Why Exports Are Key to India’s Growth Outlook
Trend in exports is important for overall growth outlook in this cycle: We believe that a meaningful of recovery in private capex, government spending or private consumption will be difficult to achieve over the next 6-12 months while policy makers focus on improving macro stability indicators, such as inflation, current account deficit, and gap between loan growth and deposit growth. Hence, we believe that the strength of the overall growth improvement will be largely dependent on improvement in exports. Why CPI and Exports Are Key to India’s Macro Outlook?
Exports have been weak until recently: After declining 1% yoy during the 12 months ended March 2013, India’s merchandise exports continued to decline, falling 1.5% yoy in USD terms from April to June 2013. Similarly, services exports have also been weak, increasing only 1.7% yoy for 12 months ending Jun-13.
India’s market share in global merchandise exports has declined marginally since October 2011. While demand growth in the developed world was weak, India exports suffered due to a loss of market share. India’s market share in global merchandise exports declined from a peak of 1.7% during 12 months ended Oct-11 to 1.65% as of the 12 months ended June 2013. Market share in services exports has remained flat after a continued steady rise for many years.
Overvalued currency and supply constraints were key factors in the loss of market share: As per our real effective exchange rate model (using CPI inflation), INR moved into overvalued territory from Oct-09, only to correct below fair value in Jul-13. Moreover, constraints on mining and exports of iron ore kept export growth weak post credit crisis.
Export growth recovering since Jul-13: Since Jul-13, export growth has moved into double-digit territory. Exports of petroleum refined products, engineering merchandise and textiles have contributed significantly to the improvement in export growth from Jul-13.
Outlook for exports is improving, but sustained gains in market share will need a more systematic effort to improve the business environment: We expect merchandise export growth to be around 8-10% in F2H14 compared with 5.3% in F1H14. We expect services exports to follow the trajectory of merchandise exports, showing recovery in the second half of the financial year. In the near term, the key factor influencing the outlook of export growth will be domestic demand growth in the developed world. Although we do expect the improvement in domestic demand in the US and Europe to continue over the next 12 months, we believe it will be gradual. Moreover, we believe the recent depreciation of the currency (on a CPI-adjusted, real effective exchange rate basis) to below its fair value should help ensure that India’s market share begins to recover again. However, a sustained increase in market share would need an improvement in business environment with policies that create an enabling environment for businesses to operate in.
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Trend in exports is important for overall growth outlook in this cycle: We believe that a meaningful of recovery in private capex, government spending or private consumption will be difficult to achieve over the next 6-12 months while policy makers focus on improving macro stability indicators, such as inflation, current account deficit, and gap between loan growth and deposit growth. Hence, we believe that the strength of the overall growth improvement will be largely dependent on improvement in exports. Why CPI and Exports Are Key to India’s Macro Outlook?
Exports have been weak until recently: After declining 1% yoy during the 12 months ended March 2013, India’s merchandise exports continued to decline, falling 1.5% yoy in USD terms from April to June 2013. Similarly, services exports have also been weak, increasing only 1.7% yoy for 12 months ending Jun-13.
India’s market share in global merchandise exports has declined marginally since October 2011. While demand growth in the developed world was weak, India exports suffered due to a loss of market share. India’s market share in global merchandise exports declined from a peak of 1.7% during 12 months ended Oct-11 to 1.65% as of the 12 months ended June 2013. Market share in services exports has remained flat after a continued steady rise for many years.
Overvalued currency and supply constraints were key factors in the loss of market share: As per our real effective exchange rate model (using CPI inflation), INR moved into overvalued territory from Oct-09, only to correct below fair value in Jul-13. Moreover, constraints on mining and exports of iron ore kept export growth weak post credit crisis.
Export growth recovering since Jul-13: Since Jul-13, export growth has moved into double-digit territory. Exports of petroleum refined products, engineering merchandise and textiles have contributed significantly to the improvement in export growth from Jul-13.
Outlook for exports is improving, but sustained gains in market share will need a more systematic effort to improve the business environment: We expect merchandise export growth to be around 8-10% in F2H14 compared with 5.3% in F1H14. We expect services exports to follow the trajectory of merchandise exports, showing recovery in the second half of the financial year. In the near term, the key factor influencing the outlook of export growth will be domestic demand growth in the developed world. Although we do expect the improvement in domestic demand in the US and Europe to continue over the next 12 months, we believe it will be gradual. Moreover, we believe the recent depreciation of the currency (on a CPI-adjusted, real effective exchange rate basis) to below its fair value should help ensure that India’s market share begins to recover again. However, a sustained increase in market share would need an improvement in business environment with policies that create an enabling environment for businesses to operate in.
