India Export Outlook Turns Bleaker As Global Growth Slows
Concerns over a global economic slowdown are growing, with the world’s largest economies including the United States and China showing sluggishness.
The World Bank, in its outlook in January 2019, cautioned that, “the outlook for the global economy has darkened.” It cut the forecast for global growth for 2019 to 3.5 percent from 3.7 percent earlier, on account of tighter financing conditions, moderating industrial production and elevated trade tensions. Since then, global central banks, including the U.S. Federal Reserve and the European Central Bank, have also signaled slower growth.
India will not be able to escape the consequences of this slowdown.
While the Indian economy continues to be driven by domestic-demand, weaker global growth will hit the trade sector via slower exports.
A regression analysis done by BloombergQuint over a 20-year period until 2017 shows that a change of one percentage point in world GDP growth, can impact India’s merchandise export growth by eight percentage points.
At the current juncture, when world GDP growth estimates have been pegged down by about 20 basis points as per the World Bank’s estimates, the impact on Indian export growth could be to the extent of 160 basis points or 1.6 percent, as per BloombergQuint’s calculations.
A regression is a statistical measurement which determines the impact of a change in one or more variables on a third variable. For the analysis, BloombergQuint used global GDP growth collated by the World Bank, along with India’s real effective exchange rate (REER), computed by the Bank For International Settlements using 2010 as base year. The REER and merchandise exports were used with a lag of one year to reflect the response of merchandise exports to a change in conditions.
To be sure, while this model would hold over a period of time, over shorter time periods, factors such as change in market access, domestic supply-side conditions and others may have a bearing on export growth as well.
The quantum of impact will depend on how steep the global slowdown is, where the slowdown is emerging from and what constitutes the export basket to that region, said Arun Singh, lead economist at Dun & Bradstreet. “Though the slowdown is already underway, we are likely to see the full impact from the middle of 2019,” he added.
BloombergQuint’s analysis further indicated that a unit’s appreciation in the real effective exchange rate can cause merchandise exports to fall by 60 basis points. As such, the recent appreciation in the rupee, if it persists, may also prove to be a dampener for export growth against the backdrop of a global slowdown.
Similarly, a percentage point change in merchandise export growth in the previous year can impact merchandise growth by 0.3 percent in the current year.
Where Is The Slowdown?
The U.S. and China, both of which are seeing slower economic growth, are among India’s top three export destinations, shows Bloomberg data.
Exports to the U.S. stood at $54 billion in 2018. Gems and jewellery, apparel, pharmaceutical products, mineral fuels and mineral oil, machinery and mechanical appliances constitute major exports to the U.S.
“Slower growth momentum in the United States and rising trade protectionism, along with recent developments of a stronger exchange rate and the withdrawal of GSP (generalised system of preferences) benefits do not bode well for Indian exports,” said Dharmakirti Joshi, chief economist at Crisil.
Economic growth in the U.S. moderated from 4.2 percent in the April-June 2018 quarter to 2.2 percent in the October-December quarter. Views on the U.S. are mixed with some expecting the economy to grow at a sluggish pace, while others fear recessionary conditions.
The Chinese economy, too, has slowed with growth seen at 6-6.5 percent in 2019. Ores, mineral fuels and mineral oils, cotton, copper and copper articles, machinery and mechanical appliances constitute major exports to China.