India’s sizzling export growth: debunking the conspiracy theories: ::JPMorgan

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India’s sizzling export growth: debunking the conspiracy theories

India’s export growth has sizzled over the last year, and continues to do so, despite the recent slowing in developed markets and rising global uncertainty However, India’s export story is increasingly being questioned by skeptics who have begun to cast aspersions on the credibility of the export data Specifically, they allege that India’s export data is not consistent either with partner country import data or with port traffic data in India We, therefore, systematically analyze India’s bilateral trade data over the last decade as well as compare it to port traffic data In contrast to the conspiracy theorists, we find no evidence that the data is being fudged While trade data discrepancies have always existed, and exist for virtually all other countries, discrepancies have actually reduced in 2010 and 2011 when India's exports began to surge Furthermore, India’s export growth is not inconsistent with growth of port traffic data, unlike what is commonly presumed Instead, India’s recent export buoyancy can be explained quite simply by the fact that a vast majority of India’s exports are now directed to developing countries where activity remains more buoyant than developed markets   Exports have been India’s silver lining amid the gloom…   India has been beset with macroeconomic challenges over the last year. With inflation continuing to remain stubbornly high month after month, no signs yet that the private investment cycle is poised to take off, markets and policymakers are bracing for a significant policy-induced slowing of economic activity – as the only viable means to quell entrenched inflationary pressures.   In the midst of this domestic doom and gloom, what has stood out for its consistently sizzling performance over the last year, is India’s export growth. Exports began to surge toward the middle of last year as global activity ticked up and grew a whopping 38% (in value terms) over the last fiscal. Despite slowing growth in some developed markets in the first half of 2011 and rising global uncertainty, exports have continued to grow buoyantly, averaging a stunning 55% (in value terms) in the first four months of this fiscal. For the longest time, skeptics were convinced that the export buoyancy was on account of the feared withdrawal of a domestic export subsidy scheme and therefore would not sustain. To their surprise, exports have continued to surge month after month.     What this consistently impressive export performance has done is to induce a moderation of the trade and current account deficit (CAD) in the last fiscal (the CAD fell to 2.6% of GDP in FY11 from 2.9% in FY10) and thereby prop up the INR despite surging crude prices over the last year.   ….but questions on data credibility have taken off the sheen   However, the sheen of India’s remarkable export performance over the last year has been consistently eroded by a growing chatter questioning both the plausibility of India’s export story as well as the veracity of the export data itself.   On the plausibility front, skeptics are quick to point out that India’s export performance over the last 2 quarters looks implausibly strong given that growth and economic activity has slowed considerably in key developed markets such as the United States and the Euro Area.   On the veracity of the data, itself, the allegations are more specific. They mainly comprise two strands: (i) that India’s recorded exports to our trading partners are significantly higher than the corresponding imports from India that those countries record; and (ii) that growth of container traffic at ports is significantly lower than what should be implied by the export numbers. The resulting implication being that India’s export story is not for real and that the numbers are being fudged.   To judge the merits of these allegations we used the IMF’s Direction of Trade Statistics (DOTS) – the most comprehensive and widely accepted data source on bilateral trade – to study India’s bilateral trade patterns over the last decade. We also looked more closely at the container traffic from various Indian ports and compared them to export volume data from GDP statistics to see if they match up. So what did this analysis throw up?   There is no trade data discrepancy at a regional level   First off, there is no discrepancy – at a regional level -- between the recorded imports from India and India’s reported exports to countries in those regions. Specifically, for the world as whole and for each individual region, for all of calendar 2010 and the first quarter of 2011 (the last point for which data is available), recorded imports from India are greater than India’s exports to those regions. This is to be expected since imports are typically computed on a cif basis (including the costs of insurance and freight) whereas exports are expected to be lower because they are computed on a fob basis (sans these costs).   In sum, for the calendar year 2010 and the 1Q2011 there is not a single region where India’s recorded exports are higher than the partner region’s recorded imports.     Bilateral trade data discrepancies have existed since time immemorial…   Are there individual trading partners for which these discrepancies exists (i.e. when recorded imports from a country are lower than the exports recorded by India to that country)? Absolutely. But this is not a phenomenon that started in 2010 when India’s exports began to surge. It has existed across all countries (not just India) and for time immemorial. As the IMF DOTS manual itself acknowledges, some discrepancies are to be expected given the different ways in which countries report their trade (differences in classification concepts and detail, time of recording, valuation, and coverage, as well as processing errors).       ….and fell, not rose, in 2010 !   If one is to believe the contention that India’s export numbers are being fudged, what we should observe is that the number of cases in which India’s recorded exports are higher than that reported by our trading partners should shoot up in 2010 and early 2011 during the time when recorded exports surged.   Instead, we observe exactly the opposite. Not only have the discrepancies always existed, but they fell to an all-time low in 2010. Specifically, among India’s 181 trading partners for which data is available, 25 percent of them recorded imports from India that were lower than India’s recorded exports to them in 2002. By 2009, this discrepancy had fallen to 14 percent and in 2010 the discrepancy was below 10 percent.   