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India’s Export Growth Mirrors Asian Trends, But With A Different Basket

Is the export growth sustainable? A large part of the value increase was due to a rise in commodities prices.

India’s Export Growth Mirrors Asian Trends, But With A Different Basket

India’s export growth increased sharply in dollar terms in March 2017, up 28 percent year-on-year to $29.2 billion, the highest since March 2014. March normally sees a jump in exports, but this year’s rise was extraordinarily high, a bounce of almost $7 billion over the average of the first five months of the second half of the financial year 2016-17. India’s export growth had turned positive in September 2016 but had been growing at a moderate 5.3 percent average from September 2016 to January 2017, before rising to 18 percent in February and 28 percent in March.

These developments in India’s exports are in line with global exports. Data released by the CPB Netherlands Bureau for Economic Policy Analysis show that emerging markets' export volumes, as well as unit prices, rose from a negative 2 percent in September 2016 to about 8 percent in February 2017.

However, much of this change was due to a rise in commodity prices and export volumes were a much lower contributor.

Other analyst and media reports suggest that the January-March 2017 export surge was largely due to a sharp rise in import demand of electronics and commodities from China. China had reportedly started replenishing commodity inventories since the second half of 2016 when commodities prices had started rising. The delta in China’s electronics imports comprised a mix of fourth-generation (4G) smartphones and semiconductors, part of a cycle which is expected to carry on well into 2017. While this is largely part of a consensus reading of China’s imports, other data, including China’s Customs, imply that this narrative might not be as straightforward. This introduces some uncertainty about the sustainability of this growth.

India’s overall topline exports growth resembles the regional pattern but the internals are very different. The contributions - which are essentially a multiple of the weight of the item in the export basket and the respective growth - of the headline 28 percent year-on-year growth are as follows. The largest contribution was from engineering goods at 11 percent, followed by petroleum products at 7 percent, gems and jewelry at 2 percent, and textiles at 1.7 percent, the total of which accounts for about 21 percent.

Engineering goods comprise of transport equipment, auto-components, metal products (largely iron and steel and its products), etc. As one would have expected, given the global rise in steel prices, iron and steel and its products contributed the biggest share of the increase in engineering goods - presumably driven both by price increases as well as volume growth of exports to China and other countries.

The largest share of engineering goods is transportation equipment, and vehicles and parts are the largest components. This segment grew by 9 percent over the course of FY17 from the previous year, and has seen a sharp jump in March. Data from the Society of Automobile Manufacturers (SIAM) shows a 22 percent year-on-year growth in passenger car exports in March 2017, which is a continuation of a trend seen over the past few months. Exports of two-wheelers grew by 19 percent each in February and March.

Where are all these vehicles being sold?

Trade data for April 2016 to January 2017 shows a big jump in exports of vehicles, parts, and accessories to Mexico, South Africa, and some South Asian countries.

The rise in exports to Mexico was counterbalanced by a drop in exports to the United States, but that is part of another story.

The flip side of the rise in exports is the even sharper 45 percent year-on-year rise in imports into India in March 2017. Petroleum crude, gems and jewellery, pearls and precious stones - which are the key inputs into the respective finished product exports - contributed 18 percent, 12 percent, and 4 percent, respectively. These categories totalled 34 percent of the headline import growth.

India’s Export Growth Mirrors Asian Trends, But With A Different Basket

Is the export growth sustainable? That is where the assumptions come in. As noted earlier, a large part of the value increase in exports since October 2016 had been due to a rise in commodities prices.

The sharp drop in steel prices – almost 20 percent since early March, much of it due to increased output in China – and of crude prices, suggests that the price-driven rise in export values is unlikely to sustain beyond June 2017 and may actually begin to taper off in the second half.

Although it is unwise to extrapolate based on a couple of data points, select developed economy indicators suggest flagging momentum in growth.

This, of course, is difficult to assert definitively, given that core Personal Consumption Expenditure deflator (i.e., inflation) of U.S. gross domestic product - a target metric of the U.S. Federal Reserve - has moved up to 2 percent. European inflation, too, appears higher than anticipated, together with strong initial euro zone growth in the first quarter of 2017.

On top of these cyclical factors are the structural implications of rising protectionism and the dilution of trade agreements, which will inevitably have spillovers into the trade in services, which now contributes a large part to India’s current account.

A surprise outcome in the forthcoming presidential elections in France might have major implications for the European Union and its trade and investment relations. On balance, while there is hope that exports will contribute to the global and Indian growth engine, the old glory days of an export-led growth recovery will only likely be a shimmering mirage on the horizon.

Saugata Bhattacharya is Senior Vice President and Chief Economist at Axis Bank. Views are personal. Abhaysingh Chavan and Tanay Dalal contributed to the article.

The views expressed here are those of the author’s and do not necessarily represent the views of Bloomberg Quint or its editorial team.