Is a revival in the export market in the offing?

Thu, 17 Mar Pre-Open

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Indian merchandise exports contracted for the fifteenth consecutive month in February. The contraction was on account of tepid global demand coupled with volatile global currency markets. The exports shrank by 5.7% for the month. Although the downfall has been the slowest since December 2014, it has come on a low base which is the cause of concern. Exports during 11 months in FY16 were down by 16.7%.

Only 16 of the 30 export sectors witnessed growth in February. Among the major items, export of gems and jewellery (11.2%), pharmaceuticals (8.8%) and chemicals (4.5%) increased. However, export of engineering goods (-11.2%), readymade garments (-0.72%) and petroleum products (-28.3%) fell during the month.

Now, you would have observed that there is huge fall in the exports of petroleum products. While, India imports around 80% of its oil requirements, petroleum products comprise a sizable chunk in the export basket.

It is worthy to note that in October 2014, petroleum products were India's largest exported commodity valued at $5.7 billion. A major reason for the fall lies in the fact that oil prices have been falling for a while now. At the beginning November 2014, the price of Indian basket of crude oil was at around $81 per barrel. Since then the price of oil has fallen to US$ 37 per barrel, a fall of around 51%.

Further, global growth recovery is slow and uneven. The International Monetary Fund (IMF), in its latest world economic outlook released in January 2016 downgraded its global growth forecast to 3.4% from 3.6% for 2016. To add to the woes, the depreciation of currency in the emerging markets has also impacted exports. A stronger rupee as compared to other currencies makes the country’s export market less competitive as compared to the products from other countries.

Falling competitiveness is one of the structural factors restricting export growth. For key export items such as gems & jewellery and textiles, comparative advantage has come down over the years. So Indian exports have been adversely impacted.

To rein in falling exports, the government raised duty drawback rates for exporters and implemented an interest stabilization scheme in November. While the increase in duty drawback rates will help exporters recover higher input tax outgo that they pay during the process of making the final product, the interest stabilization scheme will allow exporters to receive bank loans at a lower rate of interest. However, such steps are likely provide short time cushion to the exporters.

Recovery in global demand holds the key in the long term revival of the export market.

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