The external trade data for June, published by the ministry of commerce and industry yesterday, indicate that the bleak state of affairs continues. Since October 2008, exports have been declining in dollar value terms, though some of the impact on rupee realisations by exporters was mitigated by the significant depreciation of the rupee. With the revival of portfolio investment inflows, the exchange rate has changed direction, so even that source of relief is now no longer available. In June 2009, exports in dollar terms declined by 27.7 per cent over June 2008, to $12.8 billion. The decline in rupee terms was only slightly less steep, at 19.4 per cent. The one small saving grace in this is that the June decline is slightly smaller than that for the April-June quarter, which was 31.3 per cent in dollar terms and 19.6 per cent in rupee terms. The bottom line is that, even as the rest of the economy is showing some signs of revival, exports continue to plunge. With the major destination economies still in recession and expected to remain that way for most, if not all, of 2009, there isn’t much prospect of a turnaround in the near future.
Declining exports, still sluggish domestic demand and lower oil and commodity prices resulted in imports falling even faster than exports during both June (minus 29.3 per cent ) and the April-June quarter (minus 36.5 per cent). Oil prices were climbing towards their July 2008 peak in the first quarter of last year; compared to that period, oil imports were down by almost 57 per cent during April-June 2009. Consequently, the trade deficit also shrank considerably, from $28.6 billion during April-June 2008 to $15.5 billion during April-June 2009. There is clearly no threat to balance of payments stability emerging from the dismal export performance as long as commodity prices remain subdued. Of course, they have shown signs, even if fleeting, of surging again. This combined with the impact of a strengthening domestic market may widen the trade deficit in the coming quarters; but the persistence of capital inflows at current levels should provide adequate cover.
Looking ahead, there are two indicators to watch out for. One, the base effect should kick in from October 2009, at which point the year-on-year growth rate should approach zero. Even if it turns mildly positive, that should be a source of relief for the export community. Two, the US economy, though still in recession, is doing a little better than expected. This could indicate a revival in consumer demand by the end of 2009, which in turn will mean better prospects for exports to that very significant market. But, for a large number of very small exporters, this could well be too little, too late. The financial impact of several months of volume declines will inevitably knock several of them out of the arena. The government ought to be thinking of how best to manage the shakeout and consolidation that is in the offing.
