Global Recession impacts India’s export growth

For the first time in five years, India’s export growth has turned negative. Exports for October 2008 contracted by 15% on a year-on-year basis. This should not surprise as the OECD economies that account for over 40% of India’s export market have been slowing for months.

With the US and EU already entering a phase of recession, India’s export growth had to fall sharply. It must be noted this growth contraction has come after a robust 25%-plus average export growth since 2003. A low-to-negative growth in exports may continue for sometime until consumption revives in the developed economies.

A decelerating export growth has implications for India, even though our economy is far more domestically driven than those of the east Asia. Still, the contribution of merchandise exports to GDP has risen steadily over the past six years — from about 10% of GDP in 2002-03, to nearly 17% by 2007-08. If one includes service exports, the ratio goes up further. Therefore, any downturn in the global economy will hurt India. There also seems to be a positive correlation between growth in exports and the country’s GDP. For instance, when between 1996 and 2002 the average growth rate in exports was less than 10%, the GDP growth also averaged below 6%.

A slowdown in export growth also has other implications for the economy. Close to 50% of India’s exports — textiles, garments, gems and jewellery, leather and so on — originate from the labour-intensive small- and medium-enterprises.

A sharp fall in export growth could mean job losses in this sector. This would necessitate government intervention. A silver lining here, however, is the global slowdown will also lower cost of imports significantly, thereby easing pressures on the balance of payment.

The impact of oil and other commodity prices, halving over the past few months, will reflect in the import data for the second half of 2008-09. Oil import bill, earlier projected to cross $100 billion in 2008-09 with prices surging to $140 per barrel, could easily shrink by about $20 billion. The fall in imports may exceed the decline in exports in the latter half of 2008-09. This would also help soften the current account deficit.