News and Events

Govt retains export optimism

Commerce and Industry Minister Anand Sharma last week informed the Board of Trade, consisting of industry captains and exporters, that the government was looking at achieving 20 per cent increase in the country’s merchandise exports this financial year over 2011-12, even as he noted the challenges facing the sector.

Experts, however, are apprehensive of such an ambitious target against the backdrop of the difficult economic environment globally, especially that in the Euro zone.

The ministry is expected to set a target of $361 billion, up 20 per cent from the $304 billion achieved in 2011-12 (the target was $300 billion), in the annual supplement to the Foreign Trade Policy (FTP) 2009-2014. This is to be unveiled on Tuesday. Sharma also stuck to the target of $500 billion worth of exports by 2013-2014, as set in a strategy paper of his ministry.

Last month, his deputy, Jyotiraditya Scindia, said the government was hopeful of achieving $350 billion in exports in the current financial year, despite the difficult global economic condition. This will be a 15 per cent increase over 2011-12’s export figures.

The target of $300-billion set in 2011-12 was surpassed though export growth plummeted significantly in the second half due to decreasing demand in the international markets, particularly severe adversities in the European markets. The annual export growth rate reached a peak of 82 per cent in the concluding month of the first half of 2011-12 (July), while it contracted 5.7 per cent in the last month of the year (March). The first half enabled exports to still clock a growth rate of 21 per cent last year.

Outlook

The going this time may be tougher, experts said. In fact, exports started 2012-13 on a very poor note. In April, exports rose a depressing 3.2 per cent to $24.5 billion, against $23.7 billion in the same month last year. Gems and jewellery, besides the textile sector across the board, including readymade garments, saw contraction in exports.

“India has little chance of meeting such an export growth target in FY13, given the growing problems abroad and its own domestic challenges. Europe is India’s biggest trading partner and exporters are currently struggling in the face of weak demand. This is unlikely to turn around during the current (financial) year, with most estimates putting Euro zone GDP growth virtually flat over this period,” highlighted Glenn Levine, senior economist, Moody’s Analytics (Australia) Pty Ltd.

The US economy is also set for meagre growth after tax cuts expire on December 3, and about $100 billion in automatic spending cuts to defence and domestic programmes start from January 1, 2013. The Congressional Budget Office has said tax increases and spending cuts would cause the economy to shrink at an annual rate of 1.3 per cent in the first half of next year, while will include the last quarter of this financial year in terms of the Indian government’s accounting schedule. The US economy grew at a 1.9 per cent annual rate in the first quarter of this year.

Statistically, export growth may not be high in the first half of 2012-13, due to the high base effect, but a low base effect in the second half might give it a push. Exports rose sharply by nearly 40 per cent at $154.4 billion in the first half of 2011-12, while the growth declined substantially to just over six per cent to $149.3 billion in the second half.

Even then, economists advise caution against fixing any ambitious target for export growth. “The global backdrop continues to be uncertain. So, any target for exports needs to be watched closely. Some of the newer segments such as engineering, automobiles and petrochemicals are scaling up in exports,” said Siddhartha Sanyal, chief India economist, Barclays Capital.

Ahead

India has successfully tried to diversify its trade into newer markets to reduce over-dependence on the US and Europe. Even then, the two markets continued to dominate the direction of our exports. In Parliament, the finance minister had said it took time to establish newer markets.

In 2004-05, around 40 per cent of India’s exports went to the US and Europe, 16 per cent to West Asia, 15 per cent to Northeast Asia, seven per cent to Africa and three per cent to Latin America. In 2010-11, around 30 per cent of exports went to the US and European markets, while the share for West Asia, NorthEast Asia, Africa and Latin America increased to 20 per cent, 17 per cent, eight and four per cent, respectively.

Theoretically, the rupee’s depreciation against the dollar, nine per cent since 2011-12 ended till June 1, should give a competitive edge to exporters.

Yet, that advantage would be limited due to slackening demand abroad, economists said. Here it should be noted that our exports rose sharply in the first half of 2011-12 when the rupee depreciated 9.9 per cent, while the growth declined substantially in the second half when the Indian currency depreciated just 3.5 per cent.

The net advantage of rupee depreciation also depends on the import content of exports.

According to Ajit Ranade, chief economist of the Aditya Birla Group, the rupee’s fall would help in the export of those products in which the import content was low. “A weak currency definitely gives a slight competitive edge, especially in indigenous products. But I agree that this is not much of a help when import content is high. So, the benefit is marginal,” he said.

All eyes are now on the FTP. However, the government is expected to only do minor tweaking of the policy, owing to the tight fiscal room within which it is operating. Last year, the government had doled out export incentives worth Rs 1,700 crore.

The FTP is expected to factor in some of the severe problems hitting the export sector, such as volatility in global prices, slowing demand in Western markets, rupee fluctuation, a widening trade deficit and slowdown in global and domestic investment.

The government is expected to announce a package accordingly, with a special focus on labour-intensive sectors. Some sectors could also see extension of the interest subvention due to problems of high cost of credit.

The government has already announced restructuring of Rs 35,000 crore of debt for the beleaguered textile industry, which incurred losses worth Rs 11,000 crore in 2011-12. Capital infusion will provide a breather to the sector but it may not be able to totally revive exports, particularly for downstream segments like readymade garments facing slackening demand abroad, experts said.