A combination of a slump in petroleum prices and the continuing slowdown in global growth has wreaked havoc with India’s merchandise exports. Merchandise export earnings slumped 16 per cent in fiscal year 2015-16 to $261.14 billion. Exports have shrunk for 16 successive months, while earnings from petroleum product exports collapsed 47 per cent in the last fiscal year to $30.2 billion. Also, the share of petroleum products in India’s export basket contracted to just about 12 per cent, from over 18 per cent a year ago. Such devastation was not seen even in the midst of an economic slowdown in 2009-10 triggered by the financial crisis of 2008, when petroleum prices slumped from the peak of over $140 a barrel to about $32. India’s exports had contracted a mere 3.5 per cent in 2009-10. But this time it’s different. The world is drowning in surplus oil with the US becoming a major oil producer thanks to shale oil, and Iran returning to the global oil market following the lifting of sanctions. The slowdown in China has also led to a softening of demand for other commodities, including iron and steel.
Oil production is expected to remain in surplus for some time more, at least till many nations find production unviable at prevailing prices. The low oil prices are widely expected to force many producing nations to cut output, which is then expected to trigger some increase in prices. But that recovery in oil prices is unlikely to lead to anything like the 40 per cent jump in export earnings witnessed in 2011-12. Also, it is not petroleum products alone that are dragging down India’s exports. Gems and jewellery, iron and steel, apparels and yarns, all are earning India fewer dollars than a year ago. Even basmati rice has not managed to escape the slowdown.
There are no ready solutions to ensure a turnaround in India’s exports. Diversifying to new markets is unlikely to yield increased earnings, given the structure of India’s export basket. Exporters lament that the Centre and the Reserve Bank of India have not done enough to make India’s exports more competitive. They want the RBI to depreciate the rupee, like China has done with its currency, to gain more markets. But RBI governor Raghuram Rajan is unwilling to go down that path, and has turned down the commerce ministry’s plea to do so. He is right in his stance that devaluing the rupee is not a good strategy to help exporters. While a cheaper rupee will provide temporary respite to exporters, it will create another problem that neither the Centre nor the RBI would want to deal with — costlier imports putting upward pressure on prices. A sounder and more long-term strategy would be to focus on becoming more competitive and quality conscious, and strategically rework India’s trade agreements, particularly in view of the mega trade pacts due to come into play shortly.