Anaemic exports growth

Trade deficit hits a new low, but that’s small consolation

According to the trade data released by the Union ministry of commerce on Friday, India’s trade deficit is at the lowest it has been for more than a year. The deficit — the difference between how much India exports and how much it imports — reached $9.6 billion in February 2019, as compared to the $14.7 billion deficit registered in January 2019. Yet, this cannot be seen as a sign that stability has returned to the external account. In fact, the data reveals that India’s structural weaknesses continue, and thus macroeconomic stability cannot be taken for granted. In particular, weak exports growth shows that India will continue to struggle to pay for imports if the demand for those recovers.

Exports rose just 2.4 per cent year on year in February 2019, lower than the 3.7 per cent increase registered in January. Crucial sectors such as engineering and gems & jewellery saw low or negative growth. Gems & jewellery exports, for example, contracted by 2 per cent. It is clear that any hope that was raised earlier this financial year of a rebound in exports was illusory. Indeed, the withdrawal of the Generalised System of Preferences trading programme from Indian exports by the United States administration will only make it tougher for certain export sectors to recover. This is particularly true of Indian engineering exports, which will have to deal with tighter competition from zero-tariff countries. There has been some improvement on the ground in terms of permission and ease of doing business over the past few years, but not enough to ensure competitiveness. It is not realistic, therefore, to expect a sharp upturn in the short or medium run for Indian exports in these sectors. The Federation of Indian Exporters has blamed global conditions for this poor performance. But this claim does not stand up to scrutiny. According to Deutsche Bank, for example, the weekly Harpex Shipping Index tells the opposite story — that global trade began to improve in January. Though the shipping index is not necessarily an index of either world trade or the global economy, it is an indicator.

The reason that the trade deficit has narrowed is thus not a robust performance from exports but a fall in imports. This is driven partly by a decrease in the oil import bill. As has been seen in the past, such a decrease can hardly be relied upon to keep India’s external account stable — in fact, quite the opposite. Gold imports also fell, puzzling many observers. But non-oil, nongold imports contracted for yet another month — falling 3.7 per cent in February, following on from a 0.8 per cent fall in January. This is a disquieting trend, as it suggests sluggish industrial demand within India. It is also hard to reconcile with the overall data on economic growth. If growth in Indian gross domestic product (GDP) is at an all-time high, it is hard to see why import demand would be falling. It is also difficult to see how exports growth can be so anaemic if the Indian economy is seeing record economic growth. This underlines the continuing concerns about data that are being raised by economists at this time.