Can India escape the consequences of a transatlantic economic slowdown? While global commodity prices may soften and offer some comfort, international trade may be hurt. For much of the last year, exports were hurtling along at more than 30 per cent year-on-year, buoyed by new markets in Africa and Latin America. Exports for the financial year 2010-11 were a record $245 billion, while imports were of the order of $350 billion. Importantly, exports grew faster than imports, leading to a lower trade deficit than in the previous year. However, the recent statement by Union Commerce Secretary Rahul Khullar indicating a slowdown in exports during the July-September quarter is sobering. The projected decline is owing to a combination of a statistical base effect (it is virtually impossible to grow at 30 per cent year-on-year indefinitely) and the lack of depth in the new export geographies. The US, Eurozone and Japan still account for about 40 per cent of India’s exports and it is hard to see demand picking up there in the foreseeable future, which means export growth will be muted at best. The fall in commodity prices, mainly oil, certainly provides respite, but the demand for oil has traditionally been highly price-elastic. If a fall in price leads to a spike in consumption, it would not do much to lower the import bill.
While still healthy, the consumption story has weakened in recent months, as the sharp fall in automobile and white goods purchases shows. It could be reasonably expected that consumer sentiment will increasingly err on the side of caution should the economic slowdown persist. There are limits to how much rural India can compensate for a downturn in urban consumption, given that the average urban wage is more than three times higher. Constricted fiscal space precludes a sharp increase in government spending, especially with inflation spiralling out of control.
India will, thus, have to invest itself out of trouble! The share of gross fixed capital formation to gross domestic product has fallen by about five percentage points from the peak of 37 per cent in 2006-07. Much of this drop can be explained by far lower levels of private sector participation in capital formation. While the ongoing increase in interest rates has a lot to do with it, subdued future expectations are probably a bigger reason. The government has to do all it takes to reverse this sentiment at home. The frustrating tardiness in introducing meaningful reforms in areas as vital as land acquisition and labour markets is not helping. To its credit, the Union government has revived public investment, particularly in agriculture, which had been registering a secular decline since the mid-1980s. Improving the climate for investment at home would relieve the external stress to some extent. The revival of investment to pre-crisis levels should not be viewed as a temporary defensive measure, but as laying the foundation for sustainable high growth. If crisis provides opportunity, this is it. India should utilise it to the fullest.
