FICCI's News­mak­ers of the Month

FICCI Business Digest - - Contents -

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.

Newspapers in English

Newspapers from India

© PressReader. All rights reserved.