Unwelcome reminder

Trade weakness would affect growth

Data on Indian trade for the month of October 2022 has been released and, for the first time in two years, exports have declined. This has caused a recalibration of some expectations of growth and trade momentum in the coming months. Economic data for September and October is often not exactly comparable with previous years because of the variable dates of various festivals, which impact both output because of the timing of holidays and the demand for consumables, as well as commodities such as gold. Another ground for care in interpreting these numbers is that petroleum-based products compose a large part of India’s trade basket, both imports and exports. Oil exports fell by 11 per cent year on year, perhaps reflecting this price movement. Yet even in this context there are grounds for caution about what the trade data implies going forward. Exports from India declined by 16.7 per cent year on year in the month of October, compared to almost 5 per cent year-on-year growth in September. And non-petroleum exports fell by 17 per cent, far more than exports including petroleum products. The decline was broad-based, across various tradable goods.

After multiple quarters of exports growth, the latest numbers come as an unwelcome reminder of the structural constraints to growth in India. Indeed, some of the sectors that have performed best in recent years in terms of exports — for example, electronics — saw the sharpest deceleration. Contrary to some recent claims, India is still quite a distance from creating a sustainable export ecosystem. That requires focused attention from policy makers, as well as an understanding of the diffuse nature of modern supply chains. Predictable and low tariffs, in particular, are a crucial part of entering global value chains and growing export sustainably. In recent months, there has been a resurgence of the notion that “Make in India” is also “Make for the World”, capped by a specific reference to the latter in Prime Minister Narendra Modi’s speech at the inauguration of an aircraft manufacturing plant in Gujarat recently. It is crucial that greater attention be paid to the entire ecosystem that goes into supporting sustainable exports growth.

From a macroeconomic point of view, there are plenty of red flags now emerging on the horizon. High commodity prices and demand that is strong as compared to the rest of the world will continue to put pressure on the current account deficit. Any pressure on the balance of payments will be exacerbated by interest rate differentials between India and the world, especially as Western central banks continue raising their rates in an inflationary environment. Capital outflows in response to structural interest rate differentials greatly reduce the freedom of operation of the Reserve Bank of India, as well as the Union government. Senior government officials have already sought to moderate expectations about India’s growth momentum. Meanwhile, at least one major investment bank — Nomura — suggests that this trade data is an indication that growth momentum has already passed its peak. It has further predicted that growth in 2023 will be well under 5 per cent. That certainly cannot and should not be the natural rate of growth in India. The trade data must serve as a wake-up call for policy makers.