Why Indian exporters must brace for the gale from US

Caught between the pincers of high inflation not seen since the 1970s and weak growth that has pushed the US into a mild technical recession, the party is over for US consumers. Indian exporters will experience a hangover as well because they are disproportionately dependent on the US compared to India’s regional competitors, and benefitted hugely by extension from the huge stimulus packages by America’s Donald Trump and Joe Biden administrations. Generous income support prompted record levels of discretionary purchases of goods by people confined to their homes during the pandemic. Now, Sharma told me, one client in the US asked his firm to put on hold 1 million pieces that were ready to be shipped in April until November.

Just-in-time inventory management has been temporarily abandoned and substituted by a strategy of forcing vendors in developing countries to delay and warehouse orders, even share losses. While the stock market in the US has punished stocks of large US listed retailers, one of the largest has decided to pass on the pain to its large suppliers by asking them to ‘contribute’ about 10% of their annual sales to the retailer to help offset losses from mountains of unsold goods. Americans and Europeans are now spending instead on services such as travel and restaurants, which partly explains the long queues at airports in the US and Europe. There is such a shortage of airport staff that some US airports now have sign-on bonuses of $5,000 for new hires.

India’s strong export performance in 2021 benefitted from a once-in-a-century surge in US demand, a black swan outlier of the happy kind. Freight ships were backlogged at Los Angeles’ port for weeks together and freight rates soared tenfold as people stuck at home spent on clothes and equipment and furniture for enlarged work-from-home spaces.

As evident in weak Purchasing Manager Index (PMI) numbers across Asia printed this week and the US decline in gross domestic product, that already seems as remote as a historical epic. India’s own PMI print for July on Monday showed that the sub-category of new export orders slipped to 52.6, from 54.9 in June. India is especially vulnerable because we are more dependent on the US.

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As Abhishek Kumar and Divya Srinivasan of the Centre for Social and Economic Progress observed on these pages recently, merchandise exports to the US from India grew 43% in fiscal 2021-22. Our nominal exports of jewellery and leather products to the rest of the world actually declined in 2021, compared with the mostly pre-pandemic yea r of 2019. Exports of these products to the US, by contrast, surged by 50% and 20% respectively. In other words, the huge US stimulus packages in 2020 and 2021 turned out to be a Marshall Plan to revive Indian labour-intensive exporters, albeit unintentionally. This is a reminder of how deep India’s linkages with US businesses are, a point to mull over for our legion of shrill anti-American commentators who defended Russia’s invasion of Ukraine. In contrast to our commentariat, Indian exporters are overly skewed to the US. In part, this is because both the previous government and the current one have done a poor job of joining trade groupings such as the Regional Comprehensive Economic Partnership or signing free trade agreements that would matter, such as with the EU, for which we have had on-again, off-again discussions for years. The main problem is that India has mostly missed out on embedding itself in global supply chains, as underlined in Amita Batra’s India’s Trade Policy in the 21st Century. The buyer Nagesh Sharma points to Myanmar, of all countries, as an example of a country that has proved adept at finding new markets in north Asia. He blames the fragmented nature and small size of our exporters: “Their thinking is not so global."

Much of the recent discussion of the rupee-dollar exchange rate is similarly blinkered. Many of the world’s currencies have depreciated against the US dollar this year without alarmist headlines in their media. As JP Morgan economist Sajjid Chinoy has pointed out repeatedly, India’s high-growth years, its export performance and a competitive rupee all bear a strong correlation.

While it is true that having a dynamic services exports sector and foreign portfolio flows have frequently put upward pressure on the rupee, the Reserve Bank of India’s currency management in recent months appears to overlook the boon a weaker rupee would be for exporters. I can’t help thinking that a nominee or two from labour-intensive industries should be appointed as ambassadors to North Block as well as RBI, both of which seem far removed from the competitive realities that confront our exporters.

The high demand we saw last year from the US will not return soon. To rephrase Oscar Wilde: To face a huge decline in export business from the world’s largest economy may be regarded as misfortune; to have few others to turn to looks like carelessness.

Rahul Jacob is a Mint columnist and a former Financial Times foreign correspondent.

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