The trade data for the month of September 2015 was once again disappointing. For the 10th successive month, exports showed a falling trend. In fact, the exports for the month of September 2015 were down almost 25% from the corresponding period of September 2014. Falling exports is actually a global phenomenon. A global slowdown in demand, contraction in commodities off-take by China and a steep fall in the price of oil have all contributed to the fall in exports. However, many other countries have not been hit as hard as India and that is the moot point.
There are two key reasons for India continuing to show weak exports by a larger margin. Firstly, most of Indian exports are commodity sensitive and hence a fall in price tends to depress the value of exports. Oil is a classic example where the value of exports has gone down drastically due to fall in global crude oil prices. The second reason is that India really does not have an export basket that can benefit from a weaker currency. Other countries like Russia, Brazil and Australia are benefiting from a weaker currency as they are predominantly into commodity exports. India has no basket that directly benefits from a weaker rupee.
Data shows a clear downtrend…
Exports for the month of September were down by 25% to $21.84 billion largely driven by weak oil prices and weak demand for oil and commodities. Imports for the month of September also shrank by 25.42% to $32.32 billion. That leaves September with a trade deficit of $10.48 billion. The only redeeming feature of the data has been the fall in trade deficit from $12.5 billion to $10.48 billion, which was largely driven by a 50% fall in the import of gold. The saving grace of the entire data has been that at least precious forex reserves are not being frittered away in importing an unproductive asset like gold. With the kind of consistent fall that India has seen in exports, it is likely that the annual exports for the fiscal year too may fall by around 25% to as low at $270 billion. The worrying part of the story is that the trade deficit itself is likely to be more than half of the export basket.
Reading between the lines of the data…
The major redeeming feature of the trade data was the sharp 50% fall in gold imports. That single-handedly helped the deficit to be curtailed by $2 billion. This also partially compensates for the 28% fall in the exports of pearls, precious and semi-precious stones. Till the last month we had a double whammy as gold imports were rising but exports of precious stones was falling. That anomaly has been rectified.
An area of worry for India has been rising deficit that India runs with China. India’s trade deficit with China has widened by 6% to $21.6 billion. India has been trying to offset its deficit with China by expanding exports to China, although not much has been achieved at a grass-root level. Other areas of concern have been slowing exports to Europe due to an economic slowdown and a slowdown in textile exports to the US due to the Pacific Rim trade pact.
In a nutshell, the export crisis for India continues and it is getting more acute by the day. Having a trade deficit which is almost half of the annual exports is an unsustainable situation and could have serious repercussions for the global competitiveness of the Indian rupee. The government needs to also put export promotion on a war-footing. The urgency somehow seems to be missing. A clear cut strategy of incentives, finance and tax breaks for exporters is a must if the government needs to have a calibrated plan to increase exports. The government also needs to seriously re-consider curbs on gold imports. India needs to make the best of the dividends of cheap crude oil. Ten months of export contraction is a serious problem to have. India can hardly afford it.
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