Should we really get excited about the jump in exports?

Outside the Eco-Chamber

A press release put out by the government on April 4 said, “India achieved an all-time high annual merchandise exports of $417.81 billion in financial year 2021-22 [April 2021 to March 2022].” The news media reported this achievement, as it should have given that goods exports were up by more than 43% over that in financial year 2020-21 (April 2020 to March 2021), when they had stood at $291.8 billion.

But in this hullaballoo of reporting that we have had our best year till date when it comes to goods exports, a very basic point was missed. The size of the exports in relation to the size of the economy wasn’t taken into account.

When we take the size of the economy into account, the exports to GDP ratio for 2021-22 comes in at 13.2% of GDP. So, here’s the thing: Data from the Centre for Monitoring the Indian Economy over the last 20 years shows that in each of the financial years from 2006-7 to 2014-15, the exports to GDP ratio was higher than it was in 2021-22. In fact, the ratio peaked at 17% in 2013-14, the financial year just before the current government came to power.

There are several other things that need to be kept in mind while celebrating this jump in exports. In the aftermath of the negative economic impact of the Covid pandemic, countries of the rich world printed a lot of money. An estimate made by The Economist suggests that these countries printed a total of $12 trillion. The idea was to flood their respective financial systems with money, drive down interest rates and, in the process, encourage people and businesses to borrow and spend more.

What also happened was that governments handed over money directly in the hands of people by issuing cheques, depositing money directly in bank accounts, or issuing pre-loaded debit cards. This increased the spending capacity of people. In the consumption boom that followed in the rich countries, or what we like to refer to as Western countries, their imports went up dramatically. And this, in turn, is the major reason that has pushed up Indian exports, as it did exports from countries like Vietnam, Indonesia, Japan, South Korea, etc., as well.

Let’s look at this in some detail. The United States is the world’s biggest importer. In 2021, the country imported $2.8 trillion worth of goods. This was a whopping 22% more than in 2020, when total imports had stood at $2.3 trillion. The imports in 2020 were lower than imports in 2017, 2018 and 2019. So, other than increased spending capacity, to some extent, the rise in imports can also be attributed to the pent-up demand catching up.

Now, let’s specifically consider the trade that the United States carries out with India. In 2021, US imports from India stood at $73.3 billion, up 43% from $51.2 billion in 2020. Further, US imports from India in 2020 were lower than that in 2018 and 2019. What this tells us is that Indian exports have gone up primarily because there was pent-up demand in rich countries like the United States, and the fact that governments printed and handed over money directly to people and thus pushed up their spending capacity. In that sense, a rising tide has lifted all boats, not just India.

The question is whether this jump in exports will continue in the months to come. An after-effect of printing money and handing it over directly to people, along with a breakdown in global supply chains due to the spread of Covid, has been an increase in prices. Inflation in the United States, the Euro area and the United Kingdom has been at a multi-decade high. Hence, the central banks of these countries are now looking at increasing interest rates and also, sucking out some of the money they have printed and pumped into the financial system.

In that sense, they are trying to control the spending power of people by making money expensive. Hence, it remains to be seen if the rich world continues to import goods at the same pace.

Chances are they will slow down in the time to come and as and when that happens, exports will be back to being about competitiveness. The real story will come out then.

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