Tradewinds blowing strong for India but seas could be choppy

As developed countries—India's largest export markets—recover from the Covid-19 storm, improved growth have caused a rapid rise in exports from India in recent months. But some worrying fundamentals remain

By Prof. Parthapratim Pal and Anirban Dutta

Published: Aug 17, 2021 01:06:54 PM IST

Updated: Aug 17, 2021 01:29:23 PM IST

As some of the developed countries are the biggest export markets for India, improved growth in these countries have caused a rapid rise in exports from India in recent months

Image: Indranil Mukherjee / AFP

As the economic mayhem caused by the Covid-19 pandemic is gradually subsiding, global economic recovery seems to be taking a divergent path. Bigger economic stimulus, more widespread vaccination and possibly better social discipline in developed countries have resulted in faster economic recovery than in developing countries. As some of the developed countries are the biggest export markets for India, improved growth in these countries have caused a rapid rise in exports from India in recent months.

Trade data released by the Ministry of Commerce show that exports in Q1 FY22 grew by more than 86 percent over Q1 FY21. However, FY21 may not be an ideal benchmark as the country was going through a severe lockdown, and there were logistics challenge globally. Therefore, a better benchmark to compare can be the same Q1 of 2019-20. Using this period as the base, Indian exports in Q1 FY22 were around 18 percent higher. In fact, merchandise exports numbers achieved by India in Q1 FY22 is at a historic high. However, it is possible that some of these gains can be attributed to high prices of certain important export items like steel.

A look at the two major destinations of Indian exports confirms this trend. Imports by the US from India for the Q1 2021 (calendar year), is around $15.93 billion, which is 7.75 percent and 11.37 percent higher than that of Q1 of 2019 and 2020, respectively. This data also shows that India has marginally increased its market share in the US from Q1 of 2019. In the European Union (EU), imports from India in the period January to May 2021 has reached the same level (17.8 billion euros) as it was during the Q1 of 2019. Like in the US, in EU, India has also managed to increase its market share marginally.

India’s exports growth has mainly been due to rapid export expansion in Electronics and Engineering goods, along with primary commodities like iron ore and rice. Contrary to expectations, exports of pharmaceuticals and chemicals only show a marginal increase over Q1 FY20. On the other hand, exports of labour-intensive sectors like gems & jewellery and garments are lower than in Q1 FY20, indicating that the flight of migrant workers may have affected these industries.

Notably, this rise in exports has happened without significant export incentives from the government. The Merchandise Exports from India scheme was withdrawn with effect from January 1, 2021, vide a notification issued in Sep 2020. But the new Remission of Duties and Taxes on Export Products (RoDTEP) scheme is not yet operational. Though the government has recently introduced the Rebate of State and Central Levies and Taxes (RoSCTL) scheme for the garment sector and made-ups, it will take some more time for the benefits of this scheme to show up.

This export optimism is amply reflected in the recent management commentary from the leading lights of corporate India. For example, Bajaj Auto has added 200 bps to its global market share in two-wheelers and 600 bps in the three-wheelers segment in the Q1 FY22, and forecasts that FY22 will likely see their highest-ever exports. Bharat Forge has seen a sharp jump of 43 percent in exports in Q4 FY21, and the management expects strong export demand to likely continue. Bosch India’s exports, the bulk of which was to Germany and China, increased by 9.4 percent in FY21 vs FY20, bucking the general trend of export decline last year.

Cummins India states that exports to China and North America have rebounded strongly. Arvind Mills says that it is seeing strong export demand for fabrics. Schaffler India is optimistic on the export opportunity in the Asia-Pacific region in 2021, after their exports grew 48 percent last year, despite the pandemic.

It is evident that the export gain is cross sectoral – from textiles to large engines and auto/auto ancillaries. It is also interesting to note that Indian multinationals like Bosch and Cummins are exporting to their Chinese counterparts, clearly establishing the manufacturing edge and cost competitiveness of their Indian operations.

However, there are a few factors that may spoil this party for India. The first is due to a rise in trade costs because of logistical issues like container shortages and high ocean freights. The Drewery World Container Index (for 40 feet containers), which reflects the rates across eight major trading routes, rose to a high of $8,986 per container on July 22 2021, a 349 percent surge from a year ago. This increase in trade cost may put India at a disadvantage in distant markets over other producers who are in closer proximity.

Second, the rapid rise in demand by developed countries is leading to an increase in the price of crude oils, metals and other primary and intermediate goods. The supply chain disruption due to Covid-19 and the uneven growth between developed and developing countries are also resulting in sectoral demand-supply mismatches. These factors can raise the production cost for Indian manufacturers, which if passed on, might have some impact on their export volumes. Along with these, sectoral demand-supply imbalances have introduced some uncertainty in the global supply chains. For example, the global chip shortage is affecting India’s exports of automobiles.

Moreover, the INR/USD exchange rate is not helping the exporters. Data from the Reserve Bank of India (RBI) shows that the Real Effective Exchange Rate (REER, export weighted) has appreciated from 100.69 in June 2020 to 103.34 in June 2021. If the REER appreciates even more, then Indian exporters may feel some more pressure on their price competitiveness.

However, recent data unequivocally show that due to the resurgence of growth in the developed countries, their domestic demand is picking up in a big way. This increase in demand is likely to spill over and result in higher imports. If the various positive forward guidance given by the Indian corporate sector are to be trusted, then it is very likely that we may soon enter a phase where Indian exporters will grapple with a problem of plenty.

Prof. Parthapratim Pal is professor of Economics Group at IIM Calcutta. Anirban Dutta is an independent analyst.