Falling exports

Why exports have been falling for 11 months

3D chrome Dollar symbol

Exports for the month of October 2015 fell by 17.5% to $21.35 billion in comparison to October 2014. In October 2014, exports had stood at $25.89 billion.

This is the eleventh month in a row when the exports have fallen. In fact, between April and October 2015, exports have fallen by 17.6% to $154.29 billion, in comparison to the same period last year. Between April and October 2014, the exports had stood at $187.29 billion. And this is indeed a worrying trend.

So why are the exports crashing? Much has been written about how India has benefited from falling oil prices. On April 2, 2015, the price of the Indian basket of crude oil had stood at $54.77 per barrel. Since then, it has fallen by 27.2% to $39.89 per barrel.

This has pushed down the oil import bill. And that is the good bit. Nevertheless, there are negative impacts of falling oil price as well. The export of petroleum products in October 2015 crashed by 57.1% to $2.46 billion, in comparison to a year earlier. In October 2014, the petroleum exports had stood at $5.73 billion.

The petroleum exports amounted to 22.1% of total exports in October last year. Since then, they have fallen to 11.5% of exports. In fact, in October 2014, petroleum products were India’s number one merchandise export. In October 2015, they came in third behind engineering products and gems and jewellery exports. So this is the flip side of falling oil prices. Surprisingly, this doesn’t get mentioned much in the media.

While writing this column, I heard an economist who works for a big American bank say on one of the business news channels that we should be considering exports data stripped of petroleum exports. If we do that a much better picture emerges.  Exports (without petroleum products) have fallen only 6.3% between October 2015 and October 2014.

Nevertheless the thing is that such suggestions were not being made when petroleum exports had been on their way up because of the rising oil price. And they are being made only now, when the petroleum exports have crashed because the oil price has crashed. If a certain basket of products makes up for our exports, the need is to look at the complete basket and not remove certain items as and when it suits.

What is worrying is that exports by sectors like engineering goods, gems and jewellery and leather and leather products have also fallen. Exports of engineering goods has fallen by 11.65% to $4.58 billion. Exports of gems and jewellery has fallen by 12.84% to $3.49 billion. Exports of leather and leather products has fallen by 6.6% to $417 million.  It is worth remembering that these sectors especially gems and jewellery and leather and leather products, are fairly labour intensive.

The finance minister Arun Jaitley explained this fall in a statement he made  on November 17, 2015: “One aspect of India, which is adversely affected, is our exports because of shrinking global economy. The headwinds are against us.” This is yet another of those motherhood and apple-pie kind of statements that Jaitley specialises in. As he had said in May earlier this year: “The country has the potential of taking the economic growth to double-digit. The government will take appropriate action in the regard.”

In fact, exports are a very important part of economic growth and no country up until now has seen sustained economic growth without rapid export growth. As TN Ninan writes in The Turn of the Tortoise—The Challenge and Promise of India’s Future: “While optimists like Jaitley talk of getting to double-digit growth, it is worth bearing in mind that no country has achieved this on a sustained basis without rapid export growth—which, in an uncertain world economic situation, is not likely to materialize especially with continuing deficiencies of India’s physical infrastructure.” Hence, falling exports are a very worrying trend.

How are things looking on the imports front? Imports for the month of October 2015 were down by 21.15% to $31.12 billion. The total imports in October 2014 had stood at $39.47 billion. The fall in overall imports was primarily because of a fall in oil and gold imports.

Also, if we look at non-oil non-gold imports, an indicator of the strength of domestic demand, the situation doesn’t look great. The non-oil non-gold imports for October 2015 stood at $22.57 billion. This number is an improvement on the August 2015 number, but it is down from the September 2015 number. The non-oil non gold imports are down 0.76% from October 2014. This is a good indicator of flat domestic demand.

The total imports between April and October 2015 stood at $232.05 billion, down by 15.17% from $273.56 billion between April and October 2014.  Despite this fall, the customs duty collections are up 16.8% between April and October 2015 to Rs 1,22,448 crore.

One explanation for this might be a fall in the value of the rupee against the dollar. But that doesn’t explain the whole thing. As TN Ninan recently wrote in the Business Standard: “Perhaps the import mix has changed, or there is some other explanation — the government has been upping import duties on specific items to combat imports. The point is, an explanation is due; an increase in the collection rate usually points to increased protectionism.”

To conclude, things aren’t looking good for India on the trade front.

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

The column originally appeared on SwarajyaMag.com on November 18, 2015

Busted: The ‘biggest’ myth about Indian exports

3D chrome Dollar symbolOne of the economic theories (I don’t know what else to call it) that often gets bandied around by almost anyone who has anything to say on the Indian economy, is that India’s economy is not as dependent on exports as the Chinese economy is. Honestly, given that China and the word “exports” are almost used interchangeably these days, it sounds true as well. Nevertheless, that is clearly not the case. While this may have been true in the 1990s, the most recent data does not bear this out.

