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

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