This pattern is consistent even on a quarterly basis. Discrepencies in 4Q2010 when the export surge began is limited to just 10 percent of the trading partners and consistent with earlier quarters of the year. Exports surged further in 1Q2011 but, in contrast, data discrepancies fell to just 3 percent of the countries (though this new data will likely be revised)     This phenomenon exists in other countries too: the case of Brazil   Furthermore, and as alluded to above, these discrepancies are not limited to just India but true of a vast majority of countries covered in the DOTS.   For the sake of comparison, therefore, we decided to conduct the same analysis for Brazil. Unsurprisingly, bilateral trade discrepancies exist there too and, in fact, are even worse. Back in 2002, Brazil’s discrepancies existed with about 22 % of its 183 trading partners – almost identical to that of India. And, while these have reduced over the decade, the discrepancies moderated much less than in India. As such, by 2010 Brazil’s data discrepancies still existed with 18% of its trading partners – almost double that of India. In sum, there’s nothing particularly unusual about India’s data discrepancies that warrant the kind of conspiracy theories that are abound.       The repeat offenders   Giving credence to the view that these bilateral discrepancies exist, in part, on account of the differing manner in which countries report trade patterns, is the fact that most of the countries that are repeat offenders exist in Africa or states that belonged to the former Soviet Republic. This suggests that the trade reporting systems (classification concepts and detail, valuation and coverage) are likely structurally different from India in these countries, leading to the same recurrent patterns of trade discrepancies.     Guess what: port container traffic data is not inconsistent with the export growth data   In addition to bilateral trade discrepancies, skeptics point to the fact that India’s sizzling merchandise export growth over the last year is not reflected in commensurate growth of port-traffic through which the vast majority of our exports are routed.   This is because they mistakenly compare export value data (nominal) with port container tonnage and volume data (real). It is important to underscore that the 38% sizzling export growth witnessed in FY11 was in value terms, which includes price effects. Given the sharp increase in commodity prices last year, one would expect a significant price effect at play. It is therefore important to impute the growth in export volumes and compare that to the growth of container traffic.   Expenditure side GDP data reveals that real export growth was 18% last year in FY11. However, this contains both exports of manufactures and services. While there is not enough granularity available in the GDP data to disaggregate the two, anecdotal evidence suggests that volume growth of IT and BPO service exports (which constitutes the bulk of India’s service exports) was also broadly in this range. Given this, assuming 18% growth of merchandise export volumes is not a bad proxy. The other issue to contend with is that GDP real growth may overstate the growth of volumes if there are quality/technology improvements which contribute to value-add, but we will abstract from those issues for now. FY11 GDP data also indicates that gross imports grew at 9% in FY11, such that total trade volumes (on a weighted average basis) grew close to 13 % in FY11.   How does this compare to increases in container tonnage at ports? Very well, actually. The growth in container tonnage (both exports and imports combined, since the breakdown is not available) was almost identical at 12.6 % for the 12 large government controlled ports in the country (controlling about 65 % of the traffic). Some newer privately run ports (controlling another 10 percent of the traffic) showed significantly higher growth in container tonnage (25-30 %) for the last fiscal. In sum, the growth of trade volumes last fiscal was not at all inconsistent with the increase in container traffic growth – in contrast to what is routinely, and casually, assumed.       Shed the conspiracy theories: it’s new products and markets, silly!   Instead of relying upon conspiracy theories – which are not supported by the data -- India’s buoyant export performance over the last year can be explained much more simply – a move to newer markets and newer products over the last few years.   Key to the skepticism about India’s export performance is the disconnect between slowing growth in the US and euro area on the one hand and India’s continued export buoyancy on the other. But this can be explained quite easily. Contrary to conventional wisdom, India’s exports to developed markets has fallen appreciably over the last decade. Specifically, more than 55% of India’s exports was directed to advanced economies in 2000. A decade later, however, advanced economies account for just over a third of India’s exports. Instead, the vast majority of India’s exports are now directed to other developing countries (particularly in Asia) as well as OPEC countries. The growth slowdown in these economies has been far less pronounced than in the developed markets.     Similarly, the structural composition of what India exports has changed sharply. India’s conventional exports (leather, textiles, gems) have been increasingly replaced by the higher valued- added manufacturing exports including engineering goods, pharmaceuticals and chemical products which now account for the bulk of the export basket. These are shown to have a far greater sensitivity to changes in global demand – in contrast to India’s traditional exports – and, therefore, it is not surprising to see sharp growth in these sectors over the last year as growth in the new export markets has remained strong         Summing it all up: the proof of the pudding is in the eating   In sum, allegations that India’s export numbers are being fudged are inconsistent both with partner country data as well as with port traffic data in India. Furthermore, the proof of the pudding is in the eating. If indeed, the export numbers were being cooked, then the observed correlations between exports and other macroeconomic variables in India (IP, inflation) which have risen in recent years – as fast-growing exports increasingly strain industrial capacity and pressure core inflation – would have broken down, which is not the case. It is no co-incidence, for example, that core inflation surged in the first two quarters of 2011 – a time when domestic demand had begun to slow but export growth was surging. All told, instead of conjuring up more conspiracy theories, we should be celebrating the new-found dynamism of India’s export sector.