Why exports have fallen 12 months in a row


This is something I should have written last week but with all the focus on the Federal Reserve of the United States, the analysis of India’s export numbers had to take a backseat.

Merchandise exports (goods exports) for the month of November 2015 were down by 24.4% to $20 billion. Take a look at the following table. What it tells us is that the performance on the exports front has been much worse during the second half of 2015. During the first six months of the year the total exports fell by 16.4% in comparison to the same period in 2014. Between July and November 2015, exports have fallen by 19.7%, in comparison to July and November 2014.

MonthExports (in $ billion) in 2015

Exports (in $ billion) in 2014

% fall

Why have the exports fallen so dramatically? A major reason for the same lies in the fact that oil prices have been falling for a while now. At the beginning November 2014, the price of Indian basket of crude oil was at around $81 per barrel. Since then price of oil has fallen to $34 per barrel, a fall of around 58%.

But how does that impact Indian exports? India imports 80% of the oil that it consumes. Given this, any fall in the price of oil is usually welcome. The oil marketing companies need to spend fewer dollars in order to buy oil. At least that is the way one looks at things in the conventional sort of way. What most people don’t know is that in October 2014, petroleum products were India’s number one export at $5.7 billion. Several Indian companies run oil refineries which refine crude oil and then export petroleum products.

In November 2014, petroleum products were India’s second largest export at $ 4.7 billion. In November 2015, the export of petroleum products was down by 53.9% to $2.2 billion, in comparison to a year earlier. Also, petroleum is now India’s third largest exports behind engineering goods and gems and jewellery. This is a clear impact of the fall in price of oil price.

How do things look if we were to take a look just at exports of non-petroleum products? Exports of non-petroleum products in November 2015 was down by 18.3% to $17.8 billion. This doesn’t look as bad as fall of 24.4% of the overall exports, but is bad nonetheless.

How are India’s other major exports doing? Engineering goods are currently India’s number one export. In the last one year they have fallen 28.6% to $4.7 billion. Gems and jewellery are India’s number two export. In the last one year they have fallen 21.5% to $2.9 billion.

A simple explanation here is that the global economy as a whole has not been doing well and that is bound to have an impact on Indian exports as well.  When other countries are not doing well, they import less and this has had an impact on Indian exports.

As Dharmakirti Joshi and Adhish Verma economists at Crisil Research write in a research note titled Exports, Hex, Vex: “Global growth recovery has been slow and uneven. In its latest world economic outlook released in October, the International Monetary Fund (IMF) downgraded its global growth forecast for 2015 to 3.1% from 3.3% earlier. The World Trade Organisation has predicted stagnant trade growth at 2.8% in 2015, which implies annual trade growth would be below 3% for the fourth consecutive year compared to over 7% in the pre-financial crisis period…This suggests global trade has fallen more than world growth, implying trade intensity of world GDP has declined – a worrying phenomenon for export-dependent economies.

But have Indian exports just because global growth and in the process global trade have slowed down? As Joshi and Verma write: “For instance, while world real GDP growth improved from 3.2% in 2009-2011 to 3.4% in 2012-2014, India’s real growth of exports came down from 11.1% to 4.1%. This suggests the decline isn’t merely cyclical; there are structural elements at play as well. The cyclical component of exports will move up when cyclical factors (world GDP growth, prices) turn favourable, but structural factors, if not addressed, will continue to act as a drag on India’s export performance. Falling competitiveness is one of the structural factors restricting export growth. For key export items such as gems & jewellery and textiles, revealed comparative advantage has come down over the years.”

So Indian exports have come down also because their competitiveness vis a vis goods from other nations has gone down over the years. It’s not just about slowing global economic growth.

How are things looking on the imports front? Imports in the month of November 2015 fell by 30.3% to $29.8 billion. This is primarily on account of a huge fall in oil imports due to plummeting oil prices. Oil imports during November 2015 fell by a whopping 45% to $6.4 billion.

If we ignore oil imports from the total imports number, how do things look? Total imports ignoring oil were down by 24.5% to 23.4 billion in November 2015 in comparison to a year earlier. In fact, if we look at non-oil non-gold imports things get interesting. Non-oil non-gold imports for the month of November 2015 have fallen by 22.1% to $19.8 billion. This number is a very good reflection of how consumer demand as well industrial demand is holding up and still hasn’t recovered. And things clearly aren’t looking good on this front.

The column originally appeared on The Daily Reckoning on Dec 21, 2015

Will The Pay Commission Hikes Boost Consumption?

The Seventh Pay Commission has recommended an overall 23.6% increase in salaries of central government employees and the pensions of the retired central government employees. The total cost of this increase in 2016-2017 has been estimated at Rs 1,02,100 crore (as can be seen from the following table).


Source: Seventh Pay Commission Report

This increase of Rs 1,02,100 crore has led several analysts and economists to conclude that a consumption boom is on its way. As analysts at Kotak Institutional Equities point out in a research note: “We expect automobiles, consumer durables and real estate sectors to benefit from the largesse. Although current demand conditions are somewhat subdued in both the sectors, the additional funds in the hands of central…government employees should be a positive for volume growth.”

