We all know the global economy has been in dire straits for quite a while, right? That is why it was thought, when the financial crisis first hit, that India’s relatively insular economy would not be hit that badly. The argument was simple—although our exports would be affected, that would be more than offset by the resilience of the domestic economy.

But here’s the paradox. According to the data given in the Reserve Bank of India’s annual Handbook of Statistics, India’s trade exports as a percentage of gross domestic product (GDP) went up to 16.8% in 2011-12. In 2006-07, at the height of the global boom, when the world economy was sizzling, India’s trade exports were 13.6% of GDP. Looking at it another way, exports have contributed more to the country’s GDP after the financial crisis. This is, to say the least, surprising.

Chart 1 gives the data over several years.

One reason why exports remained resilient is because the direction of India’s exports has changed. We now export more to countries such as China and the Middle East, while the share of the US and Europe has gone down. That must have helped offset some of the pain from the developed world. The upshot: India’s share in world merchandize exports, which was a mere 1% in 2006, improved a tad to 1.1% in 2007 and 2008, went up to 1.3% in 2009 and to 1.5% in 2010 and vaulted to 1.9% in the first half of 2011, according to the Economic Survey. In other words, growth in market share has managed to offset the slowdown in world trade.

But there’s another, more depressing conclusion. If exports were doing so well, that implies the domestic economy has been weaker. What’s worse is that this year, exports may no longer provide a cushion. In 2011-12, exports increased by 21.3% in dollar terms, while this fiscal they’ve contracted by 6.8%. This year, the domestic economy will have to take up the slack.

Are there any signs of that happening? The Index of Industrial Production (IIP) has shown a bounce in August, with year-on-year growth at 2.7%, against a contraction in the previous two months. Notice, though, that IIP in August was 165.7 compared with 166.9 in July. In short, the year-on-year bounce was solely on account of last year’s lower base in August. Indeed, of the 22 industries mentioned in the two-digit classification, as many as 13 showed a contraction from the preceding month.

What’s interesting, though, is that the index for capital goods showed a month-on-month gain of 8.4% between July and August 2012. Is capital expenditure finally looking up, or is it just a flash in the pan? If we take the period between April and August, then the index for capital goods is up 23.7%—between April and August 2011, it was down 1.2%. Look at the contrast with the consumer goods index—it’s down 6.4% from April this year, while it was down 7.5% over the same period last year. But then, the consumer goods index hadn’t sunk so low as the capital goods index.

Nevertheless, a capex revival is the key to growth. Is there any other, more reliable, evidence of a capex turnaround than IIP data? Well, in the three months between 18 May and 24 August, bank credit to the infrastructure sector increased by 21,300 crore, compared with 9,620 crore over the same period last year. It’s not much, but it’s a beginning. And there are also the external commercial borrowings, which have been strong. Low interest rates abroad have been attractive for Indian borrowers.

The purchasing managers’ indices (PMIs) also show a bottoming out of the economy (See chart 2).

Non-oil imports in September, a proxy for the strength of the economy, were 4.5% lower than in September 2011, but then in June 2012 they were 17.8% lower than non-oil imports in June 2011. We need to see how much of the non-oil imports is due to gold, but the numbers seem to show some resilience.

In short, there are signs that the economy has improved a bit, but we could bump along at the bottom for a long time. The fiscal deficit is key. During April-July 2012, the government had already spent 54% of the entire year’s budgeted subsidies. The recent price hikes in diesel and the paring of the cooking gas subsidy have only scratched the surface.

Manas Chakravarty looks at trends and issues in the financial markets. Your comments are welcome at