Blip or trend?

The export numbers for November 2005, released last week, came as a surprise. Aggregate exports, which have been growing handsomely for some time now, declined by 11 per cent compared to the corresponding month of last year. This is the first absolute decline in the quantum of exports since 2002, and appears to be the consequence of declines in three major categories""textiles, gems and jewellery, and engineering products. The detailed numbers on product categories and destinations, which will enable a clearer view of what happened, will be some time coming. Until then, there can only be speculation as to whether this is an aberration or whether momentum has seriously started to weaken.

The main reason for believing that this is just a blip is that November 2004 was an exceptional month by export growth standards. As a result of certain revisions and adjustments made to that month's numbers, exports grew by over 40 per cent, to almost $7 billion. On that base, it would not be surprising to see a slowdown, even a decline. However, when viewed against the backdrop of monthly export performance over the last couple of years, the "base effect" explanation is not very satisfactory. There were several months during this period when export growth was comparable to that of November 2004; one year later the growth rate continued to be impressive. For example, in December 2003, exports grew by over 50 per cent, while a year later they recorded growth of about 17 per cent. Similarly, in February and March 2004, exports grew at over 50 per cent and 45 per cent, respectively. A year later, they displayed growth of 11 per cent and 8 per cent, respectively, indicating some impact of the high base. However, neither month saw an absolute decline in exports, as is the case in November 2005. More significantly, exports in October 2005 exceeded $8 billion, the highest ever. November's volume of around $6.2 billion represents a precipitous decline from one month to the next.

This is particularly worrying from the perspective of the textiles and gems and jewellery segments, as merchandise importers in the USA and Europe would have been expected to stock up for the Christmas shopping season during November. Even if the seasonal impact is partly reflected in the impressive October numbers, it is important to identify the causes of this rather sharp drop. Any explanation based on exchange rate expectations does not hold much water in today's circumstances. In the olden days, exporters would guard against a depreciating rupee by under-invoicing exports and holding a portion of their revenues abroad. Now, they can hold money overseas legally, as well as hedge against exchange rate volatility by using market instruments. They therefore have no incentive to under-report export earnings.

In short, while there isn't yet enough evidence to suggest the beginnings of a downturn in exports, November's performance in combination with September's (growth at just 7.5 per cent) indicates at the minimum a weakening of the growth momentum. Since there has been no significant downturn in economic activity in the primary export markets, this can only be the result of competitors having grabbed market share. Perhaps the well-known and oft-repeated hindrances to competitiveness are finally beginning to have an impact on performance.