The logic is very simple. If the recommendations of the Pay Commission are accepted the salaries of the central government employees will go up. The pensions of the retired central government employees will also go up. They are likely to spend this money and this spending will benefit the car, consumer durables (refrigerators, washing machines, television etc.) and the real estate companies. QED.

The truth might actually turn out to be a little more nuanced than this. There is no denying that there will be spending and that spending will benefit the economy, but the question is how much?

It is important here to consider those working for the central government and those who have retired from central government, separately. Let’s take the retired lot first. The increase in their case works out to Rs 33,700 crore (see above table). The Pay Commission report points out that as on January 1, 2014, the central government had a total of 51.96 lakh pensioners.

The increase of Rs 33,700 crore will be divided among these pensioners. This works out to Rs 64,858 on an average (Rs 33,700 crore divided by 51.96 lakh pensioners) or around Rs 5,505 per month (Rs 64,858 divided by 12). A portion of this will be taxed (I have no way of estimating how much, given that there is no way of estimating what is the average rate of income tax that India’s pensioners pay).

While this increase is substantial it is not substantial enough to make a huge impact on consumption. It will have an impact on consumer durables sales and two wheeler sales. But I don’t think this increase for pensioners will have an impact on sales of big ticket items like cars or homes for that matter. Also, it is worth mentioning here that pensioners are not as big spenders as those employed, anyway.

Those working for the central government will see a total increase of Rs 68,400 crore (Rs 1,02,100 crore minus Rs 33,700 crore of pensions). A portion of this increase in income will be taxed. Again, I have no way of estimating how much, given that I couldn’t find any data on what is the average rate of income tax that India’s central government employees pay. In fact, I could have used the average rate of income tax paid by individuals as a proxy, but I couldn’t find that number either. (Though the average rate of corporate income tax is available and is shared with every budget).

Assuming that the average rate of income tax paid by India’s central government employees is 10.3% (10% income tax + 3% education cess). This would leave around Rs 61,355 crore (Rs 68,400 crore minus 10.3% of Rs 68,400 crore) in the hands of the employees to spend.

The Pay Commission Report points out that there are currently 33.02 lakh central government employees. This means that Rs 61,355 crore will be shared among them. It works out to Rs 1,85,811 for the year (Rs 61,355 crore divided by 33.02 lakh employees), on an average. This works out to Rs 15,484 per month (Rs 1,85,811 divided by 12).

This is a substantial increase and will have an impact on consumption. It will lead to more two wheeler sales, more consumer durables sales and more car sales as well. But I still have my doubts whether this will lead to substantially more sales in real estate. Perhaps in smaller towns, yes.

Also, it is important to see how big this increase is with respect to the overall size of the economy. The increase of Rs 1,02,100 crore will work out to 0.65% of the gross domestic product (GDP) in 2016-2017.  In comparison, the awards of the Sixth Pay Commission had worked out to 0.77% of the GDP.

Some portion of this increase will be taxed away. Some portion will be saved. I guess it is fair to say that around half to two thirds of this increase will be spent and that works out to around 0.33-0.43% of the GDP. While that is a substantial number, it is not very big in the context of the overall economy.

Also, analysts and economists who have been talking about a huge revival in consumption have the Sixth Pay Commission experience in mind. As Crisil Research points out in a research note: “Sales of automobiles (two-wheelers and passenger vehicles) increased significantly (25-26%) while consumer durables saw a growth of 2.5-3% bps in fiscal 2010 and 2011 after the implementation of the Sixth Pay Commission report.”

The major reason for this big boost in consumption was that the increased payments to central government employees was made in 2009 and 2010, even though it had been due from 2006 onwards. This time the increase is due from January 2016. Even if the payments are made from April 1, 2016, onwards, the arrears will be minimal.

As the Seventh Pay Commission report points out: “The awards of the previous Pay Commissions, both V as well as the VI, involved payment of arrears…However, Seventh Central Pay Commission recommendations entail, at best, payments of marginal arrears.”

Given that central employees will not be receiving bulk payments in the form of arrears, the impact on consumption will not be as much as it was the last time around. Also, sales went up in 2009 and 2010 because of a cut in excise duty and a huge drop in interest rates. Both scenarios are unlikely as of now.

Crisil estimates that: “The Seventh Central Pay Commission to boost sales of passenger vehicles and two-wheelers by 4-5% incrementally in fiscal 2017…Consumer durables, too, are expected to see additional growth of 1-1.5% in volume, while there could be broad-based growth in televisions, washing machines and refrigerators.” And that sounds reasonable.

