The slide accelerates

January 2009 trade data provide yet another indication of the severity of the current slowdown

The trade data for January 2009 provide yet another indication of the severity of the current slowdown. Exports in dollar terms have been declining, relative to the corresponding month of the previous year, since October 2008. Although the December decline was small, raising hopes of stabilisation, the commerce ministry was quick to warn that this was an aberration and that the January numbers would be dismal. As it turned out, they were not as bad as the ministry had feared, declining by 15.9 per cent as against the government’s advance estimate of 20 per cent.

There is little question that the falling numbers month after month are closely correlated to the intensifying slowdown in the main export markets of the US, Europe and Japan. Until there is a recovery in those economies, the export community should brace itself for bleak times. It is small consolation that exports grew by over 13 per cent during the April-January period. Since the tide turned in October, the buoyancy of the first half of 2008-09 has been virtually forgotten. Neither is it of great significance that exports in rupee terms actually grew by 4.3 per cent during January 2009, and by about 26 per cent during the April-January period. This was the result of the sharp depreciation in the rupee. At an aggregate level, this may have helped shore up exporters’ margins, even as volumes declined sharply. However, the benefits of this have been quite asymmetric. There are persistent reports of export units across sectors shutting down and, consequently, many jobs being lost. Rupee depreciation has apparently not been enough to protect everybody’s margins.

Imports also declined during January, by over 18 per cent from January 2008. Much of this was attributable to lower oil prices, with oil imports declining by 47.5 per cent. Non-oil imports also declined, but by a mere 0.5 per cent in dollar terms. These numbers are consistent with the anticipated slowdown in economic activity, which was reflected in the sharp drop in the GDP growth rate during the October-December quarter. However, the relatively modest drop in non-oil imports is an encouraging sign that the slowdown may not be as severe as was feared. Meanwhile, as a result of the decline, the trade deficit was marginally lower during January 2009, compared with a year ago. Of course, during the April-January period, the trade deficit soared by over 25 per cent in dollar terms but, given the turnaround and likely near-term pattern in oil prices, the momentum is firmly towards a narrowing of the deficit and, consequently, some reassurance that the poor export performance is not causing problems on the balance of payments front.

The old argument is worth repeating, that the entire framework of export incentives is production-based. If exports are taking place, the incentives can be exploited. However, if they are not, the incentives are useless. Instead of emphasising more incentives within the same framework, which appears to be the government’s response to the falling numbers, the focus should shift on providing support to viable exporters, while facilitating arrangements that allow the fragmented sector to efficiently manage collective risk. Some degree of consolidation is essential for the sector to take advantage of a recovery in key markets as well as to prepare it for the next, inevitable, downturn.