Madan Sabnavis: Exports shine, but in a booming world

For three years, exports have done well despite the rupee appreciating, but the growth has just kept apace global trends.

The Indian foreign exchange reserves story is one of the better narrated ones in the past few years. However, the focus has been more on current account flows such as software and foreign investment flows in the form of FII and FDI. The numbers of $24 billion in software, $12.5 billion FII, and $6 billion in FDI in 2005-06 have tended to dominate our vision and pre-empt our ears.

But there is a silent revolution taking place on the exports front where significant deviations from the past have being realised with exports growing at over 20 per cent a year in the past four years. They have crossed the magical figure of $100 billion, and we can now seriously talk of a figure of over $150 billion in the next couple of years. And what is striking is that this looks possible.

There are three distinct parts to this impressive growth in exports. The first relates to the relationship with the exchange rate. Theoretically, a weak exchange rate vis-à-vis the dollar was a prerequisite for higher exports growth because a weak rupee makes Indian goods cheaper in the market and, thus, obtains a competitive edge. In fact, economists have been critical at times of the Reserve Bank of India (RBI's) action of defending a strengthening rupee on grounds of such a measure militating against exports. Even in the Euro region, there is debate over the weakening dollar that has impinged the export competitiveness of Euro exports.

Table 1 provides information on the rate of growth in export as well as exchange rate movements in the past seven years. A positive change in the exchange rate denotes depreciation, while a negative sign denotes appreciation.

The table shows that in the past three years, the relationship between exchange rate movements and export growth was severed, which shakes the shibboleth that we need to have a weak rupee to increase our exports. However, it must be highlighted here that the growth in exports must be seen in the context of buoyant world economic growth in the region of over 4 per cent a year, as well as world exports, which grew by 5 per cent, 17 per cent and 21 per cent, respectively in the past three years. What is more important is that this growth is not concentrated in just the western developed economies but also the emerging markets, which will be seen as India's dominant trade partners in years to come.

The second revelation is the composition of our exports. India has traditionally been an exporter of agricultural products and, subsequently, transited to manufactured products with the tilt being more towards traditional products such as garments and textiles, besides the ubiquitous precious stones and jewellery. Has this changed over time?

Table 2 highlights some very interesting trends. The first is that both agriculture and manufactured goods have shown a declining trend. The second is that the share of ores has gone up with a growth of over 53 per cent in the past four years, especially in iron ore. The third feature is that we have started exporting petroleum products to countries such as Singapore, UAE, Netherlands, the UK and the US. This is commendable as exports of value-added products have risen. Fourth, engineering goods have picked up in importance and will be the growth driver in future, too. Lastly, while ready-made garments did recover in the past year, the country does not seem to have leveraged the benefits from the opening up of trade in this segment on account of the dismantling of the MFA in 2005.

The third interesting feature of our exports is that there has been a shift in its country composition. Traditionally, exports have been directed to the EU and the US. However, there are fairly rapid changes taking place on this score where the shares of the US (22.8 per cent to 16.8 per cent), Japan (4.5 per cent to 2.4 per cent) and the UK (5.5 per cent to 5.4 per cent) has fallen, while that of the UAE (5.7 per cent to 8.4 per cent), China (1.5 per cent to 6.5 per cent), and Singapore (1.8 per cent to 5.4 per cent). This is again significant because it has been accepted that the fastest growing countries in the next decade would be in Asia in particular.

In conclusion, it may be said that India's export scenario appears to be bright if the trends witnessed in the past four years are persevered with. Policies must focus on the growing sectors and more opportunities must be explored in the growing regions. The exchange rate should not really matter. However, our share in world exports has not really changed as it appears that so far we have been keeping pace with the global growth in exports. There is evidently need to go beyond this level of satisfaction.

The writer is Chief Economist, NCDEX Limited