US economic recovery might boost India's exports only moderately

Persian Gulf is the largest exports destination but falling oil prices a dampener

India’s merchandise exports, after contracting in December and January, might get only a marginal lift from rising economic prospects in the US. This could be because of a decline in commodity prices year-on-year reducing the value of exports, and regulatory problems for pharma companies in the US.

India’s efforts to diversify its trade markets had been fairly successful, with the six-nation Gulf Cooperation Council (GCC) taking over the European Union (EU) as its largest export destination during the April-December. But the overall exports have lately been hit by a steep decline in commodity prices, including that of petroleum products.

Hopes of a recovery in the US have gathered steam, especially after the economy added 295,000 jobs in February, and that country’s unemployment rate fell to 5.5 per cent, the lowest in the post-recession period. A full-blown economic recovery in the US, however, remains elusive. The US economy grew 2.4 per cent in 2014, marginally up against 2.2 per cent in the previous year.

The US remains India’s top destination for exports in  terms of country; it accounted for $32.44 billion worth of exports during the first nine months of the current financial year, or 12.77 per cent of India’s $253.97-billion total outbound shipments. The bulk of the country’s exports is accounted for by pharmaceutical products, minerals and mineral oils.

“The contraction in global demand is waning. But these will not lead to much increase in exports, given a decline in commodity prices," says Ajay Sahai, director general & chief executive of the Federation of Indian Export Organisations (FIEO). Besides, delays in regulatory approvals to pharma products might hinder exports to the US, as medicines are one of the key items of India’s export basket.

India exported $2.68 billion worth of pharma products to the US; this was 8.8 per cent of its total exports to that country during the April-December period.

Meanwhile, a softening in prices of commodities, particularly oil, might also come in the way of India’s diversification of exports to the six-member GCC.

In the first nine months of the current financial year, India’s exports to the Gulf bloc stood at $38.44 billion, or 16.28 per cent of its total outbound shipments. This was higher than the $37.46 billion to the EU, which accounted for 15.76 per cent of total exports. EU had been India’s largest export destination in terms of the  region for a number of years.

Sahai says one of the reasons for an increase in India’s exports to GCC has been the rise in petroleum products’ share in India’s export profile. Of the total exports made to GCC, close to 40 per cent was petroleum exports.

However, India’s exports to each of the GCC countries are different. While petroleum exports account for the largest chunk of exports to  Saudi Arabia and Oman, gems & jewellery is the predominant category of exports to the UAE. The main exports to Kuwait are cereals, while iron & steel dominates exports to Baharain. Ship and floating structure are the main item of exports to Qatar.

Oil prices remained over $100 a barrel in 2013-14, but came down to just over $46 by January, 2015. To the extent that these are diversified, the impact of falling commodity prices could be blunted. However, together with oil, prices of other commodities like iron and steel have also fallen by 15-20 per cent in the past year.

Besides, declining crude oil prices affect economies of the six GCC countries as well, curtailing their demand for imports.

The impact of a decline in petroleum prices could be gauged from the fact that exports of oil products declined sharply, by 48.69 per cent to $2.8 billion, in January. These earlier used to be the top items of India’s exports but now have fallen behind engineering goods. India had in January exported $6.9 billion worth of engineering goods and $3 billion worth of gems & jewellery.

The rupee did not depreciate against the dollar so much over the year to offset for  fall in commodity prices. Even  if one takes into account sharp fall in rupee against the dollar, the rupee depreciated just over 3 per cent on March 10, 2015 year-on-year.

On the other hand, an economic slowdown in China might have a limited impact on India’s exports, as India mainly exports inputs, and not high-value items, to that nation. China has lowered its economic growth target for 2015 to about seven per cent. This is lower than the 7.5 per cent its government had set for 2014. The economy had grown 7.4 per cent last year, the slowest since 1990.

India exported $9.19 billion worth of merchandise to China during the April-December period. Cotton, at $1.7 billion, was the biggest item of exports to that country. It was followed by copper and articles ($1.5 billion) and mineral fuels and mineral oils ($1.1 billion).

India’s overall exports in January declined for a second straight month, by 11.9 per cent. The country’s outbound shipment rose only 2.4 per cent to $265.03 billion in the first 10 months of the current financial year, against $258.7 billion in the corresponding period of last year.