Trade winds

Early signs of recovery, but no clear trend yet

India's merchandise trade data for May, released on Wednesday, should come as a relief for the new government. Exports during the month, according to the data, grew by 12 per cent, the highest increase since October last year. This is a sharp recovery over exports in April, when year-on-year growth was only 5.3 per cent. The performance of three items was chiefly responsible for the exports turnaround in May - engineering goods increased by 22 per cent, petroleum products by 29 per cent and ready-made garments by 25 per cent. Coming as they did after a three per cent growth in passenger vehicle sales in May - the first increase after eight months - the exports data reveal an early indication of a pickup in the economy, which had slowed down in 2013-14 to record 4.7 per cent growth. The performance of engineering goods was striking. At $6.1 billion of earnings, it has now become the single largest export category, racing ahead of petroleum products. Ready-made garments too have shown robust growth, whose impact on the manufacturing sector and skilled jobs will undoubtedly be positive.

A stable rupee has certainly helped exports. Rising inflows of dollar in the last few months had inevitably put upward pressure on the value of the Indian rupee. The Reserve Bank of India (RBI) has acted wisely and soaked up the extra dollars from the market to prevent any sharp appreciation in the Indian currency that could adversely affect the competitiveness of exports. Net purchase of dollars by the RBI in March was estimated at $7.7 billion, and in April it was $5.8 billion. In shoring up exports, as important as the stable rupee was the rise in global demand, particularly in the advanced economies. There are now data to show that India's exports may be as sensitive to demand in the advanced economies as to rupee depreciation. Exports may grow in spite of rupee appreciation as long as the demand in the advanced economies remains buoyant. Similarly, exports may not benefit even after the depreciation of the currency if the advanced economies do not grow and create demand for goods. This should be examined further and could certainly be an important lesson for those who are managing India's exchange rate policies.

The data on imports in May need to be studied a bit more closely before drawing conclusions about the state of the economy. An 11.41 per cent drop in imports, aided by a 12 per cent rise in exports, has led to a significant contraction of trade deficit for May, which has helped paint a substantially improved trade balance scenario for the current year. But this could also be construed as an indication of a fall in domestic demand for goods with an adverse impact on the economy in general. But after excluding oil and gold (whose imports fell 72 per cent in May, thanks to a relatively high import duty on the yellow metal), imports for the month have actually grown, even though by a small margin of less than a per cent. This is the first increase in non-oil non-gold imports in the last 10 months. These are certainly the early signs of a recovery in domestic demand. But a clear trend will emerge only if the tempo seen in May continues in the following months.