Let’s look at exports of goods and services as a proportion of the gross domestic product (GDP, a measure of the size of the economy) of both these countries. In 1995, the Chinese exports to GDP ratio had stood at 20.4% of the GDP. The Indian exports to GDP ratio was around half of that of China at 10.7% of the GDP.

In 2014, the Chinese exports to GDP ratio had stood at 22.6% of the GDP. On the other hand, the Indian exports to GDP ratio was at 23.6% of the GDP. Hence, as a proportion of the size of the economy, Indian as well as Chinese exports are at a similar level. And that is indeed very surprising. It is not something that one expects.

As Rahul Anand, Kalpana Kochhar, and Saurabh Mishra write in an IMF Working Paper titled Make in India: Which Exports Can Drive the Next Wave of Growth?: “India’s exports have been increasing since the early-1990s – both as a share of GDP and as a share of world exports. Total exports as a share of GDP have risen to almost 25 percent in 2013 from around 10 percent in 1995. Likewise, Indian goods exports as a share of world goods exports have risen, with the share almost tripling to 1.7 percent during 1995-2013. A similar trend is visible in India’s services export – the share tripling to over 3 percent of world service exports during 2000-2013.” Computer services form around 70% of India’s services exports, which forms around one third of India’s total exports.

What these data points clearly show us is that the theory that India is not dependent on strong exports for a robust economic growth, is basically wrong, as exports now amount to nearly one-fourth the size of the Indian economy.

The Indian exports have been falling for the last nine months. In August 2015, the exports were down by 20.7% to $21.3 billion. Twenty three out of 30 sectors  monitored by the ministry of commerce saw a drop in exports in August 2015, in comparison to August 2014. Exports for the period of April and August 2015 stood at $111 billion and were down by 16.2% in comparison to the same period last year. Hence, there has been a huge slowdown in exports during the course of this financial year as well.

A major reason for the same has been a fall in commodity exports. As Chetan Ahya and Upasana Chachra of Morgan Stanley write in a recent research note titled What is Driving the Sharp Fall in India’s Exports?: “Persistent downward pressure from commodity prices has undoubtedly put pressure on commodity export growth (in value terms). Indeed, commodity exports (including oil), which account for 33% of India’s total exports, have been declining since Jul-14.”

Commodity prices have been falling because of a slowdown in the Chinese economic growth. China consumes a bulk of the world’s commodities.
Not many people would know that refined petroleum oil, much of which is exported out of the state of Gujarat, forms around one fifth of India’s exports.

Hence, while India benefits immensely due to a fall in the price of oil, given that we import 80% of what we consume, there is a flip-side to it as well.
Further, in India’s case, export of services, in particular computer services, has played a major role in driving up the exports over the years. The same cannot be said about India’s manufacturing exports. As Anand, Kochar and Mishra point out: “[India’s] services exports, as a share of total exports and in terms of sophistication, are comparable to high income countries, the share of manufacturing exports and their level of overall value content are still low compared to its peers, especially in Asia.”

The reasons for this are well discussed. They include an unpredictable tax regime (which the government keeps promising to correct), complicated labour laws and land acquisition policies, inspector-raj and a shaky physical infrastructure.

And this best explains why unlike China, India’s manufacturing exports are not a major part of its goods exports. As Anand, Kochar and Mishra point out: “For example, in 2013, manufacturing exports accounted for 90 percent of total exports in China, almost double the share during 1980-85. Indian exports have also undergone transformation during the decade of high growth, though to a lesser extent compared to peer emerging markets. The share of manufacturing in total merchandise exports has increased to 57 percent in 2013 from 41 percent in 1980.”

Also, given the problems an entrepreneur faces in India, in getting a manufacturing unit going, India’s share in global goods exports may have plateaued as far back as 2012. Data from Morgan Stanley suggests that India’s good exports as a proportion world goods exports has plateaued at around 1.7%.

As Ahya and Chachra of Morgan Stanley point out: “India’s market share in exports of goods for which we have monthly data has declined marginally over the last 12 months but has remained largely flat since 2012…The structural bottlenecks in the form of inadequate infrastructure, outmoded labour laws, a cumbersome taxation structure and systems, and poor ranking in terms of overall ease of doing business are probably making it harder to make gains in market share at a time when external demand has been weak and excess capacities in competitor economies have rise.”

And this is something that cannot be set right overnight.

