Exports may fall more as India loses preferential status in EU

Core imports decline at modest pace; most of CAD improvement driven by falling gold import

The rupee has been on a winning streak since the start of this year. Despite the US cutting back its bond-buying programme, the rupee has held its own. In fact, it has appreciated 1.5 per cent over the past month, driven by steady foreign capital flows into Indian bonds and stocks.

The sharp improvement in the current account deficit (CAD) has contributed in equal measure to the rupee’s stability. Since last June, Indian exports have shown a pick-up, as India’s competitiveness improved with the rupee’s fall.

Unfortunately, the real picture isn’t so perfect. For starters, January’s trade data isn’t as promising, though the trade deficit has remained below the $10-billion mark. The deficit hasn’t narrowed because of higher exports as in previous months but because of lower gold imports.

  Elara Capital says it will look at trade data conditional on an eventual rollback of gold restrictions to get a clear picture of the trade deficit. India’s exports, which have grown steadily since June 2013, declined 3.7 per cent year-on-year in February. This might not be a monthly blip but the start of a secular trend. The European Union’s Generalised Scheme of Preferences, which gives preference to exports from developing countries, will no longer be applicable to India. Under the new rules applicable from January, preferential treatment will no longer be given to mineral products, textiles, motor vehicles, bicycles and chemicals originating from India.

Soumya Kanti Ghosh, chief economic adviser, economic research department at the State Bank of India, says Europe and Asia account for 70 per cent of the total exports. “In both the zones, mineral fuel, et al, corners the largest market share and based on linear extrapolation basis, this item will sharply contract in FY14.” With higher duties being slapped on Indian exports, a stronger rupee is surely not a good thing for Indian exports.

Another aspect about the trade data that worries economists is the fall in imports. While overall imports have dropped 17 per cent compared to last year, non-oil and non-gold ‘core’ imports are declining at a modest pace. Sacha Tihanyi, currency strategist at Scotiabank, believes while non-oil, non-gold ‘core’ imports can decline further, the rate of decline in these ‘core’ imports still continue to be fairly moderate in relation to the decline in gold imports and thus overall imports, putting on display the real drivers of India’s external adjustment. The rupee could come under renewed pressure if inflation comes higher than anticipation and industrial activity continues to weaken.