Steering sustainable trade

India needs to push manufacturing exports

India’s merchandise exports are struggling. According to the latest numbers, exports contracted for the fourth straight month in May to $34.98 billion, as against $39 billion in the same month last year. Although imports also declined, the trade deficit expanded to a five-month high of $22.12 billion. On a sequential basis, however, exports expanded by a modest 0.7 per cent, while imports increased 14 per cent. The disaggregated data showed exports contracted in 17 out of 30 key sectors, including petroleum products, gems and jewellery, and engineering goods. On the positive side, electronics exports continued to do well and witnessed over 70 per cent growth.

Given the fact that commodity prices have come down and India is witnessing a meaningful surplus in trade in services, the current account deficit (CAD) is expected to remain manageable. Chief Economic Advisor V Anantha Nageswaran recently noted that the CAD was expected to remain under 2 per cent of gross domestic product this fiscal year. However, comfort on the overall balance of payments should not take attention away from challenges in trade in merchandise. In the near-term, shipment will be affected by weakness in the global economy. According to the projections of the Organisation for Economic Co-operation and Development (OECD), released earlier this month, global economic growth is expected to slow from 3.3 per cent in 2022 to 2.7 per cent in 2023. Growth in the US is expected to decline from 1.6 per cent in 2023 to 1 per cent in 2024.

The inflation rate in OECD countries is projected to decline from 9.4 per cent in 2022 to 6.6 per cent in 2023. Strong monetary policy action and moderation in global commodity prices have brought down the inflation rate, but it still remains significantly above the medium-term target. Financial conditions in advanced economies, therefore, are expected to remain restrictive in the foreseeable future, which will be negative for both global output and fund flows. The European Central Bank, for instance, raised interest rates by another quarter percentage point last week and indicated it would continue to push up rates till the inflation outlook changes substantially. While the US Federal Reserve paused after 10 consecutive rate increases, it is prepared to increase the federal funds rate again in the coming months. Latest economic projections suggest there could be two more rate increases, which would take the policy interest rate to the highest level in over two decades. Continued tightening of financial conditions will affect demand.

The government of India, on its part, is reported to be tapping its investment promotion agency and diplomatic missions to focus on 40 countries that account for about 85 per cent of India’s exports. In terms of policy, the government is said to be working on a twin strategy of export promotion and import substitution. However, it remains to be seen if this strategy will work in the current global economic and trade environment, particularly given India’s aversion to large trade agreements. Further, as a recent report in this newspaper showed, top export items are dominated by petroleum products. Mobile phones entered the top five rankings in 2022-23. India needs to broaden its success in mobile phones to other areas. A meaningful increase in manufacturing exports, in spite of near-term headwinds, will not only help provide lasting stability in external accounts but also create much-needed jobs for India’s rising workforce.