FICCI's Newsmakers of the Month
FICCI organised a Special Session with Sajjid Chinoy, Chief India Economist, JP Morgan, on 18 September 2018 at its headquarters in New Delhi. Sajjid Chinoy is an eminent economist and has varied experience in policy making.
While the Indian economy has exhibited good growth in the recent past, still there are several headwinds that it faces, which could have a bearing on the growth performance going ahead. Developments such as the rising international oil prices, ongoing trade war, tightening financial markets and the volatility in the currency markets are attracting increasing attention and keeping the policy makers engaged to limit the impact on the economy.
At this special session, Sajjid Chinoy shared his views on the current economic situation and made a presentation. The presentation broadly focused on answering why have Indian exports slowed so precipitously in recent years? Three set of related questions dealt by him in the presentation were: (a) What typically drives India's exports growth – global growth or/and exchange rate, (b) How heterogenous are these elasticities across sectors and time, and (c) How can these explain the current slowdown in India's exports? Some key points of the presentation are: Exports have been one of the key growth drivers of India's GDP growth in 2000s. In fact, export to GDP share for India increased steadily during the first eight years of 2000s. Even the investment growth was high during this period, with expectations of higher demand through rising exports. Exports registered an average annual real growth of 15.3 per cent from 2000-11. The export basket of India has also seen a significant shift and become broad based, with rising share of new-age products like engineering goods and pharmaceuticals in total exports as against the traditional export items like textiles, leather and gems and jewellery. Another interesting trend in India's exports has been the decline in the ratio of domestic value added to gross exports, primarily due to rise in the import component of exports (with greater integration in the global value chain). Over the last six years (since 2012), real annual growth in exports has slowed down to 4.1 per cent (2012-2018) and this was seen across manufacturing as well as services sector exports. If GDP growth is mapped the export growth, the slowdown in GDP growth from 2012 onwards can very well be explained by the slowdown in growth of exports. In fact, the study done by Chinoy shows that average GDP growth slowdown of 2 per cent can be attributed to the slowdown in exports. A key reason for slowdown in Indian export is the slowdown in global export growth. However, it has been observed that while the average world export growth dropped by 40 per cent from 4.2 per cent during 2004-2011 to 2.4 per cent from 2012-2018, the corresponding decline in India's export was to the extent of 85 per cent. In other words, India's
export slowdown cannot be explained by de-globalisation itself. In fact, the recent export lift also does not commensurate with improvement in global growth. While there has been a 25 per cent increase in global growth rates between FY17 and FY18, the growth in India's export has been much lower. To explain the recent slump in exports, Chinoy highlighted the role of global growth as well exchange rate in the growth of exports. According to a study by Chinoy, it was revealed that longrun elasticity of global growth was around 2.6 per cent. In other words, a 1 per cent global growth enables non-oil exports to grow by 2.6 per cent. Likewise, a significant correlation was found between Real Effective Exchange Rate (REER) and exports growth. As per the study, for every 1 per cent real appreciation in Rupee, the non-oil exports decline by 1.4 per cent. In all, Chinoy emphasized that India's exchange rate gas been a big driver of India's non-oil exports during the last 15 years. However, over the last six years, the importance of both global growth and exchange rate factors has somewhat diminished when compared to the previous years. This has been due to deglobalisation post the financial crisis, and due to increased import content in India's export, which becomes a natural hedge for exchange rate variations. Nevertheless, despite the income and price elasticities of exports coming down over the years, they still matter though there is wide dispersion across sectors. The new-age exports were found to be much more sensitive to changes in price, driven by exchange rate appreciation, as compared to traditional exports. Thus, a 20 per cent appreciation in Real Effective Exchange Rate (REER) from 2014-17 was a substantial drag on exports as it made India's exports less competitive. Chinoy related this real rupee appreciation to the Dutch Disease phenomenon, which was triggered due to the significant fall in oil prices. Due to the fall in global oil prices from 2014-17, there was huge windfall income gain to the country due to a positive terms of trade shock, which, in turn, led to an increase in public and private spending in the country. Generally, if any windfall gain is completely spent, it leads to an appreciation in exchange rate. Moreover, when a country's currency appreciates vis-à-vis other currencies, the exports become expensive and imports become cheaper, rendering domestic industry less competitive. In fact, this was also observed through the trend in Current Account Deficit. While India experienced a lower current account deficit in last few years due to lower oil imports following the low oil prices, however the underlying current account surplus (excluding oil and gold) had worsened. During the four years 2014-2017, India's Current Account Surplus (ex oil and gold) has deteriorated by 3 percentage points, but this was not visible as Current Account deficit was much lower due to lower oil imports. Now with the rise in global oil prices in recent times, India's CAD is forecasted to reach USD 80 billion in FY19, at 2.9 per cent of GDP. India usually has a secured cushion of USD 50 billion from FDI and NRI deposits. Financing additional BOP gap of USD 30 billion may prove challenging in a global liquidity tightening scenario given the risk of US Fed potentially increasing Fed Funds Rates to control overheating of the American economy. Now, the widening of the CAD due to the negative Terms of Trade shock. India's REER has depreciated 6.5 per cent in 2018 ( Jan-May 2018). However, from January 2018 levels, INR has depreciated by only 5 per cent vs USD; far less than Chinese Yuan (6 per cent), Turkish Lira (10 per cent), Brazilian Real (12 per cent) and Argentine Peso (25 per cent) as of June 2018. If we compare external macro indicators during 2013 and 2018, the situation is far better today – Forex reserves are significantly higher, twin deficits of Fiscal and Current Account (as per cent of GDP) are much below that of 2012 and 2013. Additionally, CPI inflation is much lower than that of 2013.
Sajjid Chinoy, Chief India Economist, JP Morgan (left) with RV Kanoria, Past President, FICCI.