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Slowdown: Exporters continue to suffer...

By Business Standard
June 03, 2009 11:04 IST
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April has been a cruel month for India's international trade. Exports declined by a mind-numbing 33.2 per cent (in dollar terms), mirroring the staggering drop in March.

But the scale of the carnage is exaggerated by the sharp price drops that have taken place in various commodities, when compared to a year ago -- petroleum products, for instance, fetch much less now than in April 2008. So the physical volume of exports would have fallen less than the financial numbers suggest.

Still, the drop is massive, but should not be a surprise since the major trade destinations -- the US, UK, Europe and Japan -- are all gripped by severe recession. Other countries in Asia have experienced declines of comparable magnitude.

The only silver lining is provided by the signs of revival in China. However, with the exception of some major minerals, India is not as plugged into China as many other countries in the region and cannot expect to derive significant benefits from a Chinese recovery.

Indian exporters are in for a prolonged period of pain, as their major markets are expected to remain in recessionary conditions until next year. In rupee terms, the decline in exports during April was 16.4 per cent, the smaller drop reflecting the depreciation in the rupee over the period.

This depreciation obviously helped to protect the commercial viability of exports to a degree; but when both costs and revenues are measured in the local currency, such a large drop in business will cause many producers, particularly the smaller ones, to shut shop.

Imports dropped even more sharply, by 36.6 per cent in dollar terms. Oil imports declined by 58 per cent when compared with April 2008, reflecting both lower prices and reduced consumption. The decline in other imports also reflects price drops in items like fertiliser, copper and the like, but also the slowdown in various sectors of the economy.

As a consequence of the sharper fall in imports and the shrinkage of the total trade bill, the trade deficit narrowed considerably to just over $5 billion, compared with $8.7 billion in April 2008.

This is the one silver lining in an otherwise bleak scenario; the decline in the trade deficit will reduce the pressure on the current account (which includes trade in services, where India enjoys a surplus). This means that the risk of a balance of payments crisis remains low, even if capital inflows do not revert to their pre-crisis levels.

The problems that exporters have to deal with are compounded by the fact that there is precious little that the government can do for them.

Virtually all export promotion and incentive schemes are production-linked. If there is no production, there are no subsidies available to producers.

The cost of credit to small and medium businesses (which account for the bulk of exports) is still very high, but it would seem that there is nothing that anyone can do about it if banks see lending to the SME sector as risky.

Promises by the ministry of commerce to come to the rescue of beleaguered exporters must, therefore, be taken with a pinch of salt.

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