(Vivek Kaul is the author of the Easy Money trilogy. He tweets @kaul_vivek)

The column originally appeared on SwarajyaMag.com on Nov 21, 2015

Mr Mahindra and Mittal, low interest rates do not always lead to faster economic growth

indian rupeesVivek Kaul

The Reserve Bank of India releases sectoral deployment of bank credit data every month. The latest data shows that loan growth of banks for the one year period between September 20, 2013 and September 19, 2014, slowed down to 8.7%.
Interestingly, in the one year period between September 21, 2012 and September 2013 it had stood at 17.9%. What is worrying is that the bank loan growth in this financial year has almost come to a standstill. Between March 21, 2014 and September 19, 2014, the bank loan growth stood at a very low 1.8%. The growth between March 22,2013 and September 20, 2013 had stood at 6.7%.
Not surprisingly, calls for a repo rate cut by the Reserve Bank of India (RBI) have become very fashionable these days. Repo rate is the rate at which the RBI lends to banks.
A PTI report quotes industrialist Anand Mahindra as saying “It might be time for the RBI to think of a rate cut.” “The need of the hour has changed and its time to start to look to support growth,” Mahindra added. Sunil Mittal, chief of Bharti Airtel, also suggested the same when he told CNBC TV 18 that the finance minister Arun Jaitley “had spoken for the nation,” when had asked for an interest rate cut. In a recent interview to The Times of India Jaitley had said “Currently, interest rates are a disincentive. Now that inflation seems to be stabilizing somewhat, the time seems to have come to moderate the interest rates.”
The logic is that if the RBI cuts the repo rate, banks will also cut interest rates, and this in turn will lead to people borrowing and spending more. Companies will also borrow more and expand and invest in new projects. And this will lead to faster economic growth.
Nevertheless, the thing is that economic theory and practice don’t always go together. So, a cut in interest rates doesn’t always lead to an increase in investment by the corporate sector. As Crisil Research points out in a report titled
Will a rate cut spur investments? Not really “the monetary policy tool of cutting the interest rate is conventionally used to energise a flagging economy. But this does not hold true under all circumstances.”
Crisil Research comes to this conclusion after comparing the last two financial years with the pre-crisis years of 2004-2008. During 2004-2008, private corporate investment increased despite high interest rates. The same has not been true during the last two years. As the report points out “Investment growth, particularly private corporate investment, plummeted in the fiscals 2013 and 2014, despite low real interest rates. During this time, the policy rate in real terms – repo rate minus retail inflation – has been negative, and real lending rates averaged 2.4%. This is significantly lower than the 7.4% seen in the pre-crisis years (2004-2008). Yet investment growth dropped to 0.3%, down from an average 16.2% seen in the pre-crisis years.”
The question to ask why has that been the case? Most corporates while making a decision to increase their investment take a look at the expected return. “Investments are undertaken when the expected returns on them are more than the real lending rate (real borrowing cost for corporates). The average rate of return on corporate investment (non-financial firms) – as proxied by return on assets – fell sharply to 2.8% in fiscal 2013 and 2014 from nearly 6% in the pre-global financial crisis years,”Crisil Research points out.
A very good example of this is the road construction sector where investments are made by looking at the internal rate of return on the project. The internal rate of return on road projects during the period 2008-2009 was between 16-18%. It has since fallen to 8-14%. And the major reason for this is cost overrun for which corporates are themselves responsible to a large extent and delays in projects clearances by the government. These projects have also found it difficult to acquire land. Interest rates have had almost no role to play here.
This is basic economics at work. And our politicians and businessmen need to be aware of this. Further, what our politicians and businessmen do not talk about is the fact that many large business groups are heavily indebted and this has led to their interest costs shooting up. One sector where companies are heavily indebted is infrastructure. As Crisil Research points out “The ratio of interest cost to operating income for infrastructure companies has increased sharply in recent years from 4.7% in fiscal 2010 to 13.2% in 2014. However, the analysis suggests that this worsening had more to do with high indebtedness of infrastructure companies than elevated interest rate.”
Also, India has fallen constantly in the global competitiveness rankings. India’s position in the Global Competitiveness Index fell to 71 in 2014. It was at 60 in 2013 and 49 in 2009. The RBI was not responsible for any of this. This was a mess made the politicians of the Congress led UPA which ruled the country for a decade and the businessmen who went on a borrowing spree and underestimated costs of setting up projects.
Also, the Indian consumer is not ready to get his shopping bags out as yet though he flattered to deceive briefly, after Narendra Modi was elected as the prime minister. This is reflected in a variety of numbers from low manufacturing inflation to low index of industrial production and car sales.
The reason for this is that inflationary expectations ((or the expectations that consumers have of what future inflation is likely to be) continue to remain high. Hence, the Indian consumer is still not convinced that the high inflation that he has had to deal with over the last few years has finally been killed.
The Reserve Bank of India’s Inflation Expectations Survey of Households: September – 2014 which was a survey of 4,933 urban households across 16 cities, and which captures the inflation expectations for the next three-month and the next one-year period. The median inflation expectations over the next three months and one year are at 14.6 percent and 16 percent. In March 2014, the numbers were at 12.9 percent and 15.3 percent. Hence, inflationary expectations have risen since the beginning of this financial year.
lnflationary expectations be reined in once inflation remains low for an extended period of time. And consumer demand is likely to pick up only after this happens.
To conclude it has become fashionable for the government and the businessmen to blame RBI for slow economic activity in the country. Nevertheless, it is time they started to get their own act right. The RBI can only do so much.

The piece originally appeared on www.FirstBiz.com on Nov 5, 2014

(Vivek Kaul is the author of the Easy Money trilogy. He tweets @kaul_vivek)