Exports of crude oil and its products (18.3% of FY15 merchandise exports) declined 45.4% yoy in value over December 2014 to September 2015, in line with the fall in crude prices. Similarly, agriculture exports (9.7%) declined 19.1% yoy on account of a decline in the prices of agricultural commodities. The decline in these two categories alone accounted for around three-fourths of the overall decline in merchandise exports. Also, the sharp fall in the prices of other commodities along with lower crude oil rates has depressed the prices of many intermediate and manufactured goods. Consequently, the value of exported items has shrunk.
The agency believes that the prices of most major commodities are close to their bottom. However, merchandise exports (in USD) are expected to post single-digit negative growth for the rest of FY16 given that commodity prices will continue to be lower on a year-on-year basis. A marginal uptick in exports (in USD) is likely from 1QFY17 driven by the base effect.
The slowdown in economic activity in countries in Asia and Africa, which account for more than half of India's merchandise exports, may be a bigger challenge to India's export growth than demand from the United States (13.7% of merchandise exports) or Europe (18.1%). Industrial activity and personal consumption in the US and Europe grew at a low yet steady pace in 1HFY16. Demand conditions in the US and Europe are likely to continue to grow at a gradual pace and therefore will support export volumes from India in the near term. However, export growth to Asian (49.6%) and African (10.6%) regions is likely to remain subdued as economic activity in these regions has moderated due to falling commodity prices, volatile exchange rates, and moderating domestic demand. Thus, an uptick in overall export volumes is as unlikely as is a sharp downturn.
Ind-Ra expects the performance of export-oriented sectors to vary. A modest growth in export volumes is likely for sectors such as pharmaceuticals, textiles, automobiles and auto components typically targeted at the US and Europe. However, exports of items such as gems and jewelry will stay subdued as a result of weak demand for discretionary purchases by customers. IT exports will continue to grow only progressively as incremental IT spending by global corporates will remain modest.
The agency believes that the nominal income growth of corporates in most exporting sectors will remain depressed due to the deflationary impact of falling commodity prices. Also, most Indian corporates having an exposure to Europe may not be able to increase product prices to offset the decline in margins caused by the depreciation of the euro due to stiff competition from other Asian exporters. The agency therefore believes that the credit profile of corporates will not improve even in those sectors where a modest demand improvement is likely.
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