EVEN though there is euphoria that India will become one of the fastest growing economies in the world this year, it looks like a key indicator could spoil the party. And these are exports. Growth in fiscal year 2022-23 is expected to end at around 6.5%, likely the same level that inflation will reach by the end of the year. Exports, on the other hand, contracted 16.7% in October, reversing the trend of a steady rise over the previous 20 months. The previous year was even marked by a record surge in merchandise exports to $418 billion. But the good times are clearly over, as exports began to slow in September, followed by a sharp decline the following month.
The decline in foreign trade is not unexpected, given global recessionary trends. Just as demand had surged in the post-pandemic period, it is now slowing as economies around the world face one of the biggest crises in recent times. Inflationary trends are reaching 40-year highs in developed countries like the US and UK, prompting central banks to aggressively raise interest rates. This has created the specter of recession even as the war in Ukraine has triggered energy shortages across Europe.
The economic crisis has even led to political collapse in countries like the UK, with Liz Truss having to step down as Prime Minister after the shortest stint in its history. His transfer to Rishi Sunak was solely due to the fallout from his fiscal policies which led to a dramatic upheaval in the markets.
In this context, it is no wonder that the growing demand after the pandemic has cooled considerably in the main export destinations of the country. What is even more troubling is that this situation is not likely to change anytime soon. This is largely because the war in Ukraine continues unabated, while China persists with its restrictive zero-Covid policy. The ramifications of these developments are that the world is facing economic turmoil on a scale not seen since the 2008 financial crisis.
India, on the other hand, was seen as an exception to these developments. If inflationary pressures continue as in the rest of the world, they do not reach unprecedented levels. And the central bank is now confident that inflation will ease to around 6.5% by the end of the current fiscal year, signaling that aggressive rate hikes may be halted. Disruptions to the global supply chain have also affected the manufacturing sector, as elsewhere, but domestic demand has meant that sales of key products such as automobiles have increased further. Energy is the only issue that could create problems, especially on the inflation front, but international oil markets are now in slowdown mode. Fears of a global recession pushed benchmark Brent crude prices to around $87 a barrel.
Exports therefore remain the only critical weakness in the economy at present. Failing trends mean the current account deficit will widen further in the coming days. So far, projections made by banks and rating agencies are between 3.3% and 3.9% of GDP for 2022-23. In contrast, it accounted for 1.2% of GDP at $38.7 billion in the previous fiscal year. But the Reserve Bank of India is still confident that it will stay below 3% in the current financial year. At this level, it would be considered comfortable because a deficit of 2.5 to 3% is sustainable for this country.
To achieve this level of comfort, much will depend on the pace of exports. The 16.7% drop in merchandise exports in October followed a 10.2% rise the previous month. This reflected a sharp drop in global demand, with the impact felt across most non-oil categories including handicrafts, textiles, iron ore, chemicals, engineered goods, gemstones and jewelry. Exports of textiles, a key export product, fell 41% in the month, while apparel exports fell 21%, according to industry estimates.
Similarly, oil exports, which had jumped 43% the previous month, recorded an 11% contraction in October. This can be attributed partly to lower global oil prices and partly to slowing demand. Import growth also weakened slightly, falling from 8.7% to 5.7% during the month. Oil imports, however, jumped 29.1% as global prices rose.
The sudden surge of fortune on the trade front in October cannot be seen as an isolated development, given the deteriorating geopolitical scenario. Japanese brokerage Nomura has already predicted, based on the slowdown in exports, that global headwinds will impact the Indian economy. He expects the situation to change significantly in the coming year, with domestic growth also peaking this year. It has thus lowered its growth estimate for the financial year 2023 to 4.7% against 7.2% previously, on the grounds that India’s investment cycles are linked to export cycles.
Policymakers need to consider the way forward on the trade front, given the hostile external environment. There could have been a silver lining for exporters, as the depreciation of the rupee should have provided a competitive advantage in normal times. However, this advantage was blunted by the fact that other currencies also fell against a rising dollar. Even so, services exports are expected to reap the benefits of the lower rupiah in the current fiscal year.
Among the measures needed to help exporters at this time is the removal of infrastructure bottlenecks at gateways, ports and airports. Documentation should also be kept to a minimum as India is known to have one of the heaviest export processes. Such changes will significantly reduce long-term costs. This is imperative as slowing exports can pose a real threat to the country’s hopes of achieving a high growth trajectory, not only now, but also in the years to come.