Even as the outlook on the Indian economy has darkened over the past few weeks, the rest of Asia appears to be rejoicing at the prospects of a recovery in global trade.
The Asian Development Bank in its recent update noted that most of the emerging economies in the region, excluding China, are witnessing a rebound in manufacturing exports, “particularly in electronics, where foreign direct investment has been strengthening”. The economies of south-east Asia are also gaining from increased activity along cross-border manufacturing supply chains.
Even India witnessed a mild rebound in exports in August. But a closer look at the data suggests that the 10% year-over-year growth in India’s exports in August was largely on the back of increased earnings from commodity exports – industrial metals and petroleum products – amid a global rise in prices of these products.
Thus, it would be premature to hail the August trade numbers. Using a three-month moving average adjustment to smooth out monthly fluctuations, we find that India has been lagging behind most major Asian economies in merchandise exports.
While the rest of Asia has witnessed a sharp rise in exports of manufactured goods, India’s exports of such items has registered tepid growth. From being a leader in Asia in manufacturing exports two years back, India today is a laggard compared to its peers, as the chart below illustrates.
The twin shocks of demonetization and GST may have contributed to the exports slowdown by disrupting supply chains, hurting the small and medium scale enterprises (SMEs), as the economist Sajjid Z Chinoy of JP Morgan has argued.
The decline in domestic manufacturing output has dealt a double blow to India’s external balances— by crimping exports, and raising imports. India today has a much greater reliance on imports for industrial supplies and capital goods compared to a year ago. Data from the commerce ministry shows that imports of machinery, transport equipment and electronics witnessed a 22% increase in the April-to-August period this year compared to the year-ago period.
This has worsened India’s trade deficit, and pulled down growth in the June quarter.
The numbers suggest that India’s economic pain is largely self-inflicted. And the climb back to a high-growth path may take some time.