Expert Zone

Straight from the Specialists

Exports on the bounce

September 20, 2011

(The views expressed in this column are the author’s own and do not represent those of Reuters)

Exports are performing exceedingly well. This does not look like a spark in the pan because the commendable performance has lasted more than 10 months in spite of repeated warnings by the Secretary, Ministry of Commerce, that the escalating trend line will bend down because of the slowing of the U.S. and EU economies.

The export sector is perhaps the only one standing out in the wilting growth of India’s economy. Industry has slumped, inflation is raging furiously, interest rates are shooting up and the stock market is in the dumps. Exports are an exception with an average growth of 55 percent in the six months since April. Why?

For two reasons. First, there was a timely change in the direction of exports. Second, there was a change in the composition of exports which suited the new markets.

It may appear that Indian exporters had an added advantage of currency depreciation. There was a fall in the value of the rupee in terms of the dollar by about 6 percent. But most of the fall came only in September and may, if sustained, help exports in future. But it would not have been an important mover of exports in the past six months.

What helped India most was the change in export destination. The share of exports to developed countries like U.S., France, Germany and Japan which have lost their growth momentum, shrank. That of Asia and Africa which are more progressive, increased. For instance, 43 percent of the increase in India’s exports in April-May went to Asia (including the Middle East) and another 15 percent to Africa, making for more than half the increase in total exports.

The other change was in the composition of exports. The new markets for exports also required new products in which India had a competitive advantage. These were primarily engineering products including electronics, machinery and automobiles. In the increase in total exports in April-May, the share of engineering products was 55 percent. The products that lost markets were textiles and chemicals.

The competitive edge that exports developed was mainly in Special Economic Zones which now contribute 20 percent to total exports and are expanding exports at the rate of 47 percent. They will be an important base for export production because exports from SEZs are free from all taxes.

Broadly, it would appear that about half the increase in exports was due to change of direction of exports and the other half due to change in the composition of exports with greater reliance on engineering goods. Asia and Africa which are growing at rapid pace are the more dependable markets in future.

The warning by the Commerce Secretary is not, however, without reason. The slowdown in the U.S. may not make much of a difference but the impending debt crisis in Europe can. That would immediately chop off export growth by 15 to 20 percent. Even then, export growth will remain commendable.

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