India exports hit by China’s economic slowdown

Competitive pressure and global turmoil has put pressure on India’s growth. Yet the target is to double its exports by 2020, which will require aggressive policy corrections and better infrastructure.

Salespeople display sarees to customers at the Roopmilan store in Mumbai. Dhiraj Singh / Bloomberg

Nischal Puri, who set up a lingerie and sportswear company in India five years ago, says he is fortunate enough to be growing his exports to Australia and the Middle East by 100 per cent each year. He even plans to open an office in Dubai soon to cater to the demand in the region. But not all exporters are faring so well in India and Mr Puri believes with a more conducive environment, his business could be expanding at a much faster rate.

“India’s exports are under tremendous pressure,” says Mr Puri, the founder of Brandis India, which is based in Bangalore and currently has an annual turnover of US$16 million.

India has set itself a target of doubling its exports of goods and services to $900 billion by 2020, from $470m in the past financial year.

But this “might prove a tad too ambitious if the current cyclical slowdown lasts and structural issues are not addressed”, according to a recent report by Crisil Research, which is part of Standard & Poor’s.

India’s merchandise exports fell by 18.5 per cent in dollar terms to $174.3bn in the first eight months of this fiscal year, which runs between March 2015 to this April, government figures show.

India’s biggest exports include petroleum products, gems and jewellery, and textiles and clothes.

“Falling competitiveness is one of the structural factors restricting export growth,” it says. “For key export items such as gems and jewellery, and textiles, revealed comparative advantage has come down over the years. Non-tariff barriers such as high transaction costs and infrastructure deficit, too, create hindrance as India continues to lag most Asian peers on these parameters.”

There are global factors at work which are partly to blame, as the world’s economic recovery and trade growth remain slow. Lower oil and other commodity prices have had a significant impact.

“Small wonder India’s export performance has suffered,” Crisil says. “Export destinations are not doing well, prices of many export items have fallen, and the rupee, too, has appreciated in real terms against a basket of 36 currencies. But our analysis shows the decline in exports is more than that warranted by these factors.”

It explains that while global real GDP growth picked up from 3.2 per cent in 2009 to 2011 to 3.4 per cent in 2012 to 2014, India’s real growth of exports plummeted from 11.1 per cent to 4.1 per cent.

Almost half of all India’s exports are sent to other countries in Asia and the next biggest market for its goods is Europe. Economic weakness in these areas is taking its toll.

“Country-wise, the biggest contributors to the slowdown in India’s exports have been China, Saudi Arabia, Singapore and Japan, all of which have seen exports contract by double digits in fiscal 2015 and so far in this fiscal,” according to Crisil. “These are followed by European markets – the UK, Netherlands, Belgium, Italy and France – all showing continuous decline.”

Official data shows that the contribution of exports in India’s GDP fell from 25.2 per cent in the 2013 to 2014 financial year to 21.2 per cent in the first half of the current financial year.

“There is no hope for revival in exports in near future,” says Satish Modh, the director of the Vivekanand Education Society Institute of Management Studies and Research, based in Mumbai. “India’s merchandise exports are continuously declining and there is no sign of revival yet due to the current crisis in the world economy.”

While the India rupee has depreciated substantially in the past year to trade at about 66.60 to 66.80 against the dollar compared to around 62 a year ago, other emerging market currencies including the Chinese yuan have weakened much more sharply, which makes it even cheaper for foreign countries to buy products from countries such as China.

The slide in India’s exports has been such that on December 22, the ministry of commerce felt compelled to step in to try to calm fears by issuing a statement.

“A general sense of alarm has been generated by the publication of figures of India’s exports in recent months,” it said. “A closer look at the trade figures gives a satisfactory explanation for divergence in these figures. Petroleum product exports have fallen by 52 per cent. In the case of petroleum products, there has been steep decline in raw material prices, namely, crude oil. Similarly, export in gems and jewellery sector have fallen by 9.5 per cent. In this case also there is a significant decline in raw material price, namely gold.”

It added that while several sectors had indeed seen declines in exports, others were rising, including clothes, pharmaceuticals, ceramic products and glassware, tea and handicrafts.

“In short, there is no crisis in India on the export front and while there is a need for caution, there is no need for alarm,” the ministry concluded.

Varun Awtani, a corporate analyst at India Ratings and Research, a Fitch company, says that he shares this view that “the fall in merchandise exports [is not] a cause for panic” and that “demand conditions for corporates in India’s export sector are not as bad as feared”.

But he explains that “the nominal income growth of corporates in most exporting sectors however will remain depressed, due to the deflationary impact of falling commodity prices. Also, most Indian companies which have exposure to Europe may be unable to increase product prices to offset the decline in margins caused by the depreciation of the euro due to stiff competition from other Asian exporters”.

India Ratings and Research “expects the mixed performance of export-oriented sectors to continue, with some sectors performing better than others”, he adds.

China, Sri Lanka and Bangladesh are the main competitors for Brandis, Mr Puri says.

“India’s policymakers need to aggressively work towards developing key industry segments and promote them by schemes like offering lower interest rates, better infrastructure,” he says.

India urgently needs an “active export policy” with a focus on four or five main industries for exports, such as garments and mobile phones, “which should be followed up by aggressive government schemes and infrastructure that create India’s competitive advantage in the chosen segments”, he adds. It could also work on exporting more lucrative high-tech products, he says.

The prime minister Narendra Modi’s Make in India campaign, which aims to develop the country into a global manufacturing hub “is an initiative in the right direction”, according to Mr Puri.

“There has to be clear linkages between the global product demand forecast and promoting private partnership,” he says. “There also need to be faster clearances in ports. The export logistics needs immediate reforms. The government should appoint a separate ministry for exports logistics and undertake substantial reforms.”

India’s exports face another threat of being negatively impacted by the Trans Pacific Partnership, a trade agreement which was reached in October by 12 countries, including the United States, Vietnam, Japan, Mexico, Peru and Australia.

“Trans Pacific Partnership countries account for 25 per cent of India’s exports. So by not being a part of TPP, India risks losing out a significant chunk of its export market to rivals,” Crisil warns. “Clearly, India needs to invest quickly in skilling its large manpower and developing infrastructure to be able to attract foreign investment and become a world-class exporting hub.”

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