India’s merchandise exports contracted in October, providing more evidence of how vulnerable they can be to the global slowdown. In the seven months to October this year, exports were at $261.7 billion compared to $234 billion in the corresponding period of FY22. At an increase of 12%, that might seem reasonably good. But, as Pranjul Bhandari, India chief economist at HSBC, points out, exports now are just 5% higher than in February 2020 when seen in nominal seasonally-adjusted terms. Given that in June they were up nearly 50% over the pre-pandemic levels, it has been a fairly rapid decline. The risk of a recession in some large economies, struggling with raging inflation and low growth, hasn’t receded, and the estimates are gloomy. The growth in world output is forecast to decelerate to 2.7% in 2023 from 3.2% this year, according to the International Monetary Fund. Global trade volumes are projected to grow at only 2.5% next year, slowing from 4.3% this year.
The finance ministry’s concern is understandable as exports have been a key driver of India’s growth in recent years. They constitute a big chunk of the economy—in Q1FY23, for instance, they accounted for about 23% of the gross domestic product (GDP) in real terms. If exports don’t pick up pace in the next few months—real exports are growing by barely 5-6%—the contribution of the exports sector to GDP growth will only be about a fourth of what it was last year. Some of the downside has already been pencilled into the growth estimates, with many believing the economy will grow at sub -7% in FY23. Indeed, how weak global demand is can be seen in the fact that core or non-oil exports have been contracting over the last four months. Volumes of items such as textiles, gems and jewellery, and agri products have been shrinking since June. Essentially, high- technology goods—electronics, engineering goods and pharmaceutical products—continue to perform well whereas exports of medium- and low-technology have been relatively weak.
While the depreciation in the currency over the past year or so should have helped, the fact is the rupee has lost less value against the dollar than many of its peer currencies. While the rupee has fallen by about 9% since January, the Philippines’s peso is down more than 10%, the Chinese offshore renminbi have lost 11.6% while the Bangladeshi taka is weaker by 15.44%. So far this year, the Vietnamese dong is among the few currencies that has depreciated less than the rupee.
However, so far, a weaker rupee seems to have fetched India’s exporters only limited gains. In a buyer’s market, it appears importers are bargaining for every penny. Nonetheless, it is important to keep the rupee competitive and a gradual depreciation would not be out of place, especially since prices of commodities like crude oil are softening. Since the exports sector employs very large numbers, the government should be prepared to support it. The withdrawal of the export levy on steel is welcome and some incentives, even temporary measures, for labour-intensive segments would not be out of place. Higher exports would help narrow the trade gap, which is up sharply at $175 billion. As of now, the current account deficit is tipped to come in at 3.3% of GDP this fiscal, which is manageable. But, at a time when the oil import bill remains elevated, focusing on exports is important.