What the future holds for Indian exports
Recent macroeconomic events provide a favourable opportunity for a rebound of Indian exports in the near future
The Economic Survey of 2017-18 identified exports as the biggest source of upside potential for growth in FY18. The optimism seems appropriate with exports growing for the fifth consecutive month in January. But do the recent macroeconomic developments pose a threat or an opportunity for Indian exports?
The US Federal Reserve hiked the benchmark funds rate from 1.5% to 1.75% in March amid mounting concerns over the impact of Trumponomics —fiscal loosening and trade protectionism—on inflation in the US. An interesting development is the expectation of a more aggressive monetary tightening in the future, with successive hikes over the next couple of years. Such a hawkish stance has tremendous implications for the rest of the world, especially the emerging market economies. A significant capital outflow, stock market downswing, depreciating currency and growth slump are what usually follows. However, there is a silver lining and it is exports.
The ghosts of the May 2013 taper tantrum still haunt Indian policymakers. In anticipation of higher yields in the US, foreign institutional investors pulled out a huge chunk of their capital from India (around $13 billion) sending the rupee into a free fall—from 54.39 to 62.68—in the next three months. The upside: exports grew at 12.98% on a year-on-year basis in Q2 2013-14, the highest in a quarter for the five-year period between 2012-13 and 2016-17.
The current situation provides a favourable opportunity for an exports rebound in the coming quarters. There are at least four factors that augur well.
First is the spillover effects from dollar appreciation. A Nomura report forecasts the 10-year US treasury yields to rise to 3.25% in Q3 2018 from 2.95% currently. It identifies Q3 2018 as a quarter holding significant potential for dollar appreciation. This has implications not only for Indo-US trade but also for India’s trade with other countries, as over 88% of Indian exports are invoiced in dollars. Consider an Indian trader shipping goods to Japan and invoicing in dollars. Since most exporters set prices in rupee and invoice in dollars, the Japanese importer will have to pay less when the rupee weakens against the dollar, further stimulating Indian exports. This wouldn’t have been the case if the invoicing was done in the Indian rupee or Japanese yen.
Second, the inevitable trade war between the US and China offers another opportunity. US President Donald Trump imposed tariffs on $50 billion worth of imports from China, to which China retaliated immediately and equally. US importers from China cannot just shift this entire demand to US manufacturers as the local economy is already operating at close to full employment. Moreover, “reshoring” of labour-intensive assembling in the high-wage US will be too expensive. India can take advantage of the situation and further strengthen its trade ties with the US. With factory wages in China escalating to the highest in emerging Asia, India can enjoy an export boom in sectors otherwise dominated by China like electronics and apparel.
Third is a revival of demand from the European Union (EU). Financial crisis and PIIGS (Poland, Italy, Ireland, Greece, Spain) debt crisis broke the back of EU’s economic growth. This led to a decline in demand from EU for Indian exports. Arguably, 2017 marked the onset of growth revival in EU when it grew at 2.5%, the fastest since 2007. The projections for 2018 remain good, according to a European Commission report. With the EU regaining the share in India’s total exports it lost between 2008-09 and 2014-15 (from 21% to 16%), the resurgence in demand from the West will act as a boon for Indian exporters.
Fourth is the diversification of China’s manufacturing sector. The growth in the manufacturing sector in February was at its lowest in the past 18 months due to a crackdown over pollution in major industrial provinces. Understanding the long-term limitations, China has started diversifying its trading pattern by focusing more on technology-driven sophisticated goods and developing a comparative advantage in this segment. It has already become a major exporter of green tech. This is creating a vacuum in the manufactured goods export segment. Chinese micro, small and medium enterprises, riding on the back of low wages, cost of capital and an undervalued currency, have been eating India’s lunch when it comes to low-end, labour-intensive manufacturing. India should now capitalize on the opportunity.
However, it’s easier said than done. The real challenge for India lies not in the volume of its exports but the structure. One look at the top exports is enough to spot the conundrum. The biggest labour-intensive export industry—gems and precious metals—provides one-time value addition with negligible power to boost real economic transformation. Even in the context of seizing the opportunity in labour-intensive sectors such as apparels and electronics, India struggles for comparative advantage against low-end manufacturers, such as Bangladesh and Vietnam. This weakening competitiveness needs to be addressed to sustain employment-generating export growth. Although India may not be able to cater to the world market like China did for two decades, it should not lose out to rivals like Bangladesh and Vietnam.
India hasn’t missed the bus yet. The key lies in improving infrastructure, easing land acquisition and boosting human capital.
Anmol Agarwal and Suchika Chopra are, respectively, research associate at CAFRAL, RBI, and staff writer at Mint.
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