Happy trade tidings for India?
4 min read 06 May 2013, 06:57 PM ISTThe improvement in India's trade performance may be misleading. Its exports to growing markets have fallen
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Finally, there seems to be some good news on the merchandise trade front. After declining for most of the previous fiscal, exports from India moved into positive territory in the last quarter. In the first nine months of 2012-13, the major cause of concern was the steady decline in exports, down by almost over 5% as compared with the previous year. However, a pick up in exports since January this year has not only reversed the declining trend, it has also played a part—together with a perceptible slowdown of import growth—in preventing another large expansion in the trade deficit. As compared with a steep 56% increase during 2011-12, provisional figures available from the department of commerce indicate that deficit on the merchandise trade account increased by less than 4% during 2012-13. The reining in of trade deficit could help tamp down current account deficit (CAD) to gross domestic product (GDP) ratio from the alarming 6.7% during the third quarter of the previous fiscal to around 5% according to recent predictions of the Reserve Bank of India (RBI). At the same time, RBI has sounded a note of caution as the expected level of CAD will remain twice the sustainable level.
The decline in India’s exports reflects ongoing uncertainties in the global economy. According to recent estimates provided by the International Monetary Fund (IMF), the global economy expanded by 3.2% in 2012, well below the 4% growth registered a year earlier. The emerging market and developing economies contributed to this decline, growing by just 5% as against 6.4% a year earlier. These findings are hardly unexpected given that China’s GDP growth was below 8%; off the 9% plus rate recorded in the preceding year, coupled with the slowing of the Indian economy. The advanced economies too saw a setback in the hesitant recovery that they had seen in 2011; witnessing an average growth of just 1%. The larger economies in the Association of South East Asian Nations (Asean), Indonesia, Malaysia, Philippines, Thailand, Vietnam, were the only exceptions, having recorded higher growth rates that were well above 6%. IMF predicts that this scenario will continue in 2013, particularly because of the sluggish growth of the emerging market and developing economies.
Were Indian exporters able to exploit the markets in the relatively faster growing economies and to stamp their presence? Available figures allude to the singular inability of the exporters to exploit the expanding markets, more so in the previous fiscal. It is clear that together with the government, the exporters will have to put in place strategies which help in repositioning Indian products in the dynamic regions of the world.
India’s inability to penetrate the Chinese market should be one of the key concerns for policymakers. Although the Chinese economy has started cooling since last year, it nonetheless remains the fastest growing economy whose dependence on the global economy for inputs is quite considerable. In recent months, China has shown an increasing tendency for imports: in March this year, China recorded a trade deficit of nearly $900 million, with imports surging by over 14% from a year earlier.
In 2012-13, India’s exports to the world’s second largest economy fell by more than a quarter, triggered by the steep fall in iron ore exports. This was caused primarily by the judicial ban on illegal mining in Karnataka and Goa. As a result, China has dropped off as India’s third largest exports destination for the first time since 2005. China also lost its position as the second largest trading partner, falling behind the US. The decline in exports to China was so sharp that it negated a modest decline in India’s imports. As a result, India’s already precarious trade imbalance with China has aggravated further; in the last fiscal, the $21.6 billion trade deficit was more than 1.6 times India’s exports to its neighbour.
The most worrisome aspect of India’s export performance is its dismal performance in the Asean region where exports fell by more than 10% during the previous year. The concerns are twofold. The first is that this region was among the very few that recorded higher growth in 2012, and India’s inability to exploit these expanding markets is, therefore, quite inexplicable. This dismal export performance is even more confounding given that India’s exports had increased by more than 43% a year earlier. The second and the more significant source of concern is that Indian exporters have preferential market access in these economies, following the implementation of the India-Asean free trade agreement (FTA). Expectations were that this FTA would allow India to exploit these fast-growing economies better and that this region would emerge as a major destination for India’s exports. However, several years after the implementation of FTA, the share of India’s exports absorbed by this region has hardly moved beyond 10%.
The experience with other FTA partners such as Japan and Korea is hardly different. The share of these North East Asian countries’ in India’s total exports has remained range-bound to 14-16% over the past several years before it came down to around 13% in 2012-13. With both Japan and Korea, registering higher than trend rate of GDP growth in 2012, exports from India should have performed better than they eventually did.
Biswajit Dhar is director general at Research and Information System for Developing Countries, New Delhi.
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