Given that the recovery in the global economy remains tenuous and growth estimates for the current year have been pared down, India’s May export-import data was not expected to show any meaningful improvement. However, while the headline trade deficit contracted to $10.4 billion, a shade lower than the $11 billion in April, there appears to have been a deterioration in some underlying trends. These could be an aberration, but nevertheless call for attention. Exports continued their weak run in May, the sixth straight monthly fall, contracting 20% y-o-y, a steeper drop than April’s 14% y-o-y. That, in itself, was not entirely unexpected since the impact of falling prices of commodities, on a year-on-year basis, persists. What’s worrying is that even after straining the data for this impact, the numbers are poor. Research by HSBC shows that the role of commodity prices in India’s export slowdown is, in fact, now smaller—for April, 82% of the decline in exports was in commodity-intensive products whereas for May, this has dropped to 72%.
In other words, other factors are now playing a bigger role in their decline—the anaemic demand in overseas markets, for one, and the relatively strong rupee, for another. There is little that can be done about the weak purchasing power in global markets though it is hurting sales of products such as electronics and engineering goods. But some action on the currency may be warranted since India’s exporters have clearly been hamstrung by a relatively strong rupee—the real effective exchange rate (REER) suggests that over the past year, the currency was overvalued by anywhere between 7-13%. There is also a third factor whose importance seems to have been under-estimated. This relates to structural bottlenecks in the home market, reflected in the stalled investments projects as a share of outstanding investments. HSBC believes half the problem lies in these domestic bottlenecks, a shortage of power, for instance, that hits medium and small-scale manufacturers catering to the export market. Which is why the momentum in exports may not pick up for a while, until the power supply situation improves. Indeed, the inertia in investment continues to hurt manufacturing as reflected in the falling non-oil, non-gold imports which shrank by 3.5% in May compared with a rise of 7.1% in April. To be sure, this could be a one-time blip and it is possible the trend will reverse. In that case, if the trade deficit is to be reined in, exports must see a pick-up. In the absence of a meaningful up-tick in demand globally, in the near-term, therefore, the government needs to ensure that exporters aren’t handicapped by a lack of resources, both material and financial.