Time to harvest the tailwind in exports

News: The current increase in global trade offers an opportunity for India to get its exports’ strategy in order before growth dips again.

What are the factors that have contributed to the growth in exports?

Factors that have given thrust to exports are,

– Revival of global growth

– Inventory restocking in early 2021 as economies opened.

– Pandemic-induced shift towards consumption of goods.

How does India stand to gain from this trend?

India’s merchandise exports could continue to benefit from a rise in external demand in the short run due to the following reasons:

One, merchandise exports highly elastic to global growth are driving the post-pandemic surge. India has a high share of these items in its export’s basket. Such items include chemicals engineering goods, petroleum products, and gems and jewelry.

Elasticity is calculated as the ratio of growth in exports to growth in world GDP, and a measure higher than 1 indicates high sensitivity to global growth.

Two, value of exports has grown faster than volume this fiscal, compared with the pre-pandemic levels. High global commodity prices have provided a disproportionate lift to the value of exports.

Three, despite higher commodity prices, the terms of trade (the ratio of export prices to import prices) remain favorable to exporters, but the gap has narrowed. This suggests prices of imports are growing faster than those of exports, and it could reduce the net earnings of exporters.

What are the risks that can offset exports trade?

The risks include,

– Supply-chain disruptions and material shortages

– Uncertainties around the impact of the delta variant

– Medium-term cut in global potential output.

– UNCTAD report cautions that the momentum in global trade in 2021 may be short-lived, as it partially reflects inventory restocking cycle.

What India should do to consolidate the benefits arising out of exports?

First, enhancing domestic production capacity will open avenues for exports in import-dependent sectors. In this context, PLI scheme can be a crucial bridge between short-term opportunities and longer-lasting growth.

Second, improving India’s competitiveness through focused reduction in trade costs (tariff and non-tariff barriers, transportation, and other costs) is critical.

Source: This post is based on the article “Time to harvest the tailwind in exports” published in Business standard on 19th Nov 2021.