The sharp drop of 12.1 per cent in exports during October (when counted in dollars), reflects the drop in global demand, which has adversely affected every country's export performance, including China's. GDP in the US slowed sharply in the July-September quarter and, by the looks of it, the economy is decelerating even more in the current quarter-whether it is the manufacturing index or the unemployment rate, the indications are that the situation continues to get worse. The saving grace for Indian exporters is that, by virtue of the rupee having depreciated sharply over the past year, the rupee value of exports has actually increased, growing by 8.2 per cent over October 2007. This will allow them to protect their rupee margins to some extent from slowing volume growth. For the year to date, the growth rate still looks a healthy 23.7 per cent in dollar terms, but the numbers for September (when growth had dropped to 10.4 per cent) and October (which has seen an actual decline) point to a bleak second half, during which volumes will slow and rupee depreciation may not continue to provide the same degree of offset.
Imports also grew relatively modestly, increasing by just 10.6 per cent in dollar terms over October 2007. The fact that the average international price of crude oil during October 2008 was not much higher than a year earlier, has provided some relief, and this will be felt even more as the months pass. Oil imports grew by only 22 per cent during October, in contrast to the 60 per cent increase during the April-October period, and will decelerate further before showing an absolute decline by January (when the international price a year earlier touched $100 per barrel for the first time). Non-oil imports grew at snail's pace (5.5 per cent) during October, partly because commodity prices have fallen appreciably but also reflecting the slowdown in domestic industrial activity.
The combined effect of these trends is a 60 per cent increase in the trade deficit, to $73 billion for the April-October period, up from $46 billion during April-October 2007. This should be a matter of concern when capital flows have turned strongly negative. If these trade patterns persist, while capital continues to flow out, the foreign exchange reserves will get drawn down fairly quickly. It is important to recognise that the economy may be re-entering a phase of balance of payments pressures, something it has not seen since the mid-1990s.
The impact of export performance on GDP growth is less in India than in most other countries, including China, because exports are still a relatively small proportion of GDP (about 15 per cent). However, the pressure points are disproportionately on a few sectors which contribute significantly to export volumes and which, most importantly, are labour-intensive. There is, therefore, a significant risk of job losses as export establishments feel the strain or go under.
The government gives the impression of being sensitive to the situation, but it is not clear that its responses will be effective. The focus is on further concessions to exporters. However, if demand is severely constrained because of a recession in the major destination countries, and if other export-driven countries use the same instruments of lower duties, interest rates and the like, such measures will not be able to push export growth and help ward off job losses. The rupee's fall could help exporters compete more in some markets, but the long-term solutions lie in improving the state of the physical infrastructure, improving productivity and reducing the cost of transport, power, finance and other general inputs. At the moment, despite 17 years of on-off reform, the dice are loaded against exporters.