Economy: Why are India’s slowing exports a cause for concern?

Economy

How are other export-dominated countries faring? Why is the government optimistic that domestic demand will counter the effects of declining exports?

News : India’s exports declined about 16.7% in October compared with the year-earlier period. This is the first slide reported for any month since February 2021. October imports rose at a much milder pace than earlier, most likely because of softening commodity prices worldwide, and trade deficit widened by as much as 50%.

How is the export sector faring?

·       Slowdown to high inflation in developed regions:  Engineering goods, which have lent a strong shoulder to India’s goods exports in recent years, slid 21%. The Engineering Export Promotion Council of India attributed the slowdown to high inflation in developed regions, falling demand in China, slowdown in the EU and the U.S. and the Russia-Ukraine war.

·       A decline of $2 billion worth of exports was seen in steel and allied products, highlighting the fact that the government had levied an export duty on these products to help increase local availability and hence temper local prices.

What about other exporting nations?

·       Vietnam, an export-dominated country, recorded a 4.5% growth in exports from a year earlier to $29.18 billion amid ‘sustained foreign demand’. Similarly, exports by the Philippines grew 20% in October.

·       China is an outlier this year because of stringent lockdowns that are impacting manufacturing output, though lockdowns are being eased currently following protests against restrictions.

Is domestic demand enough?

·       The report states that the global slowdown is driven by a ‘confluence of stubbornly high inflation, rising borrowing costs and geopolitical tensions’, but cites local demand as being ‘resilient’.

·       It also expects a ‘re-invigorated’ investment cycle which will spur growth and job creation in the coming days.

·       One seemingly positive signal for the economy is the private sector capital expenditure. Private capex typically depends on credit, or loans, from the banking system.

·       There have been reports of banks scrambling to gather deposits, with videos of managers and their teams walking the streets announcing deposit rates to help mobilise funds for credit growth. Whether this credit growth is due to inflation and low base effect from last year, remains to be seen over the coming months.

What about our foreign reserves?

·       Foreign exchange reserves stood at about $561 billion. If we take October imports at $56.7 billion (an eight-month low) as a benchmark, then we have roughly about 9-10 months’ worth of import cover which isn’t as healthy as the 14-to-15-month cover that we had seen during the pandemic. However, economists feel this isn’t as bad as 2013 when foreign investors began pulling out of India’s financial markets. At that time, we had less than seven months’ worth of import cover. And if anything, forex reserves have been rising in recent weeks signalling hope for the future.

Source: TH

Team Manvendra IAS