How to get India’s exports back on track

November 21, 2014

(Any opinions expressed here are those of the author and not necessarily those of Thomson Reuters)

The contraction of exports by 5 percent in October will pull down industrial growth and bloat current account deficit. The fall in exports may not be due to a chance fluctuation but a warning of things to come. There are strong reasons to suggest India’s export woes are due to worldwide trends which need to be understood so that the country can benefit from them.

In the past seven months, exports have not increased consistently, even though there have been subdued bursts during some periods. For instance, exports in February and September exceeded $28 billion, only to fall back again. The increase in the April-October period (0.5 percent) was also not significant enough to indicate an improvement.

There are two reasons why exports have been static in India and many other countries. The first is stagnancy in major world economies. The United States is possibly the only developed country that is still on its feet. In the third quarter of the current year, the U.S. GDP was up 3.5 percent, but the EU is waiting for a push to get up again. Greece, Spain, Portugal and Italy are on the verge of a debt crisis, and France is surprisingly on the verge of a recession with GDP growth at 0.3 percent. Germany’s growth of 0.1 percent suggests it is also staring at negative growth.

The ECB is fiddling with negative interest rates and has gone in for quantitative easing, an experiment the U.S. tried with some success. The Bank of Japan also tried the same approach, but the country went into recession before any real effect could be felt, forcing Prime Minister Shinzo Abe to call for fresh polls.

The second reason for the fall in India’s exports is the realignment of major currencies compelled by these economic conditions. With the U.S. being the only country with high growth, the dollar has gathered a lot of muscle. Almost every currency has depreciated against the dollar. Among the BRIC countries, Brazilian real and South African rand fell 5 percent in the last 10 months. The Russian ruble is the worst performer with a fall of 30 percent. Even the euro has been cut down to size, dropping 10 percent against the dollar.

The relative weakening of currencies against the dollar decides the trade advantage of different countries. Those with devalued currency gain advantage by being in a position to grab a part of the international trade share from others. Since the rupee did not weaken enough, India’s exports became less competitive, and consequently lost its share of world trade to others.

It will take quite some time for Europe and Japan to get out of their economic troubles. Consequently, the change in the currency matrix will not be reversed anytime soon. The only way for India to regain its foothold is by making exports more competitive by allowing the rupee to fall to 64-65 against the dollar.

 

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