Export to fall short of target

Together with high imports, it will widen trade deficit for this financial year to $155-160 bn.

While the country’s merchandise exports had a healthy run in the first half of the current fiscal, the picture in the first two months of second half turned just the opposite. In fact, the year-on-year growth rate in November slipped to a single digit as India’s largest trading partner — European Union (EU) — continues to struggle to put its house in order.

Forget about annual growth, exports in absolute terms have been falling since July month-on-month. If the trend continues, it is most unlikely that the outbound shipments would be able to reach the government’s target of $300 billion by March 31.

Exports reached $26.7 billion in July, $24.8 billion in August and $23.6 billion in September, followed by $22.4 billion in October and $22.32 billion in November.

This was mainly because of a severe crisis in the Euro zone. The 27-member EU account for around 17 per cent of the country’s exports. Thus, it is India’s largest trading partner as a bloc with bilateral trade that reached $91.34 billion in 2010-2011 from $74.45 billion in 2009-2010.

Indian Institute of Foreign Trade (IIFT) notes that the country will this year be able to achieve its $280-billion exports. “Looking at the crisis in the Euro zone, the target of $300 billion seems difficult. The new markets are also not able to offset the losses arising out of the demand slowdown in EU,” says IIFT director K T Chacko. “At the same time, it is because of these new markets we are able to sustain the growth rate in exports. Else, it would have been below $280 billion.”

Chacko also emphasises that the government is also not in a position now to reduce imports in order to arrest the increasing trade deficit, despite the rupee depreciation against the dollar. For, around 80 per cent of India’s imports are predetermined.

The not-so-decelerating imports and subdued exports has already pushed India’s trade deficit to $(-) 116.83 billion during April-November, against $(-) 93 billion in the corresponding period of last fiscal, according to Commerce & Industry Ministry data. Total exports during April-November reached $192.70 billion, rising 33.21 per cent against $144.65 billion during the corresponding period of 2010-2011, making the target difficult to meet.

India’s oil imports in this period rose by 42.67 per cent to $94.11 billion, compared to $66 billion during the same period last fiscal. Similarly, non-oil imports stood at $215.41 billion -- up 25.46 per cent from $171.70 billion last year.

The target of $300 billion (exports) is not possible this year. The euro zone crisis, coupled with slowdown in the new markets, would not let exports achieve that growth. New markets cannot cushion the slide in the traditional developed markets, points out Crisil chief economist D K Joshi.

Commerce secretary Rahul Khullar had recently said exports for the fiscal could end up being around $280 billion adding that the trade deficit would hover between $155 and $160 billion.

Federation of Indian Export Organisations (FIEO) say the country’s exporters are hopeful of reaching $275 billion exports by the end of this fiscal. “With the abnormal increase in the cost of inputs and packaging material, our exports are day by day becoming uncompetitive,” says FIEO’s former president Ramu S Deora. “This nullifies the scope of margins offered by rupee depreciation.”

In the last financial year, total exports stood at $246 billion and imports at $350.30 billion. The government has also decided to achieve $500 worth of exports by 2013-14.

A widening trade deficit will further put pressure on India’s current account deficit. A Goldman Sachs report says moderation in exports, depreciation of the rupee is likely to worsen the CAD picture in the last two quarters of this fiscal. While depreciation of the rupee is not helping exports much due to slackening demand overseas, imports also remained elevated.

Despite remittances by expatriates, the country’s current account deficit (CAD), which comprises trade deficit besides deficit in services trade and net inflows from remittances and some investment income like dividends and royalty, rose to 3.6 per cent of the GDP in the first half of this fiscal. This is a shade lower than 3.7 per cent in the corresponding period of last fiscal. However, the conditions this fiscal and in 2010-11 are exactly opposite.

Last fiscal, CAD situation improved in the second half to prune the gap at 2.6 per cent of the GDP for the entire 2010-11.

In the present fiscal, the CAD will end up to be 3 per cent of the GDP. Looking at the current global scenario, even a cumulative growth rate of 33 percent in exports will not be unimpressive at all, says Ajit Ranade, chief economist, Aditya Birla Group. “We need to keep in mind that our share in global trade is still very small. So growing at more than 30 per cent for our exports is not bad.”

This fiscal the CAD widened to 3.7 per cent of the GDP in the second quarter of this fiscal -- from an upwardly revised 3.4 per cent in the first three months. Yes Bank chief economist Shubhada Rao says while the CAD peaked in the second quarter of last fiscal at 4.4 per cent of GDP, the deficit is likely to widen further and peak out in third quarter of this fiscal at 4.5 per cent. For the year as a whole, Rao expects CAD to increase to around 3.6 per cent of the GDP.

Going by the current trends, it seems India’s merchandise exports during 2011-12 will be in the range of $250-300 billion. Services exports and remittances will likely remain decent, while the overall CAD in 2011-12 can be just around 3 per cent of the GDP, says Siddhartha Sanyal, India economist, Barclays Capital Research.

During April-October, total services exports reached $79.34 billion, while imports stood at $47.55 billion, according to RBI data.

Given the problems on the CAD, even capital account is not forthcoming to finance the gap in the current account balance. Because of this, foreign exchange reserves may also get a hit or may not increase significantly. The Reserve Bank of India has reclassified its capital account to put capital flows in the financial account.