Global export economy has changed fundamentally
With even non-oil exports contracting for the eighth month in a row—the August contraction was 13.9% versus 1.7% in July—the outlook for exports looks quite terrible. At an overall level, including oil, April-August exports fell to $110.6 billion this year from $133.1 billion last year. Within this, oil exports fell to $13.7 billion from $28 billion and non-oil to $96.9 billion from $105.1 billion. Given that imports have also collapsed during this period, though, the trade deficit may not be a problem—this was $57.9 billion this year as compared to $57.5 billion, just a marginal change.
There are various reasons for the collapse, some local, but mostly global. In the case of engineering exports which contracted 29% in August, one of the reasons cited is the fact that, while the hike in steel import duty in June made imports more expensive, the government did not commensurately increase the value of the duty drawback—given the 20% safeguards duty imposed a few days ago, the drawback will have to be increased even more, and fast, if engineering exports aren’t to be further hit. And, despite talk of it for months, the government has still not been able to finalise the interest subvention scheme for labour-intensive exports. Given how exports have been falling for so long, it is unacceptable that the government has not been able to cobble together a plan to combat this in a manner which is not violative of WTO conditions. More so, since the share of manufacturing is high in the formal sector and also plays a significant role when it comes to capital investments by the non-formal sector. With around 15% of all manufacturing output exported, it is not surprising that, over the last decade, India’s IIP growth was the highest in the years when exports were growing at around 25% in dollar terms.
There is, however, a far more important reason for the export collapse, and the government may not be able to do too much in the short run. In the glory days of 2004-08, when global GDP was growing at around 5% per annum, the global exports trade was growing at roughly double the pace at 9-10%. Over the past 3-4 years, however, this relationship has broken down and, in some years, global trade has grown slower than GDP. In 2012, for instance, while global GDP grew 3.4%, trade grew just 2.8%; in 2013, it was 3.4% and 3.5%, respectively, and in 2014, both grew 3.4%. In 2015, while the IMF has projected a lower GDP growth, of 3.3%, it is looking at a higher export growth of 4.1%. But that was in July, in the latest update before the G-20 summit, the IMF talked of manufacturing growth in the first half of 2015 slowing markedly over that in the second half of 2014 and of world trade contracting in volume terms in the second quarter of this year. The reason for the shift in the global export paradigm, according to an article written in the Financial Times by Herald van der Linde, HSBC’s head of Asian equity strategy, China has integrated production a lot more over the years, necessitating lesser imports from the rest of the world—the share of imported components in China’s total exports fell from a peak of 60% in the mid-1990s to around 35% today. That, of course, also underscores the need for India to jumpstart its trade talks since, only if it is part of large trading blocs will its exports stand a better chance.