SynopsisThe IMF says the world will lose economic output equal to the German economy between now and 2026. India has a chance to escape this steamroller without getting flattened out completely.
The world economy has been taking continuous hits for a while and India has been feeling the pain. With experts estimating a $4-trillion loss in economic output between now and 2026, how much should India worry?
Experts agree on one point: When there is a global slowdown, the Indian economy will also be affected. But they say the country is in a safer place or better placed when compared with other countries.
Given that the share of the Indian economy is 7.5% of the world economy in purchasing power parity, the domestic industry cannot escape a global disruption, says Rajan Ratna Sudesh, Deputy Head and Senior Economic Affairs Officer, United Nations Economic and Social Commission for Asia and the Pacific (South and South West Asia Office). “India’s exports of goods and services constitute 18-19% of its GDP. So, when there is a global slowdown, India’s exports would also be affected. This is expected as global demand for many products will decline,” he says.
However, the negative impact on India would not be as bad as in other countries because of its large market. Many industries in India still supply to the domestic market more than exporting. Besides, various government policies have led to a greater degree of creation of domestic value chains and backward-forward linkages of industries, say experts.
More and more economic experts now agree that the global economic outlook is turning bleak and recession is imminent. In October, the International Monetary Fund’s Managing Director Kristalina Georgieva said the world could lose $4 trillion in economic output between now and 2026. “We estimate that countries accounting for about one-third of the world economy will experience at least two consecutive quarters of contraction this or next year,” she said during an address. “This is the size of the German economy, a massive setback for the world economy.”
The Paris-based Organization for Economic Cooperation and Development (OECD) also has a grim forecast. It said the world economy would grow just 3.1% this year, down from 5.9% in 2021. The OECD pegged the global economy to expand 2.2% next year. These estimates, and those by other global agencies, suggest that the already fragile global trading environment is going to face another devastating blow.
More pressure on exports
While economists are not willing to put an estimate on the impact of this problem on India, they claim to have some clarity on how it would affect the country. In a closely connected world, a $4-trillion hit — the size of Germany’s economy — would affect exports the most.
Outbound trade of goods has already seen a turbulent phase largely due to these upheavals. This is also evident from the government’s numbers published in October that showed exports contracted for the first time in two years. Outbound trade declined 16.65% YoY in October to $29.78 billion. Share of exports of goods and services in GDP increased to 21.4% in 2021-22 from 18.7% in 2020-21. The overall share of goods exports in GDP increased to 13.3% in 2021-22 from 10.9% in 2020-21.
Ajay Sahai, Director General and CEO of the Federation of Indian Export Organisations (FIEO), says while any contraction in global GDP will have an impact on trade, the country will not be at the mercy of this fall. “The contraction will have much more significance for export-centric countries, those that have a large share in global trade. India’s exports have a 1.8% share in global imports.” Sahai reassures the stakeholders that these are cyclic trends and businesses always factor these into their strategy.
Though India has been aligning its exports with global demand, he points out that the focus has been on technology and sunrise sectors such as electrical and electronics, machinery, automobiles and auto components, pharma and technical textiles. The demand for these products is likely to only go up, says the FIEO chief. “We are also increasingly integrating ourselves in global value chains, which even after the pandemic, account for over 60% of the trade. These value chains are less susceptible to headwinds in global trade. It is important to entrench ourselves in global and regional value chains with shorter linkages. These have become more preferred after Covid and geopolitical uncertainties,” Sahai adds.
Moreover, stakeholders still can take steps to cushion any blow if they consider these as early warning signs.
Diversification as a solution
The latest official export data reveals commodity groups such as engineering goods, readymade garments and textiles are already seeing a dip. Pradeep Mehta, Secretary General of think tank CUTS International, says: “As the developed world grapples with record high inflation, energy crises, depressed consumer demand, high interest rates and industrial downturns, there will be subdued demand for developing country’s exports, both in consumer and intermediate goods. Forecasts of a so-called technical recession are dampening investments as well.” He also points out that domestic policy priorities — such as concerns over food security and inflation — can impact the export performance.
There are several obstacles that can cause some problems and these should not be ignored. The European Union could feel a higher impact and Indian industries focussed on such markets should be prepared.
Labour-intensive sectors such as apparel and textiles, agriculture and low value-added manufacturing face more problems because an impact will directly hit employees. These segments are also among India’s highest foreign exchange earners. “Therefore, it becomes imperative that adequate attention is paid to the diversification of export markets, instead of relying only on demand rebounds in existing ones,” Mehta says.
