Weak exports of goods to the US aren’t a surprise but a slump in services is a worry
India’s exports of goods held up in September despite US tariffs, but shipments to the US are falling and a slump in the export of services doesn’t augur well. Yet, if more work gets offshored to India, our ‘de facto exports’ could rise even as direct earnings from service exports drop.
At first glance, India’s export story remains intact. Merchandise exports grew 6.7% year-on-year this September, on par with their growth in August. That’s the good news. As September was the first full month in which America’s steep 50% extra tariff came to bear on our US-bound exports, the fact that overall shipments held up against this adversity offers some cause for comfort.
However, a closer look at the month’s numbers released by the ministry of commerce, broken up by destination, offers a less cheerful picture. Exports to the US, our largest trade partner, fell 12% from their level a year earlier, marking their fourth straight month of decline.
This was only to be expected, given the harsh levies imposed by US President Donald Trump, first in early April (‘reciprocal’) and then hiked on 27 August (openly punitive). This double whammy has led the US share in our pie of exports to shrink from nearly 24% in June—its largest—to 15% in September.
Fortunately, this decline was more than offset by rising shipments to other foreign markets. Exports to the UAE, UK, China, Hong Kong and Bangladesh, among others, rose in double digits.
As far as Indian exports of goods go, not all sectors have been hit equally hard. This is partly a consequence of uneven US barriers. Major export sectors like petroleum, electronics and pharma were spared, though starting late September, the US raised its tariff on branded drugs to 100%.
The net result is that we have some success stories, like electronics, whose exports surged 50.5% in September, while other sectors found trade headwinds hard to ride out. For example, the US-focused sector of gems and jewellery grew only 0.4% that month, its year-on-year growth skidding to a near halt from 15.6% logged in August.
The government now has the tough job of identifying the worst-hit sectors and extending selective support, as these are likely to be among the most labour- intensive.
Meanwhile, recent dynamics of the US-China relationship suggest we cannot count on a tariff edge over Chinese exporters. A trade deal struck this summer with the UK and a partnership agreement with the European Free Trade Association should help unlock new markets, even as we await a US-India trade deal.
But the other news that should perhaps worry us relates to service exports, long our bulwark against trade barriers for merchandise. These fell in September to $30.8 billion, down 5.5% from the same month a year ago, a sudden reversal from the 12.2% rise recorded in August this year. Consequently, India’s overall export growth—counting both goods and services—slumped to just 0.8% in September, compared to 9.3% in August.
Unfortunately, the horizon for services does not look any brighter. Adverse US moves such as its hike in H-1B visa fees, its flip-flops of clarification notwithstanding, risk disrupting Indian service exports further. Since the US is the largest destination for these, prolonged uncertainty on this front is bound to hurt.
According to a report by financial services company Emkay, visa restrictions could slow growth in Indian IT service exports to low single digits. Of course, it is possible that as more US businesses move work overseas to escape the punitive effect of the visa-fee hike and India attracts many more global capability centres, what we lose on the swings we could gain on the roundabouts. In other words, jobs and ‘de facto exports’ could rise even as our earnings from direct service exports fall.
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