10 Interesting Facts about India’s Exports Story
1) Over the last 10 years, India’s gain in market share of exports (merchandise & services) is second to China’s within Asia ex Japan region.
2) Over the last 10 years India’s exports to GDP increased faster than China’s. While India’s exports to GDP rose by 10ppt, China’s rose by 1.8ppt.
3) India’s merchandise and service exports were US$444 billion in 2012. China’s exports were at US$365 billion in 2002, but China’s median age was 35 years in 2012 compared with 26 for India.
4) Over the last 10 years, the largest gain in market share among different product segments for India has been in textiles. India’s market share in global textile exports rose to 5.4% in 2012 from 3.8% in 2002.
6) India’s market share in global merchandise & services exports dipped in 2012. This was the first time its market share has dipped since 1992.
7) India’s market share in Asia ex-Japan’s exports has more than doubled since 2000.
8) India’s market share in exports of services has tripled over the last 10 years.
9) India’s rank in exports of services improved to 7th from 22nd over in the last 10 years, while China’s has improved from 12th to 5th.
10) Amongst emerging economies, India is ranked 2nd after China in terms of market share in services exports.
Merchandise Exports
Export growth on a higher trajectory since liberalization: Merchandise exports to GDP has risen to 15.6% as of F2013 from 5.6% in F1991. Market share of merchandise exports has risen to 1.7% from 0.5% in the same period. Merchandise exports grew by 14% (CAGR) between F1991 and F2013. Prior to the liberalization in F1991, merchandise exports grew 8% between F1981 and F1991.
Exports mix – Over the last 10 years, the share of petroleum refined products and engineering has increased and textiles has reduced: While the share of traditional items such as agriculture-related merchandise, minerals and textile products remains high at about 25%, it has reduced from near 37% in F2003. Share of engineering merchandise has risen to 21.7% from 14.5% in F2003. There has been a notable increase in exports of petroleum refined products (reflecting the new refinery capacity additions), which now account for 20% of total exports compared to 4.9% in F2003. Exports of gems & jewellery in overall exports has remained steady over this period.
Export destination tilting more to emerging market economies: Direction of exports has progressively shifted from developed markets to developing markets. Share of advanced economies in total exports has reduced to 45% vs. 60% in 2002. Share of exports to developing and emerging economies is much higher now at 53% vs. 38% in 2003.
Services Exports: Accounts for More than 30% of India’s Total Exports
Trend in services exports encouraging: India has gained significant market share in export of services to 3.2% in 2012 from 0.6% in 1990. Similarly its rank in exports of services has improved to 7nd from 22nd over the same period. Moreover, in the top 10 services exports, only China and HK are the other Asian economies that feature.
India capitalizing on comparative advantage in export of services such as compute / software related: Export of services picked up meaningfully starting in 2000. Within services, exports of software services that accounts for 45% of total service exports grew by 22% between F2001 and F2013 (CAGR).
Export of services tilted more to developed world / English-speaking regions: Direction of services exports shows that demand for services imports from India in the US, Euro area and UK has risen over the last decade. However, more recently India’s market share has remained constant.
Within software and services exports, IT services accounts for 58%, BPO is nearly 23% and ER&D and Software Products account for 19%. The industry continues to be a net employment generator - expected to add 230,000 jobs in F2012, thus providing direct employment to about 2.8 million, and indirectly employing 8.9 million people, as per NASSCOM
Bottom Line -Sustained Gains in Market Share Will Need a More Systematic Effort to Improve the Business Environment
Domestic business environment has deteriorated, government beginning to take corrective steps: Since the credit crisis, the business environment has been very challenging as the bureaucratic machinery of the government has slowed (aftermath of graft related investigations) leading to impediments such as delay in clearances, approvals. Indeed, in the World Economic Forum Global Competitiveness Index, India is ranked 59th in 2012-13, which is down 10 notches from its position in 2009-10. Similarly, India is also ranked poorly as a place of doing business, coming in as the 134th economy (out of 189 economies ranked) in the 2014 of the World Bank’s “Doing Business” report. While over the last 12 months government has taken number of measures to improve the business environment, overall progress remains slow. Policymakers efforts to revive productivity and cut inflation is key – What to watch? 1. Trend in growth mix: Private investment spending Vs government consumption spending 2. Rural wage growth: In comparison with nominal GDP 3. Regulatory as well as legal environment (policy measures that help reverse the distortions in prices of land, labour and capital; tax laws; legal certainty; project approval process)
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