Diversification will help them offset the loss in one market with the trade in another, Sahai says. “They should figure out a diversification strategy. Moreover, focussing on brand building can help, as branded goods are generally insulated from such contractions.”
Free trade agreements (FTAs) are one way traders can consolidate their business and reach new markets. The government has worked hard to sign foreign trade agreements with several geographies. But these agreements should be designed keeping the past, present and future economic realities in mind, say experts.
Rising in the Global South
UNESCAP’s Sudesh says a greater decline may be seen in some non-essential products and white goods. Iron and steel, non-ferrous metals, industrial machinery and automobiles are on his watch list. He also sees a possible decline in savings repatriation as Indians working abroad would have to deal with a slowing economy and rising inflation, as well as a slowdown in foreign investments as multinational companies will also be hit.
The saving grace could be market diversification. “India is not only trading with the Global North, but it has also integrated well with the Global South. So, a dip in demand in developed countries may give some cushion if it continues to export to developing countries. This is especially true of labour-intensive sectors,” Sudesh adds.
The country’s traditional strengths have been its large consumer base and a large workforce. While these ensure businesses get a daily stable market even during global disruptions, experts point out that some of the country’s inherent advantages can be a booster for exports too.
“India is on good terms with most other countries out there. So, the geopolitical risk assessment associated with India is very less,” says Ravi Srivastava, Senior Partner and Director (supply chain practices),
Consulting Group.
This buttresses the country’s standing as it expands its trade to the growing markets in the Global South. Besides, companies across the world are restructuring supplier networks, trying out nearshoring. This trend also gives India a big opportunity, says Srivastava. “Our attractiveness as a manufacturing location is improving. We already have the advantage of a fairly strong pool of talent. In many categories, we have a very large domestic market. So as manufacturing comes in, it can serve the domestic market, gain scale and also can serve markets outside,” he says.
In terms of a solution, experts suggest a reduction in imports. Two-thirds of the imports comprise petroleum, fertilisers and edible oils, among others. At least in some of these cases, they argue, domestic capabilities should be strengthened. The Make in India drive is one way to reduce this exposure and boost the local manufacturing ecosystem, they add.
Services cushion, but…
Though the focus has been on merchandise exports, we should not forget that the country has a big cushion in services exports, which has softened economic blows earlier also.
Abhay Sinha, Director-General of the Services Export Promotion Council, says the segment might see a grim outlook but is on an expansion mode. Trade in services registered a YoY growth of 43.9% in October. In April-October 2022, the YoY growth was 31%. “If this momentum is maintained, services exports can help offset the problems caused by merchandise trade. It can offer some cushion on the trade deficit and the current account deficit fronts.”
The country’s breakup of merchandise and services exports is 60:40. The economic contribution of services to GDP growth is 54%.
Sinha identifies two more factors that can boost India: Economies around the world have opened up after Covid and the country has taken over the presidency of G20. “We expect more activity in travel & tourism, medical value travel and transport industries.” Besides, India has a vantage point now in reshaping global trade. “This can help us increase exports.”
That can provide some relief for now. But experts argue that the distinction between goods and services trade will blur. It cannot be a question of either-or both segments have to grow and need to be grown, they say.
“Services is indeed a strength, but we need to do well on both fronts,” says Mehta of CUTS. “There is increasing servicification of manufacturing (use of services as value chain inputs.” For example, the research, marketing and logistics process in manufacturing is getting outsourced to service providers. “So manufacturing is now increasingly dependent on services. It helps to improve productivity, efficiency, and global competitiveness. Manufacturing firms are outsourcing most of these activities in the value chain, increasing the demand for service providers. So, a bleaker investment climate bodes ill for the services sector also in the longer run,” he says.
Mehta advocates tapping new frontiers in services exports to spread the market risks. The same developed markets are mostly the biggest destinations for India’s services and merchandise exports. So, there is a need to penetrate new markets. “We also need to move beyond what we have traditionally considered to be our edge in services,” he adds.
This is probably where free trade agreements can help. Agreements signed with the United Arab Emirates and Australia, and being negotiated with Canada and the UK, can help build a robust export base for Indian products and services. The new FTAs reflect the country’s goal of deeper economic integration.
Experts agree the Indian economy has shown remarkable resilience in the face of the global crisis. It has been called “a shining star” because of its inherent strengths. But navigating through this period of high uncertainty in the global economy will require frequent course corrections based on our strengths and opportunities.
(Edited by Ram Mohan)
(Originally published on Dec 07, 2022, 09:50 AM IST)
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