Ind-Ra: Lower Commodity Prices Led to a Decline in Exports; Credit Profile of Exporters to Remain Pressured

India's merchandise exports have fallen by 16.1% in US dollar terms over the 12 months ended November 2015, however the contraction in the exports (in US dollar terms) is not reflective of the actual weakness in volumes but mainly driven by the fall in global commodity prices and the sharp weakening of the euro (averaged 16.6% lower yoy), says India Ratings and Research' (Ind-Ra). About three fourths of the decline is on account of a decline in exports of crude oil and its products and agri-commodities in line with the fall in the prices of these commodities. A sharp decline in commodity prices has depressed the prices of many intermediate and manufactured goods leading to a decline in the value of exported items. The recent commentary by the ministry of commerce on the fall in merchandise exports not being a cause for panic mirrors the view of Ind-Ra that demand conditions for corporates in India's export sector are not as bad as feared.

Ind-Ra in a report dated 9 November 2015 Corporates in India's Export Sector, highlighted that the recent double digit fall in merchandise exports may not be reflective of actual export volumes. Although global demand conditions remain sluggish, export volumes may not have fallen significantly. Demand conditions in Asia, OPEC and Africa have been hurt by falling commodity prices, moderating domestic demand and volatile exchange rates; however those in western countries such as Europe and US continue to be supportive.

The ministry of commerce and industry in its recent communication dated 22 December 2015 Exports: No Cause for Panic Excluding Petroleum and Gems and Jewellery has cited that excluding petroleum products and gems & jewellery items, India's exports have not declined significantly. The ministry has mentioned that although several sectors have shown declines, some have shown increases namely readymade garments and pharmaceuticals. Automobile export volumes have also continued to increase (April-November 2015: 2.2%, FY15: 14.9%, FY13: 7.3%; Source: SIAM). The limited impact on export volumes is also reflected in the index of industrial production for the period April-October 2015, which grew by 4.8% compared to 2.2% in the same period last year, suggesting that manufacturing activity continues to grow.

Ind-Ra expects the mixed performance of export oriented sectors to continue, with some sectors performing better than others. The nominal income growth of corporates in most exporting sectors however will remain depressed, due to the deflationary impact of falling commodity prices (World Bank non-energy price index fell by 17.4% yoy as of end November 2015). Also, most Indian corporates which have exposure to Europe may be unable to increase product prices to offset the decline in margins caused by the depreciation of the euro due to stiff competition from other Asian exporters. The agency therefore believes that the credit profile of exporting corporates is unlikely to improve even in those sectors which are witnessing modest demand growth.

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