Since April 2015, the situation seems to have turned for the worse. We have the numbers for the whole of 2014-15 and up to May 2015. A trend is discernible and it is worrying
There is a silent crisis brewing on the economic front and the political class seems unconcerned about it.
For the first time in recent years, the total value of exported goods in 2014-15 (USD 310.45 billion) was less than the corresponding value in 2013-14 (USD 313.26 billion). It was attributed to a slowdown in the world economy, a tepid recovery in India, and the fact that a new Government had yet to find its feet and address the problems. The year ended in March 2015 on a note of disappointment but not gloom.
Since April 2015, the situation seems to have turned for the worse. We have the numbers for the whole of 2014-15 and up to May 2015. A trend is discernible and it is worrying. Year on year (y-o-y), exports of goods have declined in every month since December 2014, and May 2015 marks the sixth month of decline in succession (see table).
No excuses please
I can hear the first sounds of the blame game. It will be said, “It’s because of the slump in POL (petroleum products) exports.” True, the decline in POL exports was a major contributor, but even non-POL exports have recorded a decline for four months in succession (January to April 2015). May 2015, for which figures are not yet available, was not likely to have been different.
It will be said, “This is a legacy of the UPA government.” Wrong. In 2013-14, export growth was positive at 4.3 percent. From April to November 2014, growth was positive in every month except October. Total exports of goods in 2014-15 would have been positive but for the downturn that began in December 2014. In fact, it was the performance in the months of December 2014 to March 2015 that caused the year to end on a negative note.
There is, of course, a price effect on the value of exports. If the price of crude oil falls, the value of POL exports will also fall. There is a price effect on the export of gems and jewellery as well. But if prices are more or less the same for certain goods and commodities, a decline in the value of exports of those goods and commodities points to serious problems of demand and competitiveness. Such a decline can be noticed in agriculture & allied products; ores & minerals; leather & leather manufactures; chemicals & related products; engineering goods; electronic goods; and other manufactured goods. Only the ready made garments sector seems to be holding out.
Export of services was relatively better, registering a small but positive growth in all but three months of 2014-15. However, there was negative growth in March (-1.89) and April (- 4.55), a rare occurrence and, therefore, worrying.
Let us examine what may have gone wrong. An obvious reason is that global demand remained muted. All major economies have slowed down. Yet it is pertinent to point out that countries such as China, Japan and Korea are still recording positive export growth rates. India is among the few with negative growth of exports.
The second obvious reason is the exchange rate. The rupee has strengthened against all major currencies except the dollar. RBI Governor Rajan has spent time “educating” the BJP leadership that there can be no greater catastrophe than fulfilling the BJP’s election promise of upping the value of the rupee to Rs 40 to a US dollar! He has tried to depreciate the rupee but has succeeded so far only in preventing its rapid appreciation. The Government takes pride (legitimately) in wooing foreign investments, but high inflow of capital is putting upward pressure on the rupee. Mr Rajan’s interest rate policy is also a contributor to huge capital inflows. Managing the exchange rate, and keeping it competitive for exports, is the most difficult task of the Government/RBI. Mr Narendra Modi’s long stint as Chief Minister did not prepare him for that.
The fundamental issue is the competitiveness of India’s exports. Both the Government and the RBI have instruments in their hands that can enhance competitiveness. If one factor erodes competitiveness, another factor must be tweaked to enhance competitiveness. That is the short term answer. The long term solution is to enhance the overall efficiency of the economy. Look back, and you will find that periods of robust export growth corresponded to periods of efficiency gains. We must constantly push the envelope to make road and rail transport more efficient, ports more efficient, communications quicker and more reliable, credit abundant and cheaper, electricity cheaper, labour more productive, and compliance with rules and regulations easier. That can only come through bold and fast-paced reforms that were promised but of which there has been scant evidence in the first year of Mr Modi’s government.
FIEO Sounds Alarm
The Federation of Indian Exporters Organization (FIEO) has warned that exports may decline significantly even in volume terms which will lead to lay-offs and retrenchments.
All these should have stirred the Ministry of Commerce to action. But the Minister, Ms Nirmala Sitharaman, has been unusually silent (like the Prime Minister in the last three weeks) and largely invisible. Why? Doesn’t the Government care?