Beyond $400 billion

Exports need policy support

The ongoing export boom has enabled India to attain the $400 billion target set for the current fiscal year. At the current rate, India could end the fiscal year with total merchandise exports of about $410 billion. This is a significant achievement, particularly given the near-stagnant level of exports over the past several years. Higher exports in the current year have been facilitated by all-around performance with engineering goods, petroleum products, and chemicals playing a significant part. While India has reasons to celebrate, it remains to be seen for how long the trend sustains. Meanwhile, higher global commodity prices have pushed up India’s imports to a record high of $589 billion, leaving a trade deficit of $189 billion. 

Indian exports have been driven by a number of factors. Higher global commodity prices have pushed up the value. Petroleum products, for instance, contribute about 15 per cent to total exports and have grown significantly in the current year. Further, exports have been helped by a strong rebound in the global economy from the pandemic-induced disruption. A large number of firms around the world are in the process of restocking inventories. Merchandise exports have a strong relation with global growth and, as economists from CRISIL have shown in these pages, engineering goods, chemicals, petroleum products, and gems and jewellery, which have a higher share in India’s exports, also have higher elasticity to global growth.  Thus, India’s export performance would significantly depend on the pace of global growth.

The global economy, however, is expected to slow down because of a variety of reasons. The ongoing geo-political uncertainty has pushed up commodity prices and will affect growth. Further, large central banks, particularly the US Federal Reserve, have started increasing interest rates. The recent sell-off in the US bond market suggests that financial conditions could tighten significantly in the coming months, which would certainly affect global growth. Besides, the surge in Covid cases in China and other countries would affect supply chains, resulting in lower output and higher inflation. Thus, geo-political uncertainty and slower global growth would be significant risks for Indian exports in the coming quarters. On the broader policy level, the environment has not changed much to sustain higher exports growth over the medium term. India has been raising tariffs over the past several years, which would hamper its chances in the medium-to-long run. Higher tariffs obstruct participation in the global value chain, which is essential for attaining sustained exports growth. 

India also decided against joining the Regional Comprehensive Economic Partnership (RCEP), which is said to be the world’s most dynamic trade group. India is negotiating bilateral trade deals with a number of counties, which might take time, and will not compensate for its decision to not join the RCEP. In the changing global economic and political backdrop, India must reconsider this decision. In terms of near-term policy management, India will have to manage the rupee well so that it supports exports. Higher current account deficit and capital outflow over the coming quarters will put pressure on the rupee. It would be important for the Reserve Bank of India to allow the rupee to depreciate in a non-disruptive manner. Any attempt to defend the rupee to contain imported inflation would affect exports and create longer-term macroeconomic imbalances.