Who killed Indian exports?

The Centre and the Reserve Bank of India are at it again, this time trading charges against each other for sabotaging export growth. The Centre is claiming that exports are being throttled to death by a mule-headed RBI refusing to devalue the rupee to make it competitive against its other emerging market peers. Governor Raghuram Rajan has been equally strong in his defence, arguing that it is not the rupee but other factors that are responsible for the decline.

There has been widespread concern about India’s outbound external trade for some time now. With recent numbers showing a second consecutive year of annual decline in exports, the cries to take quick action have only grown louder. It is obvious that the Centre is targeting the low-hanging fruit — the rupee — as a quick-fix solution; addressing structural issues will take time to deliver.

The exporters are also pitching for rupee devaluation. But will this work?

Numbers, however, belie this assumption. It is true that the rupee was among the strong performers against the dollar in 2015 but if we examine the performance of the rupee against the dollar in the period between January 2013 and March 2016, we find the Indian currency is down 17 per cent. The Chinese yuan is down just 3.4 per cent in this period; other currencies such as the Singapore dollar, the Philippines peso and the Thai baht have also lost less than the rupee.

This period of depreciation in the rupee corresponds with the time when Indian exports decelerated. In absolute terms, merchandise exports are down from the peak of $30.5 billion recorded in March 2013 to $22 billion in March 2016. The year-on-year growth, too, is down since mid-2013 from 13.5 per cent growth to a contraction of 5.4 per cent in March this year. In other words, exports have consistently decelerated even as the rupee was weakening. It is, therefore, doubtful if another bout of rupee weakness is the salve to resuscitate export.

Raghuram Rajan has been brushing aside the Centre’s allegation by putting forth arguments for what, according to him, are the actual reasons for the sad state of affairs of Indian exports — a slowing of global trade and a shift in importing patterns of global economies.

At the Ramnath Goenka Memorial Lecture delivered recently, he explained that the reasons for slower growth in global trade compared to growth in global GDP were threefold. Firstly, as countries get richer, non-traded services constitute a greater fraction of GDP, causing GDP to grow faster than trade. Secondly, with trade-intensive capital goods’ investment muted because of global overcapacity, trade grows more slowly than GDP. Finally, as industrial countries become more competitive, and as China moves up the value chain, more of the inputs going into final products are being sourced from inside a country than from outside. Some global supply chains are, therefore, contracting. He thinks that due to these reasons the heady days when Indian trade in goods and services were expanding at a double digit pace will probably only be a memory for some time and we have to get used to a new normal — a slower growth rate in exports.

He has also made it clear that while rupee depreciation helps one section, there are many others who are hurt by it. Again, a sharp depreciation will roil the road towards internationalising the rupee, which is one of RBI’s long-term goals. The central bank has, rightly, adopted the strategy of intervening only when there is excessive volatility, preferring to stay on the sidelines at other times.

Rajan’s view is supported in the IMF. In its recently released World Economic Outlook report, it has analysed recent trade patterns of 174 countries and has concluded that trade growth has weakened in a majority of them.

For 65 per cent of the countries, accounting for 74 percent of global imports, the ratio of average import volume growth to GDP growth observed during 2012-15 was below that during 2003-06. This slowdown has been more pronounced in emerging market and developing economies than in advanced economies.

While the indirect cause for a slowdown in global trade is a slowing global economy, the breakdown of export numbers shows that it is crude oil that is the real villain, lurking in the shadows, which has fired the fatal shot. Petroleum products, which account for over one-fifth of India’s exports, were down 47 per cent between April 2015 and January 2016 compared to the corresponding period in the previous fiscal.

While the demand for petroleum products was impacted by slowing demand, the sharp cut in crude oil price has also impacted the value of Indian exports. In volume terms, the export of petroleum products is down just 18 per cent.

The other major component of Indian export, gems and jewellery, has been hurt by slowing consumption of discretionary items, and the export of machinery and capital goods is negatively impacted by lower capital expenditure, especially in commodity exporting countries.

The good news is that exports are not entirely a lost cause. If we consider absolute numbers, merchandise exports have been stabilising since last November when it hit a nadir of $20 billion for the month. Exports in March 2016 were 13 per cent higher in value terms, at $22.7 billion.

While the recovery in crude oil price has helped, there is an improvement in volume of petroleum products exported as well. From 4.4 million metric tonnes in October 2015, the export of petroleum products improved to 5.4 million metric tonnes in March 2015. So, over the short term, the base effect as well as improving petroleum products exports can provide some relief. The resumption of capital expenditure in the oil and gas sector will also help revive the exports of capital goods. Over the long term, however, a structural shift in changing the composition of exports is needed to move towards value-added products and not just basic intermediate products.