The column originally appeared on The Daily Reckoning on Sep 28, 2015

The 7.4% GDP growth number is difficult to believe. Here’s why…

iipVivek Kaul

A lot of questions have been raised about the validity of the economic growth number put out by the ministry of statistics and programme implementation earlier this month. The ministry expects the gross domestic product(GDP) growth during this financial year to be at 7.4%. The number was based on a new GDP series. Before this, the Reserve Bank of India(RBI) had forecast a GDP growth of 5.5%.
Until now, no reasonable explanations of this sudden jump in economic growth have been provided. The trouble, as I have mentioned on earlier occasions, is that, the high frequency data that has been coming out doesn’t seem to suggest that the economy has any chance of growing at 7.4%.
In fact, some high frequency data that has come out over the last few days, continues to suggest that it is unlikely that the economic growth during this financial year will be at 7.4%.
Take the case of corporate profit and sales. A recent news report in the Business Standard points out that “aggregate net profit of 2,941 companies” declined by 16.9%. The sales growth also has been the weakest in at least 12 quarters, the report points out. Falling profits and slowing sales clearly show weak consumer demand.
This has also led to the tax collection targets of the government going awry. For the first ten months of the financial year between April 2014 and January 2015, the total amount of indirect tax(service tax, central excise duty, customs duty) collected went up by 7.4%, in comparison to the last financial year.
The budget had assumed a 20.3% jump in indirect tax collections. And that hasn’t happened. In fact only 68.6% of the annual indirect tax target has been collected in the first ten months of the financial year. It seems highly unlikely that the government will be able to meet the indirect tax target that it had set for itself at the time it presented the budget in July 2014.
Things are a little better on the direct taxes front. The growth in direct taxes was expected to be at 15.7% during the course of the year. The actual growth during the first ten months of this financial year has been at 11.4%. Hence, the gap between the expected growth and the actual growth is not as huge as it is in the case of indirect taxes. In fact, Rs 5,78,715 crore or 78.6% of the annual target has been collected during the first ten months of this financial year.
Direct taxes are back ended(i.e. a large part gets paid during the last three months of the financial year). In a report titled Will the Government Meet the Fiscal Deficit Target for F2015? analysts Chetan Ahya and Upasana Chachra of Morgan Stanley point out that “tax collection picks up seasonally toward the end of the fiscal year, with direct tax collection between December and March at 51.4% of total (five-year average).”
Given this, the gap between expected collections and the actual collections will not be huge, by the time this financial year ends. But indirect taxes will continue to be a worry.
There is other high frequency data which clearly suggests that all is not well with the Indian economy. Loans given by banks are one such data point. Latest data released by the Reserve Bank of India(RBI) suggests that bank loans have grown by 10.7% over the last one year (as on January 23, 2015). In comparison, they had grown by 14.4% a year earlier. Interestingly, bank loans have grown by just 6.7% during this financial year.
In fact, things get more interesting if we look at the sectoral deployment of credit data released by the RBI. This data among other things gives a breakdown of the total amount of bank lending that has happened to different sectors of the economy.
The lending to industry has grown by 6.8% during the last one year (as on December 26, 2014). During the same period a year ago, the lending had grown by 14.1%. A slowdown in bank lending is another clear indication that all is not well with Indian businesses as well as the economy.
A major reason for this slowdown in lending is the fact that public sector banks are still facing the problem of bad loans. As Amay Hattangadi and Swanand Kelkar of Morgan Stanley write in their latest Connecting the Dots newsletter titled Putting Serendipity to Work: “State-owned banks that comprise over 75% of the banking system’s outstanding loans are constrained in their ability to lend. Neither has the formation of bad assets ebbed, as is being evidenced in their latest quarterly reports nor have they been able to raise adequate capital to accelerate lending.”
The monthly wholesale price index (WPI) inflation data also points in the same direction. For the month of January 2015, the WPI inflation was at (-)0.39% versus 0.11% in December 2014. Manufactured products which form 64.97% of the index declined by 0.3%. What this tells us is that manufactured products inflation has more or less collapsed. A major reason for the same lies in the fact that people are going slow on buying goods.
Despite falling inflation, people still haven’t come out with their shopping bags.  When consumers are going slow on purchasing goods, it makes no sense for businesses to manufacture them. This also tells us that businesses have lost their pricing power, given that consumers are not shopping as much as the manufacturers can produce.
If all this wasn’t good enough, exports have been growing at a minuscule pace as well. The total exports for the period April 2014 to January 2015 stood at $265.04 billion. Between Apirl 2013 and January 2014 the exports had stood at $258.72 billion. This means a growth of 2.44% in dollar terms, which is nothing great. In fact, during January 2015, exports stood at $23.88 billion down 11.2% in comparison to January 2014.
Car sales, another good indicator of economic activity, also remain subdued. They grew by 3% in January. The  Society of Indian Automobile Manufacturers (SIAM) expects sales growth to be subded during this financial year at 3-5%.
What all this clearly tells us is that 7.4% GDP growth is just a number. It is clearly not happening at the ground level.

The column originally appeared on www.equitymaster.com as a part of The Daily Reckoning, on Feb 19, 2015