The Hindu Business Line : Export deflator?

The latest data on merchandise trade released by the Director-General of Commercial Intelligence and Statistics, for 11 months of 2006-07, reveal a trend that, under the conditions of a growing domestic economy, would have been considered quite routine. Thus, the trade deficit continues to be high as imports, especially of non-oil products, outpace merchandise exports that have over the past three years done creditably well, clocking an average growth of over 25 per cent. But the data now made public show not simply a higher trade deficit but a deceleration in exports. Coming as it does in the context of fears that the economy may just begin to slow, a decline in any sector can become quite ominous. Adjusting for the revised estimates for 2005-06, the DGCIS data for April-February 2007 show cumulative exports to be less than 22 per cent compared to the 30 per cent recorded in the corresponding period of the previous year.

While it is too early to hazard a guess about the impact of inflationary pressures on exports in terms of competitive pricing, there is little doubt that low inflation and healthy world trade over the past three years led to India's strong export performance. That growth was fuelled not simply by the US and Europe but also by emerging economies with the average world growth rate reaching 5.1 per cent last fiscal. While analysts predict that the world economic activity will be robust in the coming months, there are signs of a slowdown in the US and upward pressures on crude oil prices which, if sustained in the event of US-Iran tensions, can upset the growth and, therefore, the global trade applecart. For Indian exporters the accompanying worry is the possibility of the rupee strengthening with rising forex reserves. With interest rates hardening and liquidity under squeeze as the Reserve Bank of India tries to flush out the surplus money stock in the economy, inflation may hit exporters where it hurts most. With competition in such key areas as textiles and IT now on the rise from new emerging economies with lower wage and inflation levels, India's core export competencies may come under threat. Tax incentives to boost exports, even where allowed by the World Trade Organisation (WTO), work best in the absence of inflation.

Inflationary spirals must then be nipped in the bud if exports are not to slow in the medium term. Alongside, however, policymakers must look at using the forex reserves, now at around $195 billion to ramp up export credit lines in markets that have the potential to grow over the long haul. China has used its vast reserves to fund markets for oil and goods in the less developed African countries. India should follow suit.

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