Falling exports: A sign of impending recession?

Rupee devaluation may help fix the falling exports, but in the long run, India should shift to welfare economics

Indian exports were expected to rise in recent times, as the current government at the Centre seems very pro-business. But on the contrary, figures state that exports have shrunk for the thirteenth month in a row in December 2015, as outward shipments shrank 14.75 per cent, to $22.2 billion, amid a global demand slowdown.

Trade deficit during the month also widened to $11.6 billion, as against $9.17 billion in December 2014. During the April-December period of the current fiscal, exports dipped 18 per cent to $196.6 billion, as compared with $239.9 billion in the same period of the previous fiscal, according to a data released by the Commerce Ministry. To add to the woes, the main export sectors which include engineering, petroleum products, and gems and jewellery have recorded negative growth in the given month.

The direction of Indian exports has significantly moved towards the developing countries. The share of Asia, Africa and Latin America increased sharply from 58 per cent in 2004-05, to 66 per cent in 2014-15, and of this, the share of the Asian region rose from 48 per cent to 50 per cent during the period. The major and the leading export destinations for Indian exports has been China, which of course, has transformed itself into a manufacturing giant, now amounting to 10 per cent of global economic output. But the structural problem with this growth has been on account of debt binge since last 3-4 years.

China saw a 40 per cent increase in debt in five years, which is a very dangerous number. Now given that the bubble did burst in China, its domestic demands fell drastically. This led to the reduction of imports in China. Also on the global front, trade growth collapsed to zero per cent in 2015. This is reflected on the falling exports of India.

“Exports depend critically upon demand in the rest of the world. The oil exporting nations, commodity producing nations, China and the West are experiencing decelerating growth or stagnation. The problem lies in the deficiency of demand abroad at this juncture,” says Robert Johnson, Executive Director of the Institute for New Economic Thinking, and Director of the ‘Project on Global Finance’ at the Roosevelt Institute. This is despite the fact that Prime Minister Narendra Modi’s ‘Make in India’ campaign has got a very positive response. 

To add to the worries, the Chinese apex bank devalued its currency by nearly 2 per cent in August last year, following the fall in exports in June, by 8.3 per cent. This also led to the less demand of Indian exports. “The yuan devaluation has little direct effect, but anxiety about Chinese intentions is breathing caution all around the world. That reduces demand for Indian exports,” says Johnson. Arbind Prasad, Director General of Federation of Indian Chambers of Commerce and Industry (Ficci), believes that it will have a more direct impact on India’s Balance of Payments (BoP).

Rupee devaluation can be a measure, but it will help only in the short-run. The government can rather address the issue at the grassroot level. They can focus on enhancing human resources, which could deliver better productivity. Also, the government needs to be more cautious about rupee devaluation. There is a sizeable chunk of people in India, who peg their nationalism to the value of the rupee, unaware of the fallacies of rupee appreciation. We have seen the wrath of people unfold in both the UPA, as well as the NDA governments, due to the falling rupee. “Rupee devaluation may help a touch but it is not the crux of the problem. I would not try to achieve national notoriety through the value of the currency. Rather well-educated, healthy and productive people is a better measure,” opines Johnson.

Though the government has been very pro-business in its approach, it is time for it to reflect. India has become the most protectionist country, and took the second highest protectionist measures in 2015. Indian corporates saw zero per cent sales growth in 2015. There is a dichotomy that exists between the corporate performance and the GDP numbers.

The government needs to address these issues, before they turn into a problem. Also, in recent years, we have seen that the discourse in the country has been economic in nature, given the fact that the youth of the country have been getting more and more aspirational. This was reflected in the 2014 mandate, which saw an absolute mandate for Prime Minister Narendra Modi’s pro-development pitch. This puts an added responsibility on the government to deliver. Though Johnson opines that the current government cannot be held accountable for developments around the world.

It used to be said that ‘when the US sneezes, the world catches cold’. From 1990-2009, the US contributed 30 per cent to global growth, while China contributed 12 per cent. From 2010-15, China’s contribution towards the world growth has been 34 per cent, while the US contribution has come down to 17 per cent. But as mentioned earlier, this magnanimous jump is on account of a debt binge.

So are we heading to another recession? The study on trends of recessions shows that the world faces a recession every eight years. Is this fall in global demand and the consequent fall in exports, an indication of an impending recession? Given that in recent years, China has overtaken the US as the world growth leader, it can be said that ‘when China sneezes, the world catches cold’.