Export target set to be missed again

Sluggish global demand and falling commodity prices are set to derail India's export target of $325 billion in 2015-16 and lead to a second year of contraction in exports.

Ravi Kapoor, joint secretary, department of commerce, had on Wednesday said India would miss the target and might end below $300 billion by the end of 2015-16. This admission underscores the challenges the Narendra Modi government faces in boosting export growth amid sluggish global demand and falling commodity prices.

In fact, even matching last year's exports of $310 billion seems difficult.

In large part, the decline is driven by falling commodity prices, oil in particular. What is worrying is that the declines are being observed across major export segments. Even after excluding petroleum and crude oil products, exports of non-petroleum products have declined roughly nine per cent from April to September, first six months of the current financial year, against the year-ago period.

According to a study by CARE, "The impact of the global slowdown on Indian exports can be gauged from the fact that there has been a slowdown in growth of most of these countries." Of the top 10 countries, only the US and Bangladesh have witnessed an increase in growth in gross domestic product (GDP) this year from the previous one. The rest are projected to grow at slower rates, suggesting demand for India's exports would be muted. The ripple effects of sluggish growth in China, being felt across major commodity exports and East Asian economies, would also pull down demand for our exports. Competition from countries such as Bangladesh was also likely to eat into India's export share in certain categories.

The slowdown in China has pulled down commodity prices, hurting India's exports of oil, agriculture, ores and minerals. Exports of engineering goods, textiles and leather products have also declined.

India's engineering exports, roughly 22 per cent of the basket, fell 12.4 per cent from $345 billion last year to $30.2 billion this financial year (April- September).

"Despite exports in July being marginally positive, the fall in the remaining two months (August, September) has been so heavy that the second quarter of the current financial year ended with a decline of 18 per cent, as opposed to a fall of five per cent in the first quarter," said Engineering Export Promotion Council of India Chairman T S Bhasin.

Iron and steel and products have been one of the worst. The segment had declined 23.8 per cent between April and October. This has had a huge impact on engineering exports, as the segment contributes roughly a third of shipments here.

Declines were also observed in value-added products such as aircraft and spacecraft parts among engineering goods. This segment had declined 17 per cent during this period to $2.47 billion. Similar trends were observed in ships and boats, as well as automobile and automobile parts. The two segments declined 34 per cent and two per cent, respectively.

Bhasin said: "The most important reason for the decline has been a sharp drop in prices of key metals and commodity-based items, as much as 50 per cent in some sectors. Further, the slowdown in China has had a spin-off effect in several key economies that are also important markets for India in Europe, Japan and the US."

Textiles, another key export sector, also contracted in the first six months of the financial year. But Atul K Mishra, economist at the Confederation of Indian Textile Industry, said one must differentiate between exports of intermediate products - textiles, fabric and yarn - and of high-value-added items such as home furnishing and clothing. "While intermediate products have done badly, high-value items have done better in comparison. This is because demand for these products come from different countries."

Demand for high-value items usually is from Western Europe and North America. "There are some signs of demand for these items picking up," said Mishra.

CARE estimated export of readymade garments grew 2.3 per cent in April to September against the year-ago period.

Textiles, excluding readymade products, contracted four per cent. Mishra said this was due to a decline in intermediate products. These products were largely exported to China and South East Asian economies. "As the latter are closely linked to the Chinese economy, a slowdown in China is bound to impact their demand for our products such as fabrics, textiles and yarn. Further, China is also promoting its own domestic industry in intermediate products. This is also lowering demand for our exports."

Leather was another segment to see a sharp decline. Exports of leather and leather manufactured products declined 9.8 per cent this year (April-September). "This is largely driven by a decline in finished leather, treated as a raw material by European countries," said M Rafeeque Ahmed, Chairman, Council of Leather Exports.

The segment was hit because of weakening demand in the euro zone and currency fluctuations. "With the euro weakening, the price of our products have gone up, which is being resisted by European Union countries. They are getting more competitive quotes from Portugal and Romania," said Ahmed.

The decline in commodity prices has also hit agricultural exports. Former head of the Commission for Agricultural Costs and Prices, Ashok Gulati, said: "The fall is due to a decline in international prices, by 25-30 per cent, in this period. Commodities from cotton to sugar to basmati have all seen a crash in prices."

Agricultural exports declined from $19.3 billion in 2014 to $15.4 billion in 2015, about 20 per cent. The contraction can be attributed to a decline in kharif crops, which resulted in curbs on rice exports, said Madan Sabnavis, chief economist at CARE. Further, with an 'oil for rice' trade agreement with Iran ending, rice exports would be impacted. Sharper devaluation of currencies of competitive nations such as Brazil, too, disadvantaged India.

While experts said various government initiatives would help, greater thought has to be given to trade agreements. Pacts such as the Trans Pacific Partnership could potentially restrict India's export growth even further.

For example, North America is a big buyer of high-value textile items. But by signing the pact, it would give preferential access to countries that are likely to compete with India.