However, now that the March merchandise trade data has been released, a relook at the various aggregated drivers of export growth is warranted, particularly in the light of the new Foreign Trade Policy 2015-20 aiming to push up India’s (merchandise plus services) exports to $900 billion from $466 billion in FY14 (we think that FY15 exports will just have ticked up to about $471 billion, since we do not know the services exports numbers yet).
Exports in FY15 were down 1.2% in dollar terms in FY15, driven primarily by lower commodity prices, especially oil. Other than a strong growth in engineering goods (read vehicle exports), most other commodities, including chemicals, textiles and gems and jewellery, were weak.
India’s export growth had decelerated from an average 9%-plus in the first quarter of FY15 to an average negative 16% in the last. The proximate reason is the sharp drop in commodity prices, particularly crude, but other causes are also evident. In recent months, there has been a sharp rise in blame on an appreciating rupee in terms of the nominal and real effective exchange rates. In a year characterised by violently moving currencies, complicated by a sharp drop in commodities, how much of the effects can one apportion to each?
First, India’s currency, measured against a (real) basket of important currencies has certainly strengthened vis-à-vis most other emerging markets in 2014, as shown in the accompanying chart (where a move up show strengthening).
However, even adjusting for time lags in which the appreciating currency might have adversely affected exports, the causation is not explicable for a significant period of time. The first obvious place to start is disentangling the effects of currency movements from global trade. Various studies indicate that currency appreciation has a much smaller effect on exports (as shown in the accompanying chart). The reasons are not hard to seek, with export micro-markets differentially affected by the relative movements of currencies of competing peer exporting countries.
There are also asymmetric effects of a currency weakening versus appreciation on exports. Chart 2 suggests that a strengthening currency has relatively more moderate effects than a weakening one. However, the effects on imports look to be stronger.
Even if exports are relatively delinked from currency effects, do imports behave otherwise? Particularly, those components of imports which are inputs into exports.
The next driver is global trade, particularly imports. Chart 3 maps India’s export dollar value (indexed to 100 in January 2013) against indexed trends in import values of select geographies.
A potentially larger impact is of global trade (read imports), measured by the CPB Index of Global Imports, as shown in Chart 3. More immediate indices like various Baltic indices (dry, crude) also provide a feel for evolving shipping conditions.
An important measure of the effects of trade (and growth) slowdown is correlating trade growth with specific geographic regions and commodities. If further confirmation of the more significant impact of growth were needed, the accompanying table provides evidence of export share increasing in geographies with relatively higher growth.
A broad aggregative description has only limited use. More micro level studies of selected exports, as have been done by specialised institutions, will enable the identification and rectification of impediments. Be that as it may, these measures will have an impact only at the margins, so long as the overall growth of India’s established market remain sluggish.
Abhaysingh Chavan and Tanay Dalal provided the charts and calculations
The author is senior vice-president and chief economist, Axis Bank.
Views are personal