Time to harvest the tailwind in exports

The current high tide in global trade offers an opportunity for India to get its exports strategy in order before growth dips again

India’s merchandise exports have sailed through the pandemic after rebounding to its pre-pandemic levels in calendar 2020 itself.

The big upsurge was useful in propping up gross domestic product (GDP) growth at a time when private consumption was dealt an extraordinary shock, and private investments remained in limbo.

In this fiscal, too, merchandise exports have sprinted 55 per cent year-on-year in the first seven months (April-October), and a good 26 per cent over the corresponding period in fiscal 2020, or the pre-pandemic level.

Revving global growth, inventory restocking in early 2021 as economies opened, and a pandemic-induced shift towards consumption of goods — and away from services — lent thrust to exports.

To be sure, the second wave of the pandemic slowed the momentum a bit. More recently, some exogenous headwinds — global shipping logjams, semiconductor shortage, and spread of the delta variant — weakened the momentum in August-September. But exports were back with a bang in October, growing 14 per cent month-on-month on a seasonally adjusted basis.

There are three distinct takeaways from the trend in exports this fiscal:  

One, merchandise exports with high elasticity to global growth are driving the post-pandemic surge. Elasticity is calculated as the ratio of growth in exports to growth in world GDP, and a measure higher than 1 indicates high sensitivity to global growth. These items with high elasticity — chemicals (elasticity of 3.8 to global GDP growth), engineering goods (3.7), petroleum products (2.9), and gems and jewellery (1.1) — also have a high share of India’s exports basket. A few have been among the top five contributors to the growth in exports this fiscal, and during the periods of high growth in exports in the past.

The takeaway: As long as global growth is strong, these principal commodities will continue to do well.

Two, value of exports has grown faster than volume this fiscal, compared with the pre-pandemic levels. While volume rose a massive 76 per cent during April-August 2021 — over the low base of last year — it was up just 7.7 per cent from the pre-pandemic level. On the other hand, value is up 23 per cent over the pre-pandemic level.

The takeaway: High global commodity prices have provided a disproportionate lift to the value of exports.

Three, despite higher commodity prices, the terms of trade (the ratio of export prices to import prices) remain favourable to exporters, but the gap has narrowed. This suggests prices of imports are growing faster than those of exports.

The takeaway: A faster rise in import prices reduces the net earnings of exporters, especially in sectors with relatively higher import intensity, such as petrochemicals, pharmaceuticals, and gems, and jewellery.

Illustration: Binay Sinha

Merchandise imports

India’s merchandise imports have also been rising rapidly, rebounding after domestic demand was hit during the second wave. However, imports have recovered slower (15 per cent) than exports (26 per cent) this fiscal, compared with the pre-pandemic levels.

Particularly, imports of consumption goods (excluding gold and oil) have recovered faster than investment goods. Factors such as festive demand, pent-up buying in sectors less-hit by pandemic-related restrictions, and the shift towards consumption of goods — and away from services — have provided support. For instance, electronic goods, with a 12 per cent share of overall imports and 48 per cent in consumption goods imports, have seen stellar growth, followed by vegetable oils, and medical and pharmaceutical goods.  

There was some weakness in October imports — while year-on-year growth was 63 per cent, on a sequential (seasonally adjusted) basis, there was a 2.2 per cent decline, primarily because of gold, crude and petroleum products.

Services trade is recovering, but at a slower pace than goods trade. Within services, trade in information technology and financial services has recovered faster. Further, services exports are performing better than imports, which remain below the pre-pandemic levels.

The road ahead

India’s merchandise exports could continue to benefit from a rise in external demand in the short run. World GDP growth is expected to be strong at 5.8 per cent and 4.4 per cent, respectively, in this and the next calendar year, S&P Global said in October. Global trade is forecast to grow 28 per cent year-on-year in 2021, according to the United Nations Conference on Trade and Development (UNCTAD).

But risks persist — from supply-chain disruptions and material shortages, uncertainties around the impact of the delta variant, and medium-term scarring of global potential output.

A September 2021 UNCTAD report cautions that the momentum in global trade in 2021 may be short-lived, as it partially reflects inventory restocking cycle after very low inventory-to-sales in 2020.

Besides, sporadic flare-ups in Covid-19 caseloads even in largely vaccinated populations cannot be ruled out, which would affect external demand and keep trade volatile.

In January, the World Bank had said the pandemic has weakened the fundamental drivers of global growth, which will reflect in lower potential growth and trade prospects over the next decade.

The current high tide in global growth and trade has thus opened a structural opportunity for India to get its exports strategy in order. Down the road, the cycle will turn again, and exports will need fresh impetus. The Production-Linked Incentive (PLI) scheme can be a crucial bridge between short-term opportunities and longer-lasting growth.

A recent CRISIL Research report found that the PLI scheme has come as a much-needed booster shot for industrial capital expenditure, with sectors such as pharmaceuticals, telecom equipment, mobile, and electronics expected to see more greenfield investments. Enhancing domestic production capacity would also open avenues for exports in import-dependent sectors.

We must not miss the boat yet again and cede greenbacks to nimbler nations such as Bangladesh and Vietnam in labour absorbing sectors such as textiles and readymade garments.

In a global environment that’s getting more challenging, a marked improvement in India’s competitiveness through focused reduction in trade costs (tariff and non-tariff barriers, transportation, and other costs) is critical for longer term consolidation of our trade trajectory.

The hour is auspicious to hunker down and draw up further strategies that will ensure a structural upshift in India’s exports trajectory.

The writers are economists at CRISIL. Views are personal