Consequences of an export squeeze

July 27, 2012

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

In June, exports shrank more than five percent to $25 billion largely due to recessionary conditions in major importing countries such as the U.S. and the EU. Although exports are not as critical to us as they are to Singapore or China, they do count for a lot.

The slowdown in the U.S. and EU has affected exports of most countries and pulled down growth. South Korea, which is dependent on exports to the extent of 50 percent of GDP, slowed down in the second quarter of 2012 to 0.5 percent due to a fall in exports by 0.6 percent. Our exports are 22 percent of GDP and as such the 5 percent fall would significantly damage the economy.

The U.S. economy has not stopped growing but its imports have declined $5 billion in three months since March. Apparently, a protectionist stance may have been responsible. There is not much decline in EU imports though imports from India dropped 10 percent and from China 3 percent with a step-up in imports from the U.S. and Russia.

The depreciation of the rupee has not been of help. In the last six months, the rupee depreciated 14 percent against the dollar, much more than the depreciation of other currencies. For instance, the Thai Baht depreciated 10 percent, the South Korea Won 3 percent and the Chinese Yuan 1.7 percent. It appears that our exports are more sensitive to adverse international economic conditions.

We had performed pretty well until recently. In 2011-12, exports had increased nearly 21 percent to $304 billion. That is what had made Commerce Minister Anand Sharma hopeful that India’s exports will increase to $360 billion in 2012-13. The fall in exports in two consecutive months, May and June, now makes the target suspect.

It is true that our GDP is driven more by domestic demand. Exports are not the operative factor in agriculture and services, except in IT. But a chunk of the industry depends on exports for employment and income.

The reduction in employment in export industries like textiles, garments, marine foods, poultry and meat, gems and jewellery and leather products would be painful. There are also industries like chemicals and drugs and pharmaceuticals which have expanded their export market and would have generated additional employment. On the whole, employment would have shrunk.

The impact on GDP would come mainly from industry. More than 14 percent of industrial production finds a market abroad. Therefore, when exports which were increasing at 20 percent actually dropped by 5 percent, industrial growth would have been pulled down by 3.5 per cen. That would shrink GDP growth by 0.7 percent.

The U.S. and EU will take time to get back to normalcy. To keep up export growth, it would be necessary to route exports to the new fast growing markets of Africa and Asia. It is equally necessary to diversify exports into new products like cars and two-wheelers. Exports do count in keeping up industrial growth and consequently employment and national income.

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