India’s weak exports are a sign of trouble

India’s exports continue to suffer amid the looming threat of global economic recession. At $33 billion in August, the country’s exports fell vis-à-vis July and also the same month last year. Weak exports of oil products were one of the culprits. On a month-on-month (m-o-m) basis, exports of petroleum products fell 23% in August. This can be attributed to lower oil prices and imposition of export duty on items such as petrol, diesel, and aviation turbine fuel, as petroleum products contribute nearly 15% to overall exports. The scenario is grim on the non-oil exports front as well. The crucial segment of engineering goods, which has a 25% share in total exports, performed poorly in August, falling 12% m-o-m. Gems and jewellery and textile exports also lagged. All of this point to a subdued global demand environment.

As things stand, a meaningful revival in India’s exports appears far fetched. This is because global growth conditions are expected to worsen further with key central banks continuing to hike interest rates to fight inflation. India’s exports to China have been declining since 2021-end until July 2022, reflecting the impact of lockdowns in China, said Gaura Sen Gupta, India economist at IDFC First Bank. “Exports to Europe are also beginning to weaken as elevated energy costs take a toll on the euro area and UK. Exports to US also decelerated in July 2022,” she said.

China is already slowing down and if the US and Europe go into recession, the slowdown in the world’s three largest trade blocs would have an unfavourable spillover effect, especially on export-focused Asian economies. The good part is that India is a domestic demand-driven economy and not entirely dependent on exports for its growth. However, while it may be better placed than some of its export-reliant Asian peers, it is not completely immune to global macro-economic concerns.

“India is not entirely an export-oriented economy, but micro, small and medium enterprises (MSMEs), which are estimated to contribute around 45% to India’s overall exports, would feel the heat (of a global slowdown). In that scenario, it would hamper India’s domestic growth too,” said Suvodeep Rakshit, senior economist at Kotak Institutional Equities. That would, in turn, impact household consumption, especially discretionary spending. Borrowings by MSMEs could also be impacted and there could be some financial dislocation with respect to MSMEs, he said.

Post the pandemic, small and regional companies are already in a bad condition, battling severe cost pressures. Further loss of business momentum for exporters does not bode well for the employment outlook in some of the labour-intensive industries such as gems and jewellery.

India’s trade deficit in August narrowed to $28.68 billion from the record high of $30 billion in July, aided by lower imports. However, it is still uncomfortably high. This poses a risk to the country’s current account deficit (CAD), which could remain high, despite the recent coolingoff of commodity prices. Economists at Emkay Global Financial Services feel that there is scope for India’s trade deficit to sustain at $20-25 billion for an extended period. In a 5 September report, they said one should closely monitor core imports which, so far, have performed better than core exports, implying resilient domestic demand, while global demand starts to ease faster. “This could pressure Current Account Deficit for FY23, even as services trade has shown steady trends,” said the Emkay report.

Source: The Mint Mumbai Newspaper