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Global crisis may not rattle India

Ritesh Kumar Singh | Updated on November 15, 2017

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The Indian media is full of stories about imminent doom and gloom caused by a worsening Euro Zone debt crisis and continuing economic slowdown in the US. Every day, one hears about a lower GDP growth for India, though most forecasts give it a growth rate of 7 per cent or so.

Is India really doomed as predicted by a growing number of analysts? Is India as dependent upon Europe and the US for its exports as it was, say, ten years back?

An economy is exposed to foreign markets through trade. It would be interesting to see how India's dependence on Europe and the US for its export has changed over the years. Besides, it would help to see the composition of India's GDP and its bearing on economic management.

The combined per cent share of Europe and the US in India's merchandise export has declined from 49 per cent in 2000-01 to 31 per cent in 2010-11.

Thus, in 2010-11, 69 per cent of India's exports of goods went to destinations other than Europe and the US.

For Indian merchandise exports, a largely unexplored Africa is roughly as important as the US and accounts for 8.3 per cent compared with the US' 9.8 per cent.

Areas of opportunity

Latin America and West Asia are the fastest growing export markets for India. China, including Hong Kong, accounts for 12 per cent of India's export and is the largest export market for engineering goods. The BRICS region, as a whole, now accounts for one-sixth of India's merchandise exports.

Among Asian Tigers, Taiwan and South Korea are key export markets to fall back on in times of crisis.

In Europe, a non-EU fast growing country, Turkey, has become an important export destination for India and witnessed an export growth rate of 79.1 per cent in 2010-11.

The acceptance of Russia into the WTO fold will further open up this high-potential market for Indian businesses.

Among key export items with more than 2 per cent share in India's overall exports, only a few items such as organic chemicals and pharmaceuticals, readymade garments, iron & steel, machinery & mechanical appliances and electrical machinery & equipment have high (more than 30 per cent share in India's export of an item) exposure to Europe and the US, taken together.

Again, only two product categories — readymade garments and electrical machinery & equipment — have very high exposure to Europe (as shown in table 2).

Given the slow progress of WTO talks, India can use bilateral routes under PTAs/FTAs to secure improved market access for heavily protected textiles and clothing items.

Services

India's export to GDP ratio is about 25 per cent (16 per cent in goods and 9 per cent in services). When it comes to export of services, IT & ITES is the most important category, accounting for approximately 40 per cent of the export of all services and with high exposure to Europe and the US. But, luckily, it will benefit from the decline in rupee.

Besides, the crisis in developed countries presents an opportunity to explore inward (domestic market) and high-growth emerging economies for supplying IT services. The BRICS region, with a combined population of 3 billion and GDP of $4.6 trillion, is a huge market to tap.

So why not take this crisis as an opportunity?

The composition of India's GDP is a source of resilience. Private final consumption expenditure accounts for roughly 60 per cent of India's GDP compared with China's 35 per cent or so. Thus, India's dependence on the external sector is still not very high though it has increased over the years. India is primarily a consumption story and with rising income and expanding middle-class it will remain so.

Increasing income of rural population will further generate demand for industrial products and keep the economic wheel moving.

Hurdles to cross

But even though India has reduced its dependence on Europe and the US by diversifying towards non-traditional markets in emerging economies, challenges to its economic performance remain.

External challenges: A worsening sovereign debt crisis in the Euro Zone and growing risk aversion on the part of FIIs may keep net forex inflows low for a far longer period. With the RBI's limited manoeuvrability in the forex market, rupee will remain under pressure. This may affect the cost-competitiveness of import-dependent manufacturing industries already facing a high cost of borrowing, such as copper smelters or petroleum refineries.

The other challenge is the consequences of fiscal mismanagement and sustainability of easy money policy in the US. Yet another concern is whether China will be able to maintain its growth momentum in the light of its high dependence on the external sector, low domestic consumption and high investment rates; and growing resistance in the US against Chinese trade surplus when China is expected to play the role of global growth driver?

Internal challenges: India's lacklustre performance on the policy front — be it land acquisition, speedy environmental clearance, allowing FDI in specific sectors or checking fiscal deficit and inflation or tackling corruption — is making investors, domestic and foreign, nervous.

The question is: can India deliver?

Published on January 16, 2012

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