SynopsisIn 2021, for the first time in eight years, exports are booming. Merchandise exports hit a record $35.17 billion (₹2.58 lakh crore) in July 2021, up 47.9% over July 2020 and 34% over July 2019. This implies compound growth of over 15% a year for two years, a return to the heady days of yore. Sectors with high growth included engineering goods (24%), chemicals (13%), textiles (11%) and electronics (17%).
None should be enthused by the 20% rise in GDP in the April-June quarter, since this merely represented a partial recovery from the 24% fall in the corresponding Covid-stricken quarter last year. However, the latest quick indicators like mobility, e-way bills and power consumption suggest further sharp recovery in the July-September quarter. Is this merely dead cat bounce, or does it suggest chances of returning soon to 7% miracle GDP growth?
Even before Covid-19 struck, GDP growth had been declining for years — from 8.3% in 2016-17 to 7.1%, 6.1% and 4.2% in the next three years. The 4.2% growth in 2019-20 may have been closer to 5% had Covid not struck. But even that would have meant steady, sorry decline from the glory years. Some pessimists see this as a long-term slowdown, with GDP growth averaging no more than 5% in future years.
Growth Rides on 2 Wheels
Merchandise exports rose phenomenally in the earlier miracle growth period, from $43.8 billion (₹3.2 lakh crore) in 2001-02 to $314 billion (₹23 lakh crore) in 2013-14, but then declined a bit, and barely recovered to $313 billion (₹22.9 lakh crore) in 2019-20. No economy has ever sustained the ‘miracle’ growth of 7% without buoyant exports. So, India’s export stagnation after 2013-14 foretold the coming fall in GDP. Export stagnation is by no means the only reason for declining GDP.
Other reasons include a slowdown of the global economy, stagnation of world trade, high bad debts in the banking system, lack of quick exit for bust companies and failure to deepen Indian economic reforms, or improve education and the police-judicial system. Yet, note that some of these deficiencies did not stop India from averaging 7% growth for close to two decades.
Export buoyancy is a necessary, though not sufficient, condition for miracle growth. Domestic demand by itself will never suffice to sustain 7% GDP growth. That requires tapping global demand through dynamic export growth. India’s export stagnation after 2013-14 was always going to lead eventually to a GDP slowdown. Caveat: even though merchandise exports stagnated, service exports kept rising after 2013-14, but at a much slower rate.
Now comes the good news. In 2021, for the first time in eight years, exports are booming. Merchandise exports hit a record $35.17 billion (₹2.58 lakh crore) in July 2021, up 47.9% over July 2020 and 34% over July 2019. This implies compound growth of over 15% a year for two years, a return to the heady days of yore. Sectors with high growth included engineering goods (24%), chemicals (13%), textiles (11%) and electronics (17%). Exports of petroleum products, steel, aluminium and agricultural commodities benefited from high prices.
The July export figure is not a flash in the pan. For the four months April-July 2021, cumulative exports were $131 billion (₹7.6 lakh crore), beating not just $75 billion (₹5.49 lakh crore) in the same period of 2020, but also $107 billion (₹7.84 lakh crore) in April-July 2019 and $108 billion (₹7.91 lakh crore) in April-July 2018. WTO predicts that world merchandise trade will increase 8% in 2021. India’s increase may be twice as high.
Service exports data are not available beyond the January-March quarter, but were up at $56.6 billion (₹4.15 lakh crore) in 2021 against $53 billion (₹3.89 lakh crore) in 2020. Software exports were up almost 15%. Quick indicators suggest that service exports have continued booming after March.
But will this be sustained in coming years? It is too early to say. Most analysts, including me, were unprepared for this export boom, especially in the light of Covid’s second wave. It is plausible, but far from proven that reforms like goods and services tax (GST), the Insolvency and Bankruptcy Code (IBC) and improved infrastructure and ease of doing business are finally having a structural impact. If so, that will boost longer-term prospects.
In the period of export stagnancy, the real effective exchange rate (REER) appreciated by almost 20%. RBI has finally put an end to this. For the 6-currency basket, EER has hardly changed in the last two years. RBI has achieved this by massive dollar purchases to offset the huge inflows of FDI and portfolio investment into India.
RBI purchases have taken foreign exchange reserves up from $450 billion (₹33 lakh crore) in early 2020 to a whopping $633.5 billion (₹46.5 lakh crore) today. Of this, a modest $17 billion (₹1.25 lakh crore) represents the International Monetary Fund’s (IMF) grant of new special drawing rights (SDRs). Rapid reserve accumulation has led to US charges of India being a currency manipulator. But many economists have argued for such manipulation for years.
I have reservations about the Aatmanirbhar Bharat programme, which bears some uncomfortable resemblance to the import substitution fiasco of the Nehru-Indira era. But the Nehru-Indira model aimed mainly at creating public sector giants to meet domestic demand, whereas Aatmanirbhar Bharat seeks to create private sector global manufacturing hubs that are world-class exporters.
It claims success in cellphones, where exports have, indeed, skyrocketed after getting protection. But here, value addition is still under 15%. India is mainly assembling imported components. It remains to be seen whether component production will rise and eventually become globally competitive, ending the need for high tariff protection.
Nevertheless, give at least two cheers for the export boom. Its sustainability is unproven. But if sustained, it might just herald a return to miracle GDP growth.
(Disclaimer: The opinions expressed in this column are that of the writer. The facts and opinions expressed here do not reflect the views of www.economictimes.com.)
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