Tapping global trade

Exports will need policy support

Union Finance Minister Nirmala Sitharaman rightly noted on Wednesday that Indian exporters needed to be far more receptive to what was happening globally. This is important because the surge witnessed by Indian exporters in 2021-22 is tapering. Exporters benefited a great deal from the surge in global demand as the world economy was recovering from the pandemic-induced disruption. However, even as global supply chains are now normalising, the world economy is slowing, partly because of monetary tightening by large central banks to contain inflation. Although the global economy is now expected to do somewhat better than previously estimated, it is nonetheless anticipated to slow considerably. According to the International Monetary Fund’s (IMF’s) latest update, the global economy is expected to grow 2.9 per cent in 2023, which is 20 basis points higher than the previous estimate. The global economy is estimated to have grown 3.4 per cent in 2022.

The IMF further expects global trade growth to moderate to 2.4 per cent in 2023, compared to 5.4 per cent in 2022. The moderation in global economic and trade growth is getting reflected in India’s trade numbers. The data released on Wednesday showed that India’s merchandise exports in January contracted by 6.5 per cent year on year. On a sequential basis, the level of contraction was 4.5 per cent. For the April-January period, exports grew 8.5 per cent. This is against the over 40 per cent surge witnessed in 2021-22, which took the total merchandise exports to a record $422 billion. In the current year so far, India has exported goods worth $369.25 billion. As things stand, total exports in the current year will not be vastly different from those in 2021-22. Notably, imports have also declined, partly because of lower commodity prices. As a result, the trade deficit fell to its lowest level in a year.
 

The sharp widening in the current account deficit to 4.4 per cent of gross domestic product (GDP) in the second quarter of the ongoing fiscal year had raised concern. It is, however, expected to come down. Analysts expect the level to be under 3 per cent of GDP for the full fiscal year. It is also worth noting that India is witnessing robust growth in services exports, which are estimated to have grown over 30 per cent so far in the current fiscal year. However, a cautious outlook and much lower hiring by large information technology companies suggest that pressure could emerge on this front as well. While the Reserve Bank of India has reiterated its confidence in financing the current account deficit, foreign portfolio investors becoming net sellers once again could put pressure on the external account and demand vigilance.

At the policy level, while global trade is expected to recover in 2024, India needs a robust policy to facilitate higher export growth. While the Union Budget did well to not increase tariffs further, there were expectations that it would start reducing them to help Indian businesses integrate with global value chains. However, the government decided not to start the process. In fact, there wasn’t much on trade, which can be a big source of aggregate demand, in the Budget. To be able to tap potential on the trade front, which can help attain higher sustainable growth, along with exporters, the policy will also need to adapt to changing global realities.