The 81.7% year-on-year growth of exports in July broke like sunshine into a clouded sky. Data released a day earlier showed growth slowing to 7.7% in the April-June quarter. The sun, however, could disappear back into the clouds soon.
A visible slowdown in external demand from the developed world does not bode well for Christmas orders. Perhaps this is what is reflected by the HSBC’s Manufacturing Purchasing Managers’ Index (PMI), a forward-looking indicator that traditionally correlates strongly with exports. This fell to 52.6 points in August from 53.6 in July, the fourth consecutive fall and the lowest since May 2009. Worse, the ‘new export orders’ component of the PMI fell even more sharply to 45 from 56 over the last three months; it now stands just four points above December 2008 levels when exports all but collapsed.
Earlier, the Organization for Economic Cooperation and Development (OECD) quarterly report showed a sharp deceleration in global merchandise trade in the second quarter of 2011. Both imports and exports slowed in the G-7 industrialized nations as well as emerging markets save Brazil and China. Further ahead, structural constraints in the United States and Europe are broadly projected to keep economic growth at sub-potential levels of 1-2%.
To be sure, Indian exports are now less reliant upon Western demand, having diversified significantly towards other markets. Still, nearly one-third of total exports continue to head towards the US and EU. Moreover, Asian demand – of which China and ASEAN account for a 17% share in India’s exports - is now slowing too. The highly open Asian economies have been hit by inflation, necessitating monetary tightening; this is now combined with faltering growth in their largest export markets, the US, EU and Japan. The giant in the pack, China, shows both official and private manufacturing PMIs trending down for the past four months; and although the HSBC PMI rose a bit in July, it remains below 50, the boundary between expansion and contraction. Likewise, the manufacturing PMI for South Korea slipped below 50 while that for Taiwan dropped further to 45 in August. It looks like the World Trade Organisation’s estimate of 6.5% trade growth in 2011 might not be realized.
Growing uncertainty abroad may therefore impact exports. Other than the direct impact of lower real GDP growth in the advanced countries, there will be the knock-on effects of the Western slowdown upon the Asian region as well as the indirect effects from slowing Chinese growth upon investment, unemployment and consumption in Germany, Japan and to a lesser extent, the United States.
Surprisingly, Indian businesses remain optimistic. A CII survey reveals corporate firms see export volumes going up with increasing shipments in the July-September quarter. This would be fortunate if realized. Otherwise, falling exports with capital inflows drying out do not augur well for India’s external position.
Renu Kohli is Consultant Professor, ICRIER, and a former staff member of the International Monetary Fund and the Reserve Bank of India.