Exports growth at a four-month high

India’s merchandise exports picked up in August 2017, with the growth pegged at 10.3 per cent compared with a year earlier. The increase is encouraging after exports growth slowed down to single digits during the months of May, June and July 2017. In fact, exports growth in August is all the more commendable because it was widely expected that the ongoing initial disruptions as a result of the introduction of the Goods & Services Tax would hurt trade, especially that involving manufacturing exports.

In line with the improved level of transactions in August, merchandise exports growth during the first five months of fiscal year 2017-18 was recorded at 8.6 per cent. That’s a substantial jump from a negative growth of 2.4 per cent during the same period a year earlier. In August, exports growth had improved both in the commodity and non-commodity sectors. Fuel exports increased by 36.6 per cent year-on-year, partly due to a rise in global crude oil prices during the month. Meanwhile, non-oil exports growth was 6.9 per cent year-on-year in August, compared with a year-on-year growth of 2.4 per cent in July.

Strong import indicates growing demand

In the meantime, total national imports continued to grow strongly at 21 per cent and this led to the trade deficit increasing to US$11.6 billion in August. The country’s non-oil and non-gold imports reached a four-month high. However, a promising aspect of this has been the growth in capital goods imports, which is an indicator of improvement in investment demand in the economy. Note that capital goods imports expanded, despite an unfavourable base, at 9.1 per cent year-on-year in August.

Fuel exports increased by 36.6 per cent Y-on-Y, partly due to a rise in global crude oil prices during the month. Meanwhile, non-oil exports growth was 6.9 per cent Y-on-Y  in August 2017, compared to a Y-on-Y growth of 2.4 per cent in July

The acceleration in capital goods imports was broad-based, with imports of machine tools, project goods, machinery and professional instruments comprising the larger contributors. Alongside, consumer goods imports, particularly electronics imports, have also been growing very rapidly, indicating that domestic consumption demand remains robust, with some of it going towards imports.

Although the trade deficit has been rising, economists do not believe that it constitutes any danger. Most economists have forecast the current account deficit at around 2 per cent of India’s gross domestic product (GDP) for 2017-18, which is manageable and can easily be financed by capital inflows. It is true that the current account deficit was at 2.4 per cent for the first quarter of fiscal year 2017-18, on the back of a high trade deficit owing partly to one-off factors such as high gold imports. However, August trade data had shown that gold imports have already started to come down.

Improved economy driving export growth

One of the factors weighing on exports has been the strength of the Indian rupee. Going ahead, however, the rupee could weaken a little, due to the higher current account deficit on one hand and possibly a stronger US dollar, as the US Federal Reserve raises interest rates further. This should help exporters. Towards the latter half of the current fiscal year, some weakness in the Indian rupee is expected due to a slowing of portfolio inflows into the debt markets, as the ceilings for foreign investment in debt are reached. Portfolio inflows into the equity markets have already turned negative owing to high valuations. The Reserve Bank of India has been intervening actively in the foreign exchange markets with a view to ensuring that the rupee does not appreciate too much.

But perhaps the bigger boost to exports will come from the ongoing recovery in the developed economies. The latest Purchasing Managers’ Indices show that global output in August 2017 increased at the fastest pace since April 2015. If this growth is sustained it will lead to higher exports growth for India as well. World trade volumes have also started picking up, after a long period of stagnation. The other factor that is likely to boost exports is the steady resolution of challenges stemming from the introduction of the Goods & Services Tax (GST). Once these initial glitches are removed, exports should pick up pace.

Exports should also improve in the services sector. Growth in net services receipts was a tidy 15.7 per cent year-on-year in the first quarter of 2017-18. It is hoped that as the IT services sector adapts to the recent changes in the business, its export performance will improve as well. This also leaves room for more improvement in boosting Indian manufacturing exports. While our IT exports account for roughly 25 per cent of the world’s total, our share of global merchandise exports is just 2 per cent. The Government’s Make in India initiative will also help expand India’s share of the global exports market.

India’s exports are well-diversified, with most software services exports going to Europe, the US and Canada, while our merchandise exports have, over the past few years, increasingly been going to emerging market destinations. Add to that, the attraction of a vast and rapidly growing Indian market for foreign investors and we have the basis for mutual economic relations, which can serve as building blocks in developing deep and lasting relationships in a variety of fields.