Trick or trade?

Overall growth is needed to sustain export growth

What is driving the recent surge in Indian exports? Improved competitiveness even in a slowly growing world economy? An ability to serve buoyant markets in Asia better? Or, just a rush to beat the now-extended deadline for the winding-up of the Duty Entitlement Pass Book (DEPB) scheme? The last hypothesis suggests that Indian exporters are simply relocating inventories from godowns at home to warehouses abroad to get the benefits of DEPB before the scheme is wound up. Whatever the reasons, the fact remains that the April 2011 exports of $23.85 billion represent a year-on-year increase (in dollar terms) of 34.4 per cent. This comes on top of an even more impressive performance in March 2011. An uncomplicated extrapolation of these numbers would suggest that exports for FY 2011-12 would be of the order of $286 billion, while imports would correspondingly be $394 billion. The resultant annual deficit of $108 billion would be slightly lower than the $115 billion witnessed last year. At this rate of growth, the 2015 export target of $500 billion set by Commerce Secretary Rahul Khullar could be reached a year earlier. It would take a lot though to sustain this rate of growth in exports. The decision to diversify export geographies to include Africa and Latin America needs to be commended as astute out-of-the-box thinking, brought about through a combination of aggressive business and sensitive diplomacy. The composition of the export basket, especially to these destinations, has also changed to include a higher proportion of value-added goods. This trend is likely to continue into the foreseeable future as the effect of the expanded Preferential Trade Agreement with MERCOSUR pans out and the proposed free trade agreement on similar lines with the Andean economies is signed. The prognosis for Africa is similarly optimistic, as African economies especially in West and sub-Saharan Africa grow at unprecedented rates and local incomes rise sharply. However, sharply increasing domestic wage rates and high input costs can be potential headwinds that can slow down the export growth story.

The increase in imports during April 2011 has been mostly due to non-oil imports that grew at a year-on-year rate of 17.5 per cent as opposed to 7.7 per cent for oil imports. There is not much that India can do to influence oil prices. Improvements in efficiency and inter-fuel substitution impact consumption with a lag and, hence, cannot be expected to have an immediate impact on imports. The biggest disappointment has been the tardiness with which domestic oil and gas discoveries that were announced with great fanfare are being brought on stream, if they have been at all. Among non-oil imports, capital goods and consumption goods are the largest contributors. The import of capital goods is not necessarily a bad thing, as long as it helps engender economy-wide productivity gains. The same cannot be said of consumption goods, especially at a time when India does not have a foreign exchange buffer to fall back on. While the impact of a withdrawal of the DEPB scheme remains to be seen, sustaining export growth requires a range of policy initiatives aimed at improving the overall environment for manufacturing and business in India.