Recession cloud returns: Slowing Europe worries exporters

Core euro zone seems on verge of yet another recession; however, exporters hope other markets will compensate

The economic slowdown in Europe has some worry for exporters. There is, however, a belief that other markets would help ensure the target for this financial year of $350 billion, about 11 per cent more than in 2013-14.

That level of growth, one needs to note, hasn't been there in the past couple of years or, for that matter, in the average for the first four months of 2014-15.

“Some of the European countries are going into recession. The situation is extremely bad as far as the European Union (EU) is concerned. Asia is also down but the US is showing some signs of a recovery and the condition of Africa is okay,” Commerce Secretary Rajeev Kher told Business Standard.

Exports rose 8.6 per cent in the first four months of the current financial year (see chart). and the growth slowed in the fourth month to 7.3 per cent, after two months of double-digit expansion. It is too early to say whether the slower pace of July export growth was a result of the problem in some European countries.

“We are little worried but let us watch for now. Europe has started slowing. Also, there are problems in west Asia. Iraq is a big export market for us,” said

M Rafeeque Ahmed, president of the Federation of Indian Exporter Organisations (FIEO).

He, though, was confident $350 bn worth of export would be realised this financial year. The target was not set by the government but by FIEO. The government expects export to reach $340 bn.

Ahmed said US economic growth was good and the confidence level there was rising. “We also exports to countries which further value-add and export to the US.”

However, Ajit Ranade, chief economist with Aditya Birla Group, said $350 bn looks a little ambitious. Merchandise export saw only 4.7 per cent growth in 2013-14 and had contracted in 2012-13.

However, Ranade agreed, economic conditions are not uniform in Europe. Besides, America is doing well. “So, it might compensate to an extent.”

India has diversified its export markets to an extent in recent years. The EU accounted for 21 per cent of our export in 2008-09; this came down to 16.4 per cent in 2013-14. It, however, remains the biggest market destination for India.

Within the EU, the euro zone group of 18 economies seems on the verge of falling into a third recession in six years. The German and Italian economies contracted in the April-June quarter and the French economy was stagnant. Economic expansion in the entire euro zone was close to zero per cent in April-June; the earlier quarter was not much stronger.

On the other hand, the American economy grew at an annual rate of 4.2 per cent in April-June, the fastest pace since the third quarter (July-September) of calendar year 2013.

However, Japan’s economy suffered its worst contraction since 2011 in April-June of 2014, as the threat of higher tax payments put consumers off major purchases.

Its economy shrunk by 6.8 per cent in this quarter.

On the other hand, China’s economy expanded a better-than-expected 7.5 per cent in April-June, against 7.4 per cent during January-March. Taken together, both these east Asian economies now account for almost seven per cent of India’s export.

The government should incentivise exporters more, in its Focus Market Scheme and Focus Product Scheme in the coming foreign trade policy, to encourage them to diversify markets and products, said Ranade. The schemes give duty credit scrips to exporters in certain commodities and for some markets.

He said India should push for pharmaceutical export to China. And, explore the expansion of its information technology and software export to non-English speaking countries such as Japan. Also, 97 million Chinese go for outbound tourism in a year, of which only 50,000 come to India, he said.

The rupee is firmer against the dollar this financial year as compared to the previous year. Exporters said stability suits them better than sharp fluctuations on either side. Economists concur.

Some worries could also come on softening of global petroleum prices. Brent crude rates declined below $100 at 99.75 a barrel on September 2, against $110.42 as on April 1. It rose the next day to $100.36 a barrel. Petroleum products’ export in July was $7.2 bn; that of engineering goods was $5.7 bn.

"We face inelastic exports of petroleum. So, we will not face problem in exports of theses, volume-wise. However, exportd in value terms might come down. But, marings will be retained as the import prices of crude oil have also been softening," said CARE Ratings' chief economist, Madan Sabnavis.