India: the lowdown in exports - DBS Research Report

India: the lowdown in exports

* India was not spared by the slowdown in Asia's export cycle. Merchandise ex­ports fell in the nine months to August 2015, the longest decline since 2008-09.

Ironically, India, as a net crude importer, should have benefited from low com­modity prices. Having fallen by 39% YoY since Apr15, oil imports shrank the total imports bill by 12%. Unfortunately, the trade balance did not improve much this year because exports also declined 16%

* The government's target to raise India's exports from USD 310bn in FY14/15 to USD 900bn over the next five years is likely to be an uphill task.

Exports downtrend not as weak as feared on tri-currency basis

* Asia's exports, in US dollar terms, fell by an average 16% YoY in Apr-Aug15, The US dollar's sharp appreciation (and tumbling euro and yen) understated Asia's export growth.

* To even out the sharp and divergent currency swings, Asia's exports should not be mea­sured solely against the US dollar but against a tri-currency basket of dollars, euros and yen. After the adjustment, Asia-10 exports have, instead, been rising at an upbeat 8% pace since 2011. Measured on tri-currency basis, the downtrend in India's goods exports are also not as weak as initially feared

Other factors that also depressed external trade

* The share of commodity exports has been rising in recent years. Petroleum exports now account for a fifth of total shipments with non-oil commodities making up another 10%. Hence, a third of India's export earnings entered into a free-fall.

* India's exports are unlikely to improve in a hurry due to its close corre­lation with global imports.

* Export growth has been restrained by supply-side bottlenecks, mainly power shortages, lack of infrastructure facilities, port congestion e.t.c. Smaller export-oriented units are particularly vulnerable to energy shortages that in­flate costs and hurt price competitiveness.

* A competitive currency is important but in isolation it is of little help

Despite TPP, progress on trade pacts will be slow and cautious

* Of the twelve signatories of the TPP, India has existing free trade/cooperation agreements with three. Negotiations are on-going with the ASEAN member countries on a separate Regional Comprehensive Economic Partnership (RCEP), which includes China but not the US. India had expressed plans earlier in the year to join the APEC (Asia Pacific Economic Cooperation) and push forth the EU FTA but progress has been slow.

* A think-tank estimates that India's exports, especially textiles and leather prod­ucts might face threats, as countries such as Vietnam and Malaysia get cheaper access to the US and other markets covered by the deal.

Source : Equity Bulls

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