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Reasons behind India's poor show in exports

March 12, 2014 09:22 IST

Reasons behind India's poor show in exports

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The fall in exports is a product of poor policy from the RBI and laziness from the Centre, says Mihir S Sharma.

For the first time in eight months, India’s exports have fallen year-on-year – just the sort of confidence-drainer the economy could do without at this point.

They were down 3.7 per cent in February 2013, when compared to February 2014. 

Now, imports fell too, and by a much larger proportion – a fallout of the government’s clampdown on gold imports, mainly – and so India’s trade deficit still looks like its improving.

But that’s not really true. Because the fall in imports is temporary, a product of gold import restrictions that simply can’t last forever unless we want to go back to the 1970s of Haji Mastan and boats landing at midnight in MadhIsland. But slack exports are structural.

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Image: An activist from the India's main opposition Bharatiya Janata Party (BJP), wears a mask depicting Prime Minister Manmohan Singh, during an anti-government protest in New Delhi.
Photographs: Parivartan Sharma/Reuters

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Reasons behind India's poor show in exports

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There are two main reasons. The first is the current ridiculousness of the rupee.

The slightly demented exuberance of various investors in the Indian markets – some of whom apparently expect Narendra Modi to be sworn in sometime in the next few days, and for India to be transformed into a land of milk and honey in week after that – has pushed the Sensex to a record high – but pushed the rupee to an eight-month high, too.

Is it surprising, even slightly, that export growth hits an eight-month low just as the rupee hits an eight-month high? No, it isn’t.

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Photographs: Reuters

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Reasons behind India's poor show in exports

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In a way, India is a victim of its own success. It tackled the headline current account deficit number so successfully – bringing it down from 6.5 per cent of GDP in the last quarter of 2012 to 0.9 per cent in the last quarter of 2013 – that it began to be seen as a safe destination for money. And that meant that the rupee strengthened – and exports fell. 

This can’t be allowed to last.

The Reserve Bank could be seen as being pretty irresponsible in not choosing this moment to instead build up its reserves of dollars, and moderate what is obviously a temporary appreciation of the rupee.

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Image: Reserve Bank of India.
Photographs: Reuters

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Reasons behind India's poor show in exports

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India doesn’t export enough; what we need is, ideally, a slightly undervalued rupee, not the too-strong one we have right now.

The second reason for the fall in exports is that India has been criminally slow in finalising a trade deal with the European Union. The FTA needed to be signed, ideally, before the EU’s decision to end the “generalised system of preferences” that favoured Indian exports. 

The GSP expired in December; but the FTA has been held back by a commerce ministry whose competence apparently extends merely to repeating in negotiations what various protectionist industry associations would like them to say.

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Image: India needs a slightly undervalued rupee.
Photographs: Reuters

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Reasons behind India's poor show in exports

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Even Finance Minister P Chidambaram, mystifyingly called a reformist by the Indian press, has spoken out against free trade agreements.

But at least this government is partially committed to the FTA; once the United Progressive Alliance leaves office, we can say goodbye to any hope that a real free-trade deal will be signed.

The BJP and the Third Front are both more protectionist at heart. Indian exporters will be stuck dealing with higher tariffs.

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Image: Finance Minister P Chidambaram
Photographs: Reuters

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Simply put, the fall in exports is a product of poor policy from the RBI and laziness from the Centre.

And it isn’t a minor thing, either; for more jobs, and robust industry, India needs to export more.

But until minds change in Mint Road and North Block, the structural weakness in India’s exports won’t go away.


Image: Fall in exports is a product of poor policy from the RBI.
Photographs: Reuters

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