Hope for exports: Is it real or imagined?

The pace of contraction in May was the lowest since November 2014, fuelling optimism that the decline in exports has petered out

After declining for 18 consecutive months, latest data provides a glimmer of hope that India’s exports are on the cusp of a revival.

While exports were lower at $22.17 billion in May, compared to $22.34 billion in the same month last year, the pace of contraction has slowed sharply. Exports contracted 0.8 per cent in May, compared to 24.4 per cent in September last year. The pace of contraction in May is the lowest since November 2014. Further, non-oil exports grew for the first time in May at 1 per cent after shrinking for more than a year.

Commerce Minister Nirmala Sitharaman was quick to construe this as a signal that the decline in exports had petered out. “The fall in exports has now been arrested. Last month’s data indicate a fall of 0.7 per cent,” said Sitharaman. “The bottoming out (of the fall) has happened. From now, it will be a slow recovery and a steady pick-up.”

While petroleum exports continue to contract, as the performance of this segment in value terms is largely a function of the price of oil, does the expansion of non-oil exports signal that exports are on the cusp of a revival?

Economists are cautious about drawing any inference from recent data. “It’s difficult to say at this moment that the decline in exports has petered out based on a few months’ data,” says Pronab Sen, former chairman, National Statistical Commission.

Madan Sabnavis, chief economist at CARE,  agrees. “Export growth was negative last year, so it’s misleading to say it has bottomed out. There is no conclusive evidence that there has been a revival in production. Even if it shows a rise in the coming months, it’s likely that the base effect is playing out.”

Outshining others
Much of the rise in non-oil exports can be traced to the sharp rise in gems and jewellery. This segment grew a staggering 24.3 per cent in May, followed by chemicals at 10.9 per cent and engineering goods at 2.2 per cent, while pharmaceuticals declined sharply by 14.2 per cent and ready-made garments by 5.3 per cent.

The gems and jewellery sector has registered a rather robust 14.8 per cent growth over the March to May period this year, rising to $10.8 billion from $ 9.4 billion in March-May 2015. But despite this stellar performance, the outlook for the sector is uncertain.

  This is because imports of gold, silver and precious & semi-precious stones, which are used as inputs in the sector, have declined sharply. Recent data show that the combined imports of gold, silver and precious & semi-precious stones declined to $10.7 billion over March to May 2016 from $17.5 billion in March to May 2015. The jewellers’ strike could have been partly responsible for this fall.

“It seems likely that domestic inventories would have been significantly depleted during this period, replenishment of which may boost imports in the coming months,” says Aditi Nayar, senior economist, ICRA.

It is thus possible that this fall in imports could adversely affect exports going forward. “The double-digit pace of growth of gems & jewellery exports may not sustain,” says Nayar, though she adds that “global demand is likely to pose more of a constraint than the availability of inputs in the domestic market.”

Another major export segment is engineering goods. The segment recorded a turnaround in May 2016, though the pace of growth was admittedly modest at 2 per cent. In value terms, it was up $124 million compared to last year. But is this trend sustainable?

Economists contend that to a large extent, sustaining this trend depends on demand emanating from countries in West Asia and Africa. This in turn is influenced by prices of crude oil and other commodities. But with the World Bank lowering its global trade projections owing to “weaker demand from commodity exporters”,  the outlook for the sector doesn’t look bright unless oil prices perk up sharply. Also the devaluation of the Nigerian currency is likely to pose a problem for Indian exports.  Further, as Sabnavis points out, there does not seem to be any fresh investment being made in the sector in India. Export growth could thus be restricted owing to capacity constraints.

Global headwinds
Textile is another segment that could potentially boost India’s exports. While a National Textile Policy is expected to be tabled in the next Cabinet meeting, growth is likely to be subdued due a challenging external environment. Low fibre prices have moderated growth in value terms, despite a rise in volumes in the second half of 2015-16.

“Given that textile exports from India are predominantly cotton-based, and ICRA expects cotton prices to remain stable in FY2017, exports growth is likely to record a modest 5 per cent rise in the current fiscal, falling short of the government’s  target,” says Nayar. Further, policy changes in China, which is seeking to extend its hold on the entire supply chain, could be a source of concern.

Add to this sluggish global growth and the outlook for India’s exports doesn’t look bright.  

The recent jobs data emanating from the US is hardly encouraging. Non-farm payrolls rose by a mere 38,000 in May, forcing the Federal Reserve to keep rates unchanged. Growth in China is also not seeing any sign of perking up. The economy is projected to grow 6.7 per cent this year, down from 6.9 per cent last year.

With weak demand, the World Bank has lowered its June projections for global trade to grow at 3.1 per cent, down from the 3.8 per cent it projected in January. “Global merchandise trade remains subdued, reflecting rebalancing in China and weaker demand from commodity exporters, which together contributed to an outright contraction in overall EMDE (emerging markets and developing economies) merchandise imports in 2015,” it said. Add to the mix the specter of Brexit and the outlook for exports doesn’t look that promising.