Export growth still depends on demand in Europe, North America

The trade data for May released by the Commerce Ministry last week shows a year-on-year (YoY) decline of 10.31 per cent for merchandise exports and 6.59 per cent for merchandise imports leading to a five-month-high trade deficit of $22.22 billion. In all probability, it is the fall in commodity prices that has led to these declines and not necessarily the volumes. Indeed, the widening trade deficit suggests a relative pick up in the domestic economy, where the growth indicators are encouraging and prices are moderating, as the Reserve Bank of India (RBI) pointed out in its recent bi-monthly monetary policy statement.

Responding to the May exports figures, Dr. A Sakthivel, president, the Federation of Indian Exporters Organisations (FIEO), said that sharp decline in the international demand situation has led to the fall in overall exports. He blamed the economic slowdown in the United States (US) and Europe due to persistent geopolitical tensions, monetary tightening, and recessionary fears. He hoped that the exports will start showing better growth numbers starting July 2023, as things are expected to improve from the third quarter of the calendar year, when fresh orders for the festival and New Year season will start coming in. The government has similar views on exports growth figures and export growth prospects.

These reactions indicate that Indian exports growth is still heavily dependent on demand for our products in the developed countries in Europe and North America. The attempts to help the exporters diversify the markets for exports have not really borne fruit, at least to the extent expected. Between 2004 and 2014, the government gave incentives for diversifying the markets to the countries in Latin America, Sub-Saharan Africa, Central Asia, islands in the Pacific Ocean, and so on, through the Focus Market Scheme and Market Linked Focus Products Scheme. During that period, special incentives were also given through Focus Latin America scheme and scheme to encourage exports to the Central Asian Republics that were part of the erstwhile Soviet Union. In 2014, that focus was given up and all these schemes were merged into the Merchandise Exports from India Scheme.

The government is pinning its hopes on increased investment that its Production Linked Incentives (PLI) scheme may attract. The increased production and exports of mobile phones and electronic goods in recent months has helped the government defend its strategy. However, value addition in the manufacture of such products is modest and poor investment in some sectors has forced the government to review certain aspects of the scheme. Much depends on how the scheme is tweaked in the coming weeks.

Since the last few years, the government is rightly focused on building transport infrastructure that will help our exporters reduce logistics costs. By and large, the government has also ensured that in the last 8-9 years, the rate of inflation is maintained around 6 per cent.

However, the problem of exporters seems to be the exchange rate. With exports of services growing significantly in recent years and with growing inflow of funds from institutional investors in the Indian equity markets, the rupee has appreciated against currencies of the competing countries and remained stable against the US dollar, despite interventions by RBI that have boosted its foreign currency reserves. Till that position changes, many exporters may continue to struggle.

Email : tncrajagopalan@gmail.com