It’s a long haul for India’s exports

In 20 out of the last 21 months, India’s merchandise exports posted negative growth. Services exports, which were earlier doing well have now started to decline — it fell 4.56 per cent (year on year) in July.

With a decline of just 0.3 per cent in August, Indian officials claim that the export decline has bottomed out and hence it should soon pick up. However, that doesn’t seem a possibility because of the complex interplay of global as well as internal factors that will continue to constrain India’s exports, going forward.

The slowdown in regions such as China, Japan and EU, along with the great commodity crash, will impede the revival of international trade any time soon. That means there will be lower demand for imported goods and services in most parts of the world.

Global trade liberalisation is progressing slow as trade policy now has to deal with contentious non-tariff issues such as labour and environment, tighter WTO-plus rules on protection of intellectual property rights, public procurement and investment.

The growing sentiment against globalisation and trade in general rules out any serious change on the ground in near term. If that was not enough, Brexit is the newest worry as the EU accounts for nearly a third of the global trade even though its share in global GDP is 25 per cent.

To make matters worse, trade elasticity (that measures change in world trade as a result of change in global GDP) has gone down from 2 (1980-2011) to 1 (2012-15/16). And it’s likely to remain lower for quite some time. It is falling both in China and the US — that’s roughly a third of the world economy, pushing down the overall global trade elasticity.

For instance, the share of imported components in China’s manufacturing exports has fallen from a peak of 60 per cent in mid-1990s to 35 per cent in 2014 because of its policy of import substitution. This change implies lower demand for outside exporters. Similarly, increased production of US shale gas has reduced the demand for imported crude oil.

Thus, global trade, which on an average grew at double the rate of global GDP: 5 per cent versus 2.8 per cent or so during 1980-2011, is now growing at either the same or slower rate as global GDP i.e. sub-3 per cent. According to WTO, world trade is likely to grow at 1.7 per cent in compared to world GDP at 3 per cent this year.

The share of services (which are mostly produced and consumed locally rather than traded) in global GDP is increasing sharply but the increase in services GDP is not adding much to the global trade. Raghuram Rajan aptly says, ‘as countries become richer, non-traded services constitute a greater share of output causing GDP to grow faster than trade.’ Thus, a significant portion of global GDP growth is simply bypassing global trade.

Continued global growth slowdown, increasing share of services in GDP and halving of global trade elasticity from 2 to 1 means lower demand for imported products and services that is bound to adversely affect exports of countries such as India even if India’s global trade share is not significant.

Slowing China will impact India’s exports directly — by limiting exports to China and giving tough competition to India’s exports in third country markets as India competes with China in several products starting from apparel and footwear to steel and chemicals. Indirectly, China, by limiting the growth of commodity exporting nations as well as Asean, Japan and Korea, will limit the overall demand for Indian exports. OPEC, along with Brazil and Russia together, accounts for roughly one-fourth of India’s merchandised exports.

Moreover, India’s dream of replacing China as the exporter of low cost manufactured goods as envisaged under PM Modi’s Make in India initiative is going to be seriously challenged by ever-growing competition from LDCs which are likely to have labour cost advantage over India.

India will continue to be under pressure to keep hiking minimum wages despite having lower labour productivity compared to countries such as Bangladesh and Vietnam in key manufacturing industries.

Further, the EU accounted for 17 per cent ($45 billion) of India’s merchandise exports in FY 2016 and 20 per cent of that shipped to UK. Similarly, UK accounted for half of $24 billion IT exports to the EU. These exports are likely to hit by Brexit and its after-effects.

India has a narrow export basket, both in goods and services. The top 20 product categories account for 80 per cent of India’s total goods exports. The export of services is even more skewed than goods. Services sector accounts for roughly 60 per cent of its GDP (and global trade in traded services is growing faster than trade in goods), yet India is not able to benefit much as it has a narrow services export basket with information technology being its main export.

That’s not the only problem though. Over 62 per cent of India’s IT export goes to the US alone, and one vertical, BFSI accounts for 40 per cent of total IT export. Thus, we’re relying too much on one sub-sector and one market that will complicate matters with Donald Trump’s open defiance of commitment to global trade rules setting the tone of political discourse in the US.

Despite its diverse geography and rich cultural heritage, India has not been able to tap its tourism potential primarily because of infrastructural bottlenecks, lack of ethical business practice and women safety issues. Most of India’s exports are either commodities or, have ‘commodity-like’ nature. For instance, contract export of labour intensive items such as apparel or foot wear, have no pricing power and hence operate on thinner margins.

Contrary to popular belief, gimmicks such as keeping rupee undervalued won’t help India’s exports. Rupee depreciation usually leads to demand for steeper discounts from buyers in a sluggish global demand scenario.

Thus, we end up supplying more goods for the same amount of dollars. It’s important to realise that faster global GDP growth rather than discounts lifts India’s exports as India’s export basket is now more income elastic than price elastic.

Though, Modi government is trying to fix trade infrastructural bottlenecks, yet lots remains to be done. Obsessed with revenue collection targets, India’s finance ministry has not shown any urgency in addressing the problem of inverted duties that continues (and may be, will continue) to constrain India’s exports by discouraging value addition within the country.

Badly conceived and poorly negotiated trade pacts are not helping India’s exports either and for India’s bad luck they are too difficult to fix once they are concluded.

The writer is a corporate economic advisor based in Mumbai

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