New Delhi: The current slowdown in global trade could result in an increase in India’s trade with other developing countries and, in general, trade between developing countries or the so-called South-South trade which currently accounts for less than 10% of global merchandise trade.
“South-South trade may increase as Indian exporters will be pushed into diversifying their export destinations. If you look at the data, trade with countries in Africa has been growing at a fast rate,” said K. T. Chacko, director, Indian Institute of Foreign Trade.
Upbeat: K.T.Chacko, director, Indian Institute of Foreign Trade. He says India’s trade with African countries has been picking up. (Photo: Madhu Kapparath/ Mint)
According to the latest data available, between April and December 2007, India’s exports to African and Latin American countries grew by 34.23% and 26.64%, respectively. However, exports to these areas accounted for less than 11% of India’s total exports.
Growth in global trade is expected to slow from 8.5% in 2006 and 5,5% in 2007 to 4.5% in 2008, according to the latest trade statistics released by the World Trade Organization (WTO) on 17 April.
The slowdown is primarily due to a sharp economic deceleration in the key developed countries, which has been only partly offset by the continuing strong growth in emerging economies.
“The signs are already there for us to see in terms of the change in direction of India’s trade. The share of the US in India’s trade has been falling while that of China is increasing,” said Sumita Kale, chief economist of Indicus Analytics, an economic research firm.
Suparna Karmakar, senior fellow at the International Council of Research on International Economic Relations’ said that while the quantum of South-South trade would increase, it may not necessarily result in a reversal of trend.
“The US is suffering from stagflation at present...the developed countries will look at India and China for imports to meet their domestic demand and so there will be continuing demand from these countries,” said Karmakar. Traditionally the problem with South-South trade has been the poor amount of investment that the developing countries make in each other.
Karmakar added that “60% of the total trade in the world is intra-industry trade. Typically, trade between countries closely follows investments made (by the trading partners in each other)”.
Another fallout of the slowdown in the economic growth of the developed world is the diversion of investments from the developed world to countries such as India and China.
“Business prospects determine the flow of investments. In that sense, say, Japanese investments may be diverted out of Japan and into India since the growth prospects are far more robust here,” said Kale.
However, not everyone is convinced that South-South trade will look up.
“The problem is that our trade with other developing countries is competitive in nature and not complementary. That’s why South-South trade has not really taken off till now,” said Rajat Kathuria, professor of economics at the International Management Institute. India’s trade with developing countries stands at just above 50% according to Kathuria.
He said the target of $200 billion (around Rs8 trillion) for India’s exports in 2008-09, set by the government in the annual supplement to the trade policy in April, is unrealistic, given the projections of economic growth of the developed world countries.
“The tipping point would be the result of the ongoing Doha Round of talks in WTO. If it is concluded within 2008, which is unlikely in my opinion, then it will have a positive impact on the trade scenario,” he added.
According to Kathuria, trade in services is the area which will provide a genuine fillip to India’s trade prospects in the future.
Chacko, while agreeing that most of the products exported by India are competitive in nature compared with products exported by other developing countries, feels that there is a lot of room for all the developing countries to grow.
“There is a huge range in the product mix that is on offer, primarily in terms of price and quality of the product,” said Chacko.