A V Rajwade: Trade-data puzzles

WORLD MONEY

It's difficult to see how, as the data suggests, there is no link between the rising rupee and export growth.

Last week witnessed the release of merchandise trade data (on customs-cleared basis) up to November 2007, and also the Balance of Payments data for the first half of the current fiscal year. While the numbers do not support my expectation that the sharp appreciation of the rupee will start impacting the trade and current account numbers, a point I will come to later in this article, there are several puzzling factors:

For one thing, the trade data evidence that oil imports have gone up by only 10 per cent. This is surprising when the per barrel price of the crude oil basket we import, has gone up by 35-40 per cent between the last and current years. From the core sector data which has come out only recently, the production of crude oil over April-October of the current fiscal year has gone up just 0.6 per cent compared to the corresponding period last year. Over the same period, refinery output is up 8.8 per cent. Overall, the comparatively low rise in the oil import bill is puzzling in the context of the higher global prices, domestic refining output, and practically flat domestic production.

While the oil import data come along with the monthly trade numbers, data about the export of petro-products are available only up to August 2007. These report that exports have gone up by about 22 per cent, or $1.9bn, compared to the corresponding period last year.

Projecting the first five-month petro-product export growth (a result of the global oil prices) up to November 2007 would suggest that about $3bn of the export growth is accounted for by this item. Even adjusting for this, exports of other products have gone up a healthy $15bn over the eight months, or an increase of 20 per cent-plus over the corresponding period last year.

Given that the export performance seems healthy even six months after the sharp appreciation of the rupee, proponents of a market-determined exchange rate believe that exports, or indeed, macro economic growth, have little to do with the exchange rate. With due respect to this view, one is not quite convinced of the conclusion that is being drawn. Before declaring the independence of trade performance from the exchange rate, one needs to keep in mind several other factors:

Non-oil import growth has remained strong, at over 35 per cent, compared to the corresponding period last year. While we do not have sectoral data of imports, it is difficult to believe that the $29bn increase is the result of a jump in real capital investments. One suspects that much of it is probably accounted for by consumer goods suggesting growing uncompetitiveness of domestic industry, in relation to imports.

Exchange rates affect trade only with a lag. It is generally believed that this lag can be anywhere between six to twelve months. Therefore, it may still be early days to declare a divorce between exchange rates and export competitiveness.

As for the last point, namely, exports of labour-intensive manufactures, I firmly believe that the competitiveness of the exchange rate remains a very material factor for economies exporting commodity-kind, undifferentiated manufactures (at the current stage, to my mind, India certainly falls in this category).

To elaborate, the demand for differentiated, brand-identified exports may not be very elastic to the exchange rate (Mercedes cars, or Sony or Samsung consumer electronics); surely, this is not the case with our exports. Hardly any Indian companies have brands known globally (a few Chinese companies are getting into that league lately); therefore, as of now and perhaps for the foreseeable future, our exports would continue to depend on price competitiveness. And the role of the exchange rate in this should not be under-estimated, whatever the lag between the two. Perhaps the "tipping point" is still to be reached.

The current account? The RBI has started reporting trade credit as a separate item in the capital account. However, one still has questions about the numbers. From the external debt report as of September 2007, published by the finance ministry, it seems that outstanding trade credit represents just one-and-a-half months of imports, and the proportion has remained unchanged for three years. This is difficult to digest, given the obvious economics and what so many corporates are doing.

avrajwade@gmail.com