softening. After rising by an average 8.7% y-o-y (in the April-July period of 2019-2021), it has fallen to 4.9% (in the April-July period of 2022).A closer look shows that while all categories have weakened, high-tech exports continue to grow the fastest, followed by medium tech goods, and finally low-tech goods.
There’s both good and bad news from our analysis so far. The good news is that India was able to ramp up production in those goods and services which were most in demand during the pandemic period, namely IT services, mobile handsets, and pharmaceutical products. In fact, we have written about how India is gaining global market share in high technology exports since 2017. Some of these new trade opportunities could outlast the pandemic.
The not-so-good news is that if the softening in export growth carries on for the rest of the year, the contribution of the exports sector to GDP growth will only be a quarter of what it was last year. In simpler terms, a drag on India’s GDP growth, arising from recently softening exports is imminent. We forecast GDP to grow by 6.8% y-o-y in FY23, lower than consensus expectations of 7.2%. Also, while it is good to see high-tech exports doing relatively well, the weak low-tech exports are the real job creators. India needs to work hard on textiles, leather and food exports.
And there are some policy implications too. A competitive rupee is one strategy to nurture exports growth during uncertain times. The dollar index has strengthened c10% since the start of the year, while the rupee has only weakened c6%. The RBI has done substantial intervention in the FX market to keep the rupee relatively stable in the face of a BoP deficit. Some gradual depreciation from here, we believe, could help nurture India’s exports and its economic growth.
With Priya Mehrishi, associate, HSBC Securities and Capital Markets (India) Private Limited
Edited excerpts from HSBC Global Research’s India Economics Comment, dated August 30