Exports decelerating when global trade is improving: Radhika Rao
DBS Bank economist Radhika Rao on India's exports, global trade and the biggest downside risks to the economy
India’s exports decelerating is worrying as it comes at a time when global trade has improved, Radhika Rao, an economist at DBS Bank, Singapore, said in an interaction, pointing out that from $250 billion in FY11, the country’s exports were at $260-270 billion in FY17.
Rao said while blame for falling exports was routinely laid on the currency, the country’s loss of competitiveness, particularly in labour-intensive industries, was also responsible for this drag. According to her, the biggest downside risks to the Indian economy are job creation and ensuring employment-generating growth.
“Favourable demographics are a key, long-term tailwind for the economy, which, if not harnessed well, could carry economic and social ramifications. This structural advantage is even more relevant against the regional backdrop, where many of the high-income economies face a rising aging population and imminent workforce shortage,” she added. Edited excerpts:
Do you think the next move of the Reserve Bank of India’s (RBI’s) monetary policy committee is likely to be a rate hike? Do you see an earlier-than-expected rate hike?
While RBI is likely to consider policy tightening in FY19, a rate hike at the next monetary policy meetings in April/June is not a done deal. RBI’s stated intention to look past the better data in H1 2018 suggests policymakers are yet to be fully confident about recovery prospects. Our base case scenario sees the central bank holding rates steady for the time being, with a hike coming only in Q4 FY19. If the hike is brought forward, it will probably come in the September quarter—Q2 FY19. This would have to be driven by sharp increases in minimum support prices keeping inflation sticky above 5% beyond June 2018, more so if accompanied by high oil prices and heightened market volatility, especially in the Indian rupee.
Where do you see the rupee headed, especially with the trade gap widening?
The Indian rupee appreciated by 6% in 2017, ranging at the middle of the Asia ex-Japan pack, while the Korean won and Malaysian ringgit outperformed with 10-12% gains versus the US dollar. Part of that rally was driven by a weak dollar in the midst of dovish US Fed hikes and a favourable domestic macro backdrop. However, this positive tone started to reverse towards late-2017 and is spilling over into 2018 as macro-stability risks resurfaced.
Sharp gains in oil prices have led to a wider current account deficit, while fiscal consolidation targets stand delayed. Inflation has tested past the 4% target and is likely to remain a percent higher until June/July. On technical grounds, there are also concerns that banks might resist rolling over short-term trade credits, in midst of tighter due diligence after a recent fraud case at a domestic bank. This led to a surge in demand for dollars, weighing on the rupee. The rupee is among underperformers on a year-to-date basis. Factoring in macro-stability risks and the likelihood of a dollar recovery this year, the DBS currency economist expects the USD-INR to drift higher towards 67.0 by end-year.
What are the biggest downside risks to the Indian economy going forward? Is it rising non-performing assets (NPAs) and sluggish credit growth, or jobless growth, slowing agriculture, fiscal slippage, sluggish exports? Amid all of this, what are the positives?
Job creation and ensuring employment-generating growth are crucial pieces for the economy. Favourable demographics are a key long-term tailwind for the economy, which, if not harnessed well, could carry economic and social ramifications. This structural advantage is even more relevant against the regional backdrop, where many of the high-income economies face a rising aging population and imminent workforce shortage.
Data on employment trends is patchy, but taking RBI’s industrial outlook survey as a gauge, the sharp deceleration in current and future expectations on the employment situation observable since 2011-12 appears to have bottomed out.
Beyond intermittent blips due to demonetisation and GST roll-out, the trend has been improving into the March survey.
Need for job creation has been ascertained, albeit solutions have been slow to bear fruit. A two-pronged approach is underway—skill development to be shovel-ready, whilst expanding the manufacturing sector through a combination of domestic and foreign players. Non-agriculture employment is being encouraged through the NREGA (National Rural Employment Guarantee Act) initiative and directed into asset-creating initiatives -22% jump in ongoing projects.
Besides extending payroll tax sops, the government also plans to roll out fixed-term contractual jobs across sectors. Efforts need to be expedited in light of structural changes globally—firstly, formalization of the economy might displace surplus labour—more than two-thirds of the 490 million labour force are in the informal sector, requiring existing industries to improve absorptive capacity.
Secondly, the traditional manufacturing-led growth model is being challenged by the advent of low-cost centres and re-shoring or deglobalization in various parts of the world due to globalization and expanding reach of new economy sectors.
Who will lead the next level of economic growth? What are the top macro themes that will play out over the next few years?
