The rupee may look a lot weaker than it has in some time, but when you look at the real exchange—this also takes into account inflation in competing countries—it has actually appreciated. The relationship between global GDP and trade growth has broken down, and it appears quite irretrievable—prior to 2012, barring 2009, global trade growth has always been higher than that of global GDP. Apart from the slowing Chinese export machine, the import-intensity of China’s exports has also fallen dramatically … all of these, and more, are explanations offered for why India’s exports have contracted for the last 11 months in a row. Each explanation is correct, but they offer only a partial explanation for what is happening.
Certainly, the slowdown in Asian growth has hit India’s exports, but the biggest problem, as a recent Crisil report points out, is that big Indian exports appear to be losing their competitiveness as well—so, even as global trade picks up, these items are not growing. Crisil uses the standard Revealed Comparative Advantage (RCA) method to identify the problem areas—RCA measures the share of Indian exports in a particular sector to India’s overall export share—and it finds a fall in competitiveness of gems and jewelery, organic chemicals, textiles and clothing.
Add to this the problem created by the Trans Pacific Partnership, where a fourth of India’s exports go, and it is clear the government will have to take some strong measures to counter this. In the case of the US, to which half of India’s textile exports are sold, the preferential duty access for Indian goods will go once the treaty is ratified. The reason why India cannot even aspire to be a member of the TPP is that this requires a sharp cut in import duties—India’s average import tariffs are 13.5% versus the US’s 3.4%—as also greater market access, less stringent IPR rules, and so on. Similarly, if the rupee is allowed to slide—to benefit exports—this will cause a spurt in inflation and, more important, will expose India Inc to balance-sheet problems as the value of global debt will rise in rupee terms. If the government does not take stock of the matter and make some strategic moves, India’s exports aren’t going to recover soon—that has important implications for the MSMEs, who export a lot of their production. For the near future, the days of high export growth are certainly over.