| It seems mystifying that exports fall even with a weakening rupee |
The fall in India’s merchandise exports in October is one of several developments that point to increasing stress on the country’s external economy. It is for the first time in seven years that monthly exports have contracted.
However, for all its eye-catching headline appeal, it is not the sharp decline in a particular month that is the principal cause for worry. Although exports in the first seven months have grown by 23 per cent in dollar terms, the deceleration since September is equally disturbing.
October exports at $12.82 billion were more than 12.1 per cent below the performance a year ago ($14.58 billion). It is little consolation that in rupee terms these grew by 8.2 per cent during the month.
The important point is that exports measured in dollars fell at a time when the rupee was depreciating sharply. In September, the rupee was 44 to a dollar. By November, it was down to 50 and is now trading around that level. In normal times, a strengthening dollar (or a weaker rupee) is good for exports: it improves the competitiveness of Indian exporters.
The opposite — a rupee appreciation as was experienced last year — hurts them. Indeed, exporters had then lobbied and won some concessions from the government by way of partial compensation. Not all exporters stand to gain automatically from a cheaper rupee however. Export receivables are often sold forward at the then prevailing exchange rate applicable to forward contracts. Even so, it seems mystifying that India’s exports have witnessed a fall at a time of rapid decline in the rupee’s value.
One reason is that our closest competitors have also aligned their currencies with the dollar in such a way that they do not lose out. A second reason is that a substantial portion of exports depend on imported inputs. A dearer rupee obviously inflates their manufacturing costs.
The third and the most fundamental reason is of course the global slowdown. Practically all countries including those relying on exports to a greater degree than India have seen falling exports. This has been an inevitable consequence of the global slowdown. Recently, the U.S. was officially declared to be in recession, a tag which nearly all countries in the Euro zone as well as Britain and Japan already have.
The IMF, the World Bank and others expect the developed economies to contract during 2009. Developing countries in comparison will fare better but far below their recent sterling performance. Weak demand from the developed world will become even weaker as the recession spreads and deepens. Various countries are therefore trying to boost domestic demand through tax rebates, large public sector spending and a variety of unprecedented monetary measures.
The growth in imports too has been modest in October. Compared to last year they grew by 10.6 per cent in dollar terms. The petroleum import bill has naturally been lower and will drop even further reflecting the downtrend in crude prices. The cost of India’s crude basket peaked at $142 a barrel on July 3 but has been coming down. (Somewhat belatedly the government reduced the retail prices of petrol and diesel by Rs. 5 and Rs. 2 a litre, respectively, on December 5).
Lower global oil prices augur well for inflation management. The RBI estimates that inflation could well go down below 7 per cent, the monetary policy’s target for March 2009. But on the negative side, the fall in global oil prices is due to lower demand, a consequence of the slowdown. Non-oil imports grew by just 5.5 per cent, partly due to lower commodity prices. But inasmuch as fewer capital goods and consumables are being imported, a lower non-oil import bill is a cause for worry as it corroborates the ongoing slowdown in industrial activity.
The trade deficit has gone up to $73 billion during April-October 2008 from $46 billion during the corresponding period last year. What makes this development particularly worrying is that capital inflows are reversing themselves sharply. Also, invisible earnings — inward remittances and earnings from software — will also be affected by the global slowdown. The IT industry’s sterling performance over the post few years cannot possibly be repeated.
The U.S. has been its main focus and much of its earnings have come from the banking and financial sector, worst hit by the ongoing economic crisis. The widening current account deficit is such that it might put pressure on the balance of payments for the first time in several years. Conventional remedies to bridge the deficit such as boosting exports are themselves hostage to the deteriorating global situation.
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