Just when exports were looking up, clouds over Europe threaten to dent exports in the coming months. As the sovereign debt crisis in some countries spills over and begins to hurt consumer sentiment across Europe, India’s exports could shrink 10-15 per cent in the coming months, like it fell when the US slipped into a recession.
Worse, analysts fear the Euro crisis could spill over to the US much the same way as the US recession hit major economies in Europe like Germany, France and the UK. Indranil Pan, chief economist, Kotak Mahindra Bank, said the impact of the euro crisis won’t be restricted to Europe. ‘‘It will have a spill over effect on global growth,’’ he said.
That’s because many European banks, which are holding these debt papers, are also major banks in the US. ‘‘Ìf US gets affected, we are talking of 40 per cent of the cake (getting impacted),’’ Pan said. The good news is that the spill over will take some time. The US fiscal measures is likely to wane out by the second-half of calendar year 2010.
Economists say the US ISM index (factory output) and the ZEW Institute’s confidence index in Europe which measures investors' expectations for the next six months, often move in tandem. Any slowdown in the US gets transmitted to the US, and vice-versa.
Economic sentiment in the eurozone fell in May at its sharpest rate since the financial crisis---the European Commission's Economic Sentiment indicator dipped to 98.4 from 100.6 in April, indicating how the debt crisis has started affecting the real economy.
Pradeep Mehta, director general, CUTS International, a Jaipur-based global think tank, said that exports to Europe have already been affected adversely. ‘‘Indian banks are not honouring LCs (letters of credit) of small European banks,’’ he said.
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The global downturn saw India’s exports turn negative for over an year from October 2008 to October 2009. Exports fell 22.3 per cent between April and November 2009. At its worst in April-May 2009, exports fell by 40 per cent. Biswajit Nag, professor at Indian Institute of Foreign Trade feels exports could shrink in a similar way due to euro crisis.
Exporters to Europe, who have seen profits wipe away by the 15 per cent fall in Euro and Pound Sterling in the last six months, fear a 15-20 per cent drop in volumes as they believe that poor consumer sentiment will start hurting retail sales. ‘‘Why will our customers increase prices by 20-25 per cent?,’’ said HK Maggu, CEO, Jyoti Apparels.
That’s why Biswajit Dhar, director general, Research and Information Systems, feels India should be pushing for an early signing of the EU-India free trade agreement (FTA), which is likely to be concluded by the end of this year. The FTA will provide India’s exporters better access to Europe and help them consolidate their position.
‘‘It’s not just about lowering tariffs but rules and market access.. Given the importance of Europe, we should move forward on the FTA and consolidate our position. We can’t afford our exports to falter,’’ Dhar. But not everyone feels Euro crisis will derail exports.
Ashima Goyal, professor of economics at the Indira Gandhi Institute of Development Research said the euro crisis will be negative for exports, but the impact won’t be that much. ‘‘Twenty years back, the OECD countries accounted for 50 per cent of India’s exports. Today, it has reversed with Asia... We don’t have to worried as our exports are diversified, both in terms of the export basket, and growth sources (markets),’’ she said.
But Indian exporters will to keep finding new markets. India’s exports have diversified in the last 4-5 years with new markets emerging Latin America, Southeast Asia, Africa. UAE has emerged as the largest destination for Indian exports, which many believe is an entry point for exports to Africa, and some of it finding its way to Pakistan.
‘‘Our export performance is more supply-constrained than demand-constrained. If we are competitive, exporters can find growing markets,’’ said Rajiv Kumar, director and chief executive, Indian Council for Research on International Economic Relations.
Exports had touched $19.9 billion in March 2010, which analysts say is comparable to exports in June/July 2008 (pre-recession). Exports had touched $11-12 billion in April-May 2009, before recovering $13-14 billion in June-July 2009. ‘‘In March, we were in a much healthier situation. It remains to be seen if that is sustainable,’’ said Pan.