In the short-term, good economics does not always make good politics. Ahead of the state and general election, efforts will be concentrated on implementation of reforms rather than rolling out fresh measures. Ironing out teething problems and resolving last-mile issues, will be a priority to ensure the negative impact on growth dissipates and some of the promised benefits surface. Beyond the immediate political calendar, priorities are likely to be accorded to, first—spur agricultural output and creating higher non-farm employment; second—infrastructure push, and third—pursue formalization of the economy.
On the first, the FY19 budget has outlined additional reforms to support an increase in rural incomes. Being a state subject, many of these reforms will require legislative changes at the state level. Key efforts will need to be channelled towards implementing the electronic trading platform, improving the availability of agricultural service-industries, including food-processing and warehousing facilities, and simplification of land leasing laws. In the meantime, avenues to lower labour-dependency on agriculture will need to be lowered by creating and encouraging movement to non-farm employment.
Second, after years of under-investments, infrastructure has emerged as a policy priority in recent years—expenditure has risen from Rs1.8 trillion in 2014-15 to Rs5 trillion in FY18 and is pegged to rise to Rs5.5-6 trillion next year. Despite higher allocations, other fiscal compulsions limit the headroom for government’s participation, which requires support from other financing lines, including multilateral institutions—Asian Infrastructure Investment Bank’s (AIIB’s) $1.5 trillion investments, a case in point—dedicated/off-budget infra financial pools like the National Infrastructure Investment Fund (NIIF) and domestic private sector players.
The recent Economic Survey pegs funding requirements over the next two decades at $4.5 trillion. So far, notable progress has been achieved in road transport, highways and railways. Bharatmala (roads and highways project) and Sagarmala (ports/water transport) are two ambitious multi-year projects, in a bid to improve inward connectivity and lower logistical/trading costs.
Third, formalization of the economy has been the essence of many recent reforms—including GST—which carry inherent benefits of a wider tax base, higher workers’ welfare and bridging the regulatory arbitrage between formal/informal sectors.
The transition process, however, will entail pain alongside broader economic and political implications, thus requiring the shift to be gradual and handled carefully. If achieved, this will help a wider tax base for direct progressive collections to lower the pain of high indirect regressive taxes.
How do you view India’s recent moves to raise import tariffs? Will it end up hurting its economy?
Import tariffs have been raised for a string of product lines, including labour-intensive industries and electronics/communication devices. This comes just as the government heads into a politically sensitive year, with many states due for elections, which will culminate in the general election in mid-2019.
Higher tariffs are intended to protect domestic industries supporting the ‘Make in India’ initiative and restrain demand for imported inputs, but risk falling short of these objectives.
A shift towards import substitution is seen as a regressive step, with other structural factors like complex taxation systems, comparative disadvantages in the production cycle, challenges surrounding land acquisition, stringent labour laws and funding concerns likely to impinge on India’s trade competitiveness. Instead, these might push the economy towards high-cost production and hurt its exports capability, while also generating higher inflation, without any commensurate improvement in capacity.
What can India do to reap the benefits from a growing world market? This is in the context that India’s export growth has stagnated since 2012.
It is worrisome that India’s exports have been decelerating at a time when global trade has improved. From $250 billion in FY11, India’s exports were little changed at $260-270 billion in FY17, apart from a brief peek above the $310-billion mark in FY14. While blame is routinely laid on the currency, in India’s case, loss of competitiveness, particularly in labour-intensive industries, is also responsible for this drag. In the past year, domestic idiosyncrasies by way of demonetisation, GST roll-out and duty drawback posed as speed-bumps and magnified the export sector’s underperformance.
Moreover, a sharp increase in electronics and semi-conductor shipments that benefited most exports-reliant regional peers in 2017—South Korea, Taiwan, Singapore, etc.,—largely skirted India, given the relatively smaller presence of these products in its exports-basket. Unless structural support is extended to improve the external sector’s footprint into a wider pool of products and on cost-competitive basis, turning the Make in India programme into an exports-oriented policy is likely to be a challenge.
Do you think foreign investments will continue to shrink until India agrees to allow investors the right to approach other judicial redressal centres? Is this an area of concern at all?
India climbed 30 notches to fall within top 100 countries on the World Bank’s Ease of Doing Business index last year. While it improved on grounds of taxation and insolvency proceedings, it still lags on enforcing contracts and, by extension, legal proceedings. This aspect emerges as a sore point in midst of a handful of big-ticket investors awaiting the final decision on disputes on their past investments into India.
For now, authorities remain steadfast for litigants to exhaust all available legal recourse within India first before opting for international arbitration. If this remains the case, efforts will require to be focused towards contract enforcement, transparency in taxation/ legal proceedings at the early stages, no retrospective action and improve the legal infrastructure to—firstly, lower scope for participants to run into legal cross hairs and, secondly, legal conclusions are arrived at in a cost-effective and timely manner.
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