Comparisons between India and Belgium are, it’s fair to say, usually skewed in our favour. A cruel joke that asks one to n:ame five famous Belgians usually has people stumped; not so for India, where famous (and infamous) names tumble out of every corner. Indeed, in every respect, you would expect future superpower India -- with an economy that’s four times bigger, with a population and a landmass both more than 100 times that of Belgium - to score over the north European country.
And you would be wrong: This year, Belgium will almost certainly beat India in the value of its merchandise exports.
That tells you how precipitous and alarming the fall in shipments of Indian merchandise--exports of goods, not services like software-- this year has been. For 12 straight months, the value of shipments has fallen; in November the fall was 24%. This is worrying given that such exports in the financial year to March 2014 accounted for over 15% of Gross Domestic Product.
The slump couldn’t have come at a worse time: The Modi government announced earlier this year that it had an exports target (including services) of $900 billion by 2020. If we end the year at $270 billion of merchandise and $100 billion of software exports, we would need total exports to grow by an average 25% per year over the next four years; in normal years, half that rate of growth would be considered good.
So what’s hurting Indian exports, what are we doing about it, and what’s the overall message?
First, the main reasons: The euro zone, which took in 16% of our exports last year, is slowing. China, until recently the driver of the global economy, is facing excess capacity and inventory. Potentially lucrative markets in Africa have yet to take off. And there’s a race to the bottom among key currencies. The fall in the rupee (down 5.9% versus the dollar this year) should be good news for exporters, because it makes Indian goods cheaper for other countries to buy. But currencies like the euro (down 10%) and many others have fallen more against the dollar. This makes Indian exports less competitive in third markets than exports from these countries. And the weak euro makes our exports to the euro zone costlier.
The commerce ministry is not ditching the $900 billion target (yet), maintaining that if a need to explain the divergence emerges, there are explanations, such as those above.
In terms of actions, the ministry is pushing free trade agreements--with Australia and the European Union. It’s working on negotiations over Asia’s Regional Comprehensive Economic Partnership, which could mitigate the effect of not being part of the Trans Pacific Partnership--a free trade pact between 12 countries ranging from New Zealand to the United States.
Indian exporters now get a 3% subsidy that reduces their interest costs. But the cost of getting approvals and dealing with the various government authorities remains high. Exporters say they are looking to the U.S. market, plus Iran and central Asia as possible bright spots.
The saving grace for the economy is the oil price, now hovering at 7-year lows, which helps our import bill and trade deficit. But those inclined to see the glass half empty will point out that weak oil prices are also symptomatic of continued poor demand for goods-- including our exports.
The key message? India will have to rely on domestic investment and consumption to drive the economy for the next few years as there’s little we can do about the wheels coming off the export train. Which makes it all the more important for the central bank to keep interest rates benign, commercial banks to pass rate cuts on to consumers, the government to cut red tape relentlessly, and industry to take the odd leap of faith.