Export eventualities

The data released by the ministry of commerce and industry indicate that India's exports grew by almost 30 per cent during May 2006, touching $9.4 billion, as compared to $7.2 billion a year ago. During the same period, the import bill touched $13.2 billion, up from $10.8 billion a year ago, with a relatively slow growth rate of 21.7 per cent. Thirty per cent growth under most circumstances would be quite impressive. In today's context, when there are increasing concerns about the sustainability of capital inflow, this news is even more heartening. The management of the balance of payments situation would be greatly helped by a narrowing of the current account deficit, to which the most important contributor is the trade deficit. Although it widened marginally in May, a persistence of this pattern of growth rates for a few months will begin to bring it down. From the balance of payments perspective, then, the critical question is whether exports will continue to grow at these rates and also maintain the distance from import growth rates.

There are pointers in both the negative and positive directions. The most important negative indicator is the concerted rise in global interest rates in response to heightened inflationary pressures. It appears that oil prices are finally beginning to get to the global economy and, though differing in degree, virtually all central banks are placing their priorities on containing price increases. This will have a dampening effect on growth, if not immediately then certainly over the next year or so. To add to this, declining asset prices will probably affect consumer spending, not to mention investment, adversely, which will also have a direct impact on India's exports. While most current forecasts of world economic growth during the current year do not anticipate a rapid meltdown, it would be surprising to see these forecasts not being significantly ratcheted down for 2007. There is virtually nobody who expects the energy price scenario to change for the better (from the oil importers' perspective) in the for eseeable future. In a scenario of declining global appetite for consumption, countries that have depended so heavily on exports for growth will scramble to protect their respective market shares. Inevitably, some will do better than others.

The positives for India really come from the diversification of its current account inflow over the last decade. Even if its merchandise exports face the risk of slowing growth, its service exports will most likely remain insensitive to a potential global slowdown. It is often argued that a slowdown in the US will, in fact, increase the pressure on companies there to offshore as many processes as possible to save costs and India remains well-positioned to capture a large share of this business. Further, while high oil prices hurt importers, they are a windfall to exporters; India's merchandise and service exports (including labour) to some of these countries should offset some of the potential decline in exports to other countries.