Why exports have fallen 12 months in a row

deflation

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
January23.926.911.15%
February21.525.415.35%
March23.930.321.12%
April22.125.613.67%
May22.32820.36%
June22.326.515.85%
July23.125.810.47%
August21.326.820.52%
September21.828.924.57%
October21.325.917.76%
November2026.524.53%

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

Rajan is right, the world does not need another China

ARTS RAJANVivek Kaul

The index of industrial production (IIP) for the month of October 2014 fell by 4.2%, in comparison to October 2013. IIP is a measure of the industrial activity within the country.
The biggest fall within the IIP came from ‘Telephone Instruments (including Mobile Phones & Accessories)’ which fell by a massive 78.3%. Several analysts have linked this massive fall to the decision of Nokia to shut-down its mobile-phone manufactruing factory in Chennai.
The fall “reflects the impact of the shutdown of the Chennai-based Nokia mobile manufacturing plant,” write Chetan Ahya and Upasana Chachra of Morgan Stanley in a research note dated December 13, 2014. Nokia shut-down the factory on November 1, 2014. Hence, production must have been falling through October and that is reflected in the IIP number.
If the shut-down of one factory manufacturing mobile phones has led to such a massive fall in telecom manufacturing in the country, what does that tell us? It tells us that Nokia was just about the only company manufacturing mobile phones in India. Even the home grown Indian brands (and there are many of them), which now have a significant presence in the mobile phone market, also don’t manufacture mobile phones in the country. They simply import phones from China and put their own brand name on it.
In fact, mobile phones are a fairly complicated instrument, we don’t even produce the 
rakhis, pitchkaris and ganeshas that we buy at different times of the year to celebrate different festivals. It is cheaper for businessmen to buy things over the counter in China or manufacture them there, and simply ship it to India.
India lacks competitiveness even in making the most basic products. So, everything from the most complicated electronic products to nail-cutters that we buy, are made in China.
Keeping this in mind, where does the 
Make in India programme launched by the prime minister Narendra Modi stand. The website of the Make in India programme defines it as “a major new national program designed to transform India into a global manufacturing hub.”
There are a couple of questions that crop up here. The first is that when Indian companies are not manufacturing goods in India and sourcing them from China, why will the foreigners come to India and make it a global manufacturing hub?
The second and the more important question is can the world absorb another global manufacturing hub like China? This point was raised by Raghuram Rajan, governor of the Reserve Bank of India (RBI) 
in a recent speech.
Rajan started his speech talking about slowdown of global growth. As he said: “The global economy is still weak, despite a strengthening recovery in the United States. The Euro area is veering close to recession, Japan has already experienced two quarters of negative growth after a tax hike.”
Over and above this things in China are not looking good either. Albert Edwards of 
Société Générale whose work I closely follow has been talking about things not being well in China for a while now. In his latest research note dated December 11, 2014, Edwards writes: “Chinese inflation data surprised to the downside this week with November’s producer prices falling more deeply than expected at 2.7% – a record 33 consecutive months of yoy[year on year] declines.”
Producers price index is essentially what we call the wholesale price index in India and its been falling for 33 consecutive months in China. What this means is that prices have been falling in China and China can end up exporting this deflation or fall in prices to other parts of the world.
Long story short: Global economy will not grow anywhere as fast as it was in the past or even currently is. This is a sentiment echoed by Niels C. Jensen, in 
The Absolute Return Letter for November 2014, where he writes: “I don’t think GDP growth at an aggregate level will return to levels experienced in the past anytime soon.” Jensen is another analyst whose newsletter I closely follow. The International Monetary Fund has also been downgrading its global growth forecasts.
In this scenario, how much sense does it make to build an export led growth strategy right from scratch. As Rajan put it in his speech: “Slow growing industrial countries will be much less likely to be able to absorb a substantial additional amount of imports in the foreseeable future. Other emerging markets certainly could absorb more, and a regional focus for exports will pay off. But the world as a whole is unlikely to be able to accommodate another export-led China.”
Over and above this, developed countries are also trying to get their respective manufacturing sectors up and running again. The 
Make in India strategy will have to counter that as well. “Industrial countries themselves have been improving capital-intensive flexible manufacturing, so much so that some manufacturing activity is being “re-shored”. Any emerging market wanting to export manufacturing goods will have to contend with this new phenomenon,” Rajan said.
And last but not the least, China will not sit around doing nothing if India gets aggressive on the export front. “When India pushes into manufacturing exports, it will have China, which still has some surplus agricultural labour to draw on, to contend with. Export-led growth will not be as easy as it was for the Asian economies who took that path before us,” Rajan pointed out.
Moral of the story: just because something has worked in the past, doesn’t mean it will work now. This does not mean that India should stop banking on an export led strategy totally. What it means is that an export led strategy of “subsidizing exporters with cheap inputs as well as an undervalued exchange rate” that worked beautifully for Japan, South East Asia, South Korea and China, will not work at this point of time.
In this scenario, if the government should first encourage Indian companies to make products in India for the Indian market. Doing that would be a good starting point. This would mean trying to improve the ease of doing business in India. 
In the latest Ease of Doing Business rankings, India ranks 142 among the 189 countries that were considered for the ranking.
On the critical parameters of starting a new business, dealing with construction permits and enforcing contracts, the country ranked 158th, 184th and 186
th, respectively. These rankings need to improve if Indian businesses are to be encouraged to invest in India.
There are a whole host of things that need to be done. As Rajan put it: “This means we have to work on creating the strongest sustainable unified market we can, which requires a reduction in the transactions costs of buying and selling throughout the country. Improvements in the physical transportation network I discussed earlier will help, but so will fewer, but more efficient and competitive intermediaries in the supply chain from producer to the consumer. A well designed GST bill, by reducing state border taxes, will have the important consequence of creating a truly national market for goods and services, which will be critical for our growth in years to come.”
Over and above this, labour reforms need to be carried out as well. Unless these and many other steps are carried out, what seem like innovative policy proposals, will end up sounding like hollow marketing slogans.
While the government has made all the right noises on this front, no significant economic reform has happened until now. As Arun Shourie
told The Indian Express in a recent interview quoting the legendary Urdu poet Akbar Allahabadi: “Plateon ke aane ki awaaz toh aa rahi hai, khaana nahin aa raha (The  plates’ sound can be heard but the food is not coming).”
To conclude, once Indians start making in India, the foreigners will automatically follow.

The article originally appeared on www.equitymaster.com as a part of The Daily Reckoning, on Dec 16, 2014