Indian exports may take a hit as trade war could lower growth in China, US

Exports from India could be hit as a fallout of a global trade war between America and China. The dispute could lead to demand falls and higher costs, pushing up prices.

"Such tariff wars come at a time when the world economy is just about getting out of a slow growth phase. If global trade volume shrinks on account of this trade war, our exports are bound to be buffeted. The expected double-digit growth in export in FY19 might not happen," went a report issued by CARE Ratings on Friday.

"Global growth can be affected, as a trade war will mean higher prices and lower growth in these two main geographies. This will impact our exports," the report said.

A continued trade war would affect other secondary markets as well, due to the size and trade connections of both nations. Global Gross Domestic Product is valued at $75.3 trillion, with USA and China contributing $19.4 tn and $11.9 tn, respectively.

Experts also warn of currency volatility, which generally follows trade battles. India's exports have been on a growth streak over the past one year, owing to a pick-up in global demand. "Exports depend more on global demand than the currency rate and India's exports are broadly expected to remain stable and rise over the next financial year. But, significant global developments such as this might negatively affect the process ,” said Devendra Pant, chief economist at India Ratings and Research.

Experts said currency volatility was set to return, noting trade battles have historically affected currency markets significantly.

The rupee has been relatively stable over the past year and is expected to strengthen in the long term as investors continue to pump money into the economy. Investor confidence in India meant the rupee ended at 65.01 to the dollar, up nearly 0.2 per cent on Friday, a day after the Trump administration in the US slapped higher tariffs on China.

The rupee had similarly gained on Thursday after the US Federal Reserve raised its policy rates, a move that has historically strengthened the dollar and weakened other currencies. However, experts now say market reaction is more difficult to predict. 

"Overall, the rupee is expected to strengthen and make outbound trade more expensive, adding to India’s woes of uncompetitive exports. Apart from the rupee and the Chinese yuan, most other currencies of Asian competitor nations have depreciated and are expected to continue doing so,” said Ajay Sahai, director-general, Federation of Indian Export Organisations.

Corporate heads want the government to step up talks at the Wold Trade Organization (WTO), so that the conflict between US and China could be quickly defused. “India can play a significant role in guiding this exercise. It is important to keep the WTO process going and  make the multilateral institution stronger, so that rule-based global trade is ensured and bilateral issues have an effective platform for resolution,” said Rashesh Shah, president of the Federation of Indian Chambers of Commerce and Industry.

The stakes are high for Indian companies with business interests in both nations. The US is India’s largest export destination, with $42.2 billion of shipments sent there in 2016-17. In the same year, China was the largest source of Indian imports. Our $51 bn of trade deficit with China might also rise as Chinese producers search for other markets.

February exports were $25.8 bn, taking the total for the current financial year in its first 11 months to $273.7 bn. March, the final month, would have to see at least $27 bn of exports for the country to hit the government’s target for the year of $300 bn.