Rajiv Kumar & Amitendu Palit: Has the fuel run out of India's exports?

Remove petroleum exports from the total, and export growth has halved this year.

Buoyant export demand has been one of drivers of the strong GDP growth in the last three years. As the table shows, exports have chalked up an impressive growth rate of higher than 21 per cent for the last four years (since 2002-03). This, combined with a growth of around 6.5 per cent in domestic consumption, has been the principal driver of the 8 per cent plus GDP growth rate in recent years. Although growth in investment demand is likely to play a more important role in sustaining GDP growth in the next period, a flagging off of export growth should be a cause of concern. We examine the available evidence and argue for some caution in dismantling the export incentive regime prematurely.

The evidence available points unambiguously to a marked slow down in India's merchandise exports during the current year. During the first seven months of 2006-07 (that is, April-October 2006-07) for which commodity-wise export estimates are available, exports have grown by 25.3 per cent, more than 8 percentage points less than 33.9 per cent in the corresponding period of 2005-06 (see table). Taking seasonality into account, the full year's growth rate might drop even further. The last five months of 2005-06 saw the overall export growth getting dragged by more than 10 percentage points. If a similar trend emerges during the current year, annual export growth in 2006-07 could be expected to come in at less than 20 per cent, the first time in five years that it would have declined to the below 20 per cent level. Indeed, in aggregate terms, exports during April-December 2006-07 were provisionally estimated at $89.5 billion, which, compared with $73.4 billion during April-December 2005-06 (provisionally revised estimates), show a growth of 21.9 per cent during 2006-07. Thus between the first nine and seven months of 2006-07, growth has already dropped by 3.4 percentage points. 
 

CLOUD BEHIND THE SILVER LINING India's Export Performance: 2002-03 - 2006-07 (April-October)
	Growth Rates (in %) in $ terms				'05-06	'06-07
	2002/03	2003/04	2004/05	2005/06	Apr-Oct
Primary Products	22.00	14.00	37.00	20.90	33.30	14.00
of which:
Agriculture and Allied Products	14.00	12.00	12.00	20.00	22.70	17.50
Manufactured Goods	21.00	20.00	25.00	18.30	30.10	14.30
of which:
Chemicals and Allied Products	83.00	27.00	32.00	16.60	29.50	15.50
Engineering Goods	30.00	37.00	40.00	24.20	39.30	37.90
Textile & Textile Products	14.00	10.00	6.00	18.30	22.80	5.30
Gems and Jewellery	24.00	17.00	30.00	13.00	29.60	-4.40
Petroleum Products	22.00	38.00	96.00	64.70	67.00	84.80
Overall Export Growth	20.00	21.00	31.00	23.00	33.90	25.30
Overall Export Growth excluding petroleum exports	19.00	18.90	27.10	18.80	30.60	14.20

The picture becomes significantly grimmer if we look at export growth net of petroleum products. Petroleum exports are estimated to have grown by 85 per cent during April-October 2006-07 (see figure) over the same period in 2005-06! Petroleum product exports increased to $11.3 billion during April-October 2006-07 from $6.2 billion in April-October 2005-06. The share of petroleum products in total exports more than doubled from 5 per cent in 2001-02 to 11 per cent in 2005-06 and has increased further to 16 per cent this year. Excluding petroleum products, export growth in the first seven months of 2006-07 comes in only at a very moderate 14.2 per cent, about half of the growth in 2004-05! This slowdown must be reversed if the GDP growth is to be maintained at recent levels.

It is reasonable to look at export growth net of petroleum products, given India's status as a net importer of hydrocarbons for the conceivable future. Petroleum product exports reflect neither the country's comparative advantage nor even a temporary supply surplus. These are a consequence of the rather perverse incentives built into the (formally abolished!) administered oil price regime. These have encouraged the largest refinery in India to export a major part of its output rather than supply it in the domestic market even at the cost of mothballing its retail outlets. The 25.3 per cent growth in India's exports in the current year thus far has much to do with the fast growth in petroleum product exports.

Otherwise, the slowdown in growth is spread across almost all product categories. There is a visible deceleration in manufactured goods exports that comprise more than 70 per cent of the total exports. Such exports dropped to 18.3 per cent in 2005-06 from 25 per cent in 2004-05 and further to 14.3 per cent in the first seven months of 2006-07, being less than half of 30.1 per cent in the same months of 2005-06. This could well be a result of a surge in domestic demand. But that would point once again to exports being a residual activity in India rather than being built on strong competitive and comparative advantages that should see greater concentration of exports as well as a rising share of Indian exports in particular global markets.

Gems and jewellery, one of India's largest foreign exchange earners, are likely to suffer an absolute decline in growth for the first time since 2001-02 if the current trend continues. Textiles, textile products and handicrafts are other key industries showing signs of export deceleration. Handicraft exports are only $191 million during April-October 2006-07, compared with $289 million in 2005-06. The growth in chemicals exports, another leading manufacturing category, is almost half that of 2006-07. Engineering goods exports growth at 37.9 per cent is the fastest among manufacturing with machinery & instruments, iron & steel, and other engineering items (aluminum and non-ferrous metals in particular), driving the growth in this segment. However, even these are showing a marginally lower overall growth than last year.

Primary product exports are around 16 per cent of India's total merchandise exports with agriculture and allied products making up almost half of India's primary exports. While overall growth of primary exports during April-October 2006-07 is almost 20 percentage points less than that during April-October 2005-06, the growth in agriculture and allied exports has dropped to 17.5 per cent from 22.7 per cent last year. Expectedly, cereals and pulses exports have declined during 2006-07, while sugar and processed food exports have been robust.

India's somewhat sluggish export performance during the current year might be partially attributable to an appreciation of the rupee in real terms in recent months. Real exchange rates, after declining from February 2006, began hardening from September 2006 again. The partial slowdown in global growth momentum witnessed in the latter half of 2006, particularly the lower Q3 GDP growth in the US and Japan, might have also affected the performance. Irrespective of the underlying factors, however, it is evident that Indian exports have lost pace and this does not bode well for overall growth.

What should be the appropriate policy stand for pushing Indian exports growth back on a higher trajectory? There is some merit in depreciating the currency, although, such a measure contains the attendant risks of strengthening inflationary pressures. But across the world a relatively devalued currency (and certainly not an appreciating one) is one of the principal instruments for achieving high export growth. India can hardly be an exception. Some means will have to be found to moderate domestic demand, perhaps by raising interest rates, especially for consumer credit. A more generalised interest rate hike attracts foreign capital flows and nudges the currency upwards as in the classical case of the Dutch disease. Also it will probably be more appropriate if exports, especially manufactured exports, continue to enjoy the incentives that have in the past encouraged them to strive harder. These incentives create a non-uniform exchange rate for importers and exporters and even for different categories of exports. These may have to be continued and indeed finetuned. Notable among these are fiscal benefits in terms of tax holidays. Given the weakening of the current export performance, it would perhaps be advisable that such fiscal benefits for exports be persisted with for the forseeable future.

Dr Rajiv Kumar is Director & CE, ICRIER, and Dr Amitendu Palit is Visiting Fellow, ICRIER