Exports underperform, pointing to weaknesses in economy

Subir Roy

Senior economic analyst

THE news from India’s foreign trade front is not too good. It is not a crisis situation as there is a redeeming feature. But that is about all. This picture tells us what is wrong with the overall economy and needs to be corrected.

Exports are down and the trade deficit is up. The redeeming feature is that software or IT exports are doing very well and saving the day, so to speak. Policy must now focus on what is going wrong in the rest of the economy and put in motion an action plan to set things right.

In August, merchandise exports fell for the seventh month in a row to $34.5 billion, which was 6.9% down from what they were a year ago. Imports also fell, but by a smaller 5.2% from a higher base to $58.6 billion. The upshot of all this was that the trade deficit stood at a 10-month high of $24.2 billion.

Instead of just looking at a single month’s figures, it is instructive to look at a longer period, like the current financial year (April-August). During this period, merchandise exports fell sharply by $23 billion to $173 billion and imports by $37 billion to $272 billion. Thus, August is not the odd man out, but a part of the longer trend.

A rising trade deficit does not augur well for the economy, particularly when it has been happening for several months in a row. On the face of it, this would imply that the economy is getting less globally competitive, though what would really clinch the issue is these figures as a percentage of the GDP. But since the revised GDP figures will take time to come, we have to assume that the figures in themselves paint a correct picture.

It is necessary to go behind the export figures and check their composition to know what exactly is not going right. Key sectors which have influenced the fall in overall merchandise exports in August are petroleum and gems and jewellery, but they are not a good guide to what is happening in the overall economy.

India is a large net importer of petroleum products and the figures for them reflect global price movements. Since the Ukraine war began, international petroleum prices have fluctuated intensively and India has had to take what has come its way. India needs to reduce its dependence on fossil fuels because of its global commitments on reducing carbon emissions, but that is a long-term issue. Changes in India’s petroleum trade figures do not tell us much about the health of the economy.

For gems and jewellery, a huge amount is imported and re-exported with very minor value addition. So, changes in trade figures for the sector also do not tell us much about the overall state of the economy. The sector is a large employer of craftsmen, but there is a greater change in the earnings than employment in response to the change in import and export values. So, while changes in the petroleum and gems and jewellery trade figures have affected the overall trade figures, the two sectors have not caused any major development in the entire economy.

For the really positive news, we have to turn to the services and, in particular, the software sector. Some number-crunching shows that during the last financial year (2022-23), the total foreign exchange earnings of the listed software services companies surpassed those of all other sectors — that is, not just oil and gas companies, but also those in the pharma, automotive, engineering, textiles, chemicals and consumer durables sectors.

The combined foreign exchange revenues of the listed IT companies went up by 20.7% on a year-on-year basis, whereas those of all other manufacturing companies (those excluding software and oil and gas) went down by 5%. Thus, there was a sharp slowdown in the foreign exchange revenues of all manufacturing firms.

The picture that emerges by looking at nearly 800 listed companies is truly arresting. Over the last 15 years ending 2022-23, export earnings of IT companies have risen steadily from less than Rs 1 lakh crore to over Rs 5 lakh crore. Against this, the export earnings of oil and gas companies in the sample have gone up from over Rs 1 lakh crore to just over Rs 4.5 lakh crore. Most significantly, the export earnings of companies in all other sectors have gone up from nearly Rs 2 lakh crore to just over Rs 5 lakh crore. To sum up, what is remarkable is that in the last year (2022-23), the IT companies have managed to pip the other companies to the post while leaving oil and gas companies far behind.

The complete picture that emerges is that when it comes to exports, Indian manufacturing is getting nowhere. Agricultural exports have been robust, but recently, export curbs have been introduced to arrest domestic inflation in an election year. So, we do not know what kind of a picture will emerge at the end of the current financial year.

Much pride is being taken in India being the fifth largest economy in the world and the fastest-growing among the large economies. But this distinctiveness is not built on firm manufacturing foundations. Services exports, powered by software, are holding forth, but we do not know the future of even that as generative artificial intelligence is taking away lower-end jobs, while India’s cost advantage meant that it could source cheap skills to perform these tasks.

If manufacturing, particularly small and medium enterprises, is unable to take off, the future employment scene for industrial or blue-collar workers will look depressing. Currently, the unemployment rate is running high at 8%, according to the CMIE (Centre for Monitoring Indian Economy). Plus, if IT ceases to provide a large number of jobs to educated youngsters, the future of white-collar jobs also looks gloomy.

So, what the export figures, read with the others, are telling us is that in a period of global slowdown, the Indian economy, which is largely self-reliant, is doing relatively well. However, this prosperity is not just leaving behind a large number of Indians (a K-shaped recovery) but also things are unlikely to get better in the near future. In fact, they are likely to get worse for most Indians.

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