The February exports puzzle: Business Line March 20, 2017

While it hasn’t been proved that a weaker rupee helps exports growth big-time, a stronger rupee will come in the way

The exports performance for February 2017 has been very impressive with growth of 17.5 per cent, which is one of the highest rates recorded in the last five years or so. In October 2014, growth was 14.3 per cent, which is the next highest growth rate. Is there reason to cheer?

Cautious cheer

Prima facie there is reason to be satisfied as growth has turned positive for quite some time now and it is reasonable to expect that growth will be in this zone in the coming months too given that global economic conditions are definitely not deteriorating even though the growth process is localised and sluggish. The exports picture today has, however, been distorted considerably in the last few years with global conditions being weak and the rupee particularly strong. The former is important as it reflects the inherent demand strength while the latter relates to the competitive edge that can be had by having a weaker rupee.

The January world economic outlook put out by the International Monetary Fund has projected growth at 3.1 per cent in 2016 for the world economy compared with 3.2 per cent in 2015, with world trade volumes slowing down quite perceptibly from 2.7 per cent to 1.9 per cent. Hence, demand conditions do not appear to have been very bright for the greater part of 2016, which could, however, change in 2017 with the US economy poised to revert to the upward growth path. The rupee has depreciated by just about 2 per cent during this period which was very moderate compared to the extent to which other currencies of the emerging markets were impacted. Therefore, the export advantage on price was not evident.

The cumulative picture till February reveals that growth was 2.5 per cent as against -16.4 per cent in FY16. Hence there has been a statistical base advantage this time. Growth in monthly exports for the period September 2016 to February 2017 witnessed continuous positive growth numbers and peaked in February. There were sharp declines in the growth rates in exports in the comparable months in the previous year which does moderate the initial emotion when viewing growth rates for FY17.

Preliminary data also suggests that engineering exports grew by 47.3 per cent which is impressive. Such data has to be treated with caution because if this number is to be interpreted as being resurgence in exports due to due to buoyant demand, there has to be a corresponding increase in production on the domestic front.

Juxtaposing the scenario presented by the index of industrial production, it does appear that there was a one-time increase in growth of capital goods by over 10 per cent (which however did come over negative growth of around 20 per cent in January 2015), which can probably explain the lagged effect on exports growth in February. Growth has to be witnessed on a sustained basis to convince that exports have really turned the corner. None of the other products have witnessed a high growth to provide assurance that growth in exports is well spread across all industries.

Another component that has grown sharply is refinery products, by around 28 per cent in February. Here growth can be attributed more to the fact that crude prices increased during this period, enhancing the value of these exports. In fact, when crude oil prices were reining at a high level in 2013, refinery products accounted for around 25 per cent of aggregate exports, which has come down now to around 10 per cent.

On the imports side too, there was an increase of 60 per cent in oil imports in February which again came over a negative growth of 21.4 per cent last year.

Therefore both the growth drivers of exports in February 2017 have certain qualifications attached.

Interpreting data in the Indian context has become fairly complex over the years due to the fairly volatile behaviour of various sectors, which is also reflective of unbalanced growth.

The new measure of calculating GDP has exacerbated these anomalies where the headline number does not rhyme with the individual components.

A sharp drop in growth rates in years for any variable has tended to overstate the extent of growth when there is a recovery. This has also been associated with sharp spikes in single months that have become quite common especially for industry. A couple of large orders or contracts being delivered or executed have caused these spikes in growth that get corrected subsequently. This also tends to get reflected in the growth numbers.

The thumb rule

Ideally a three-month period of sustained growth numbers can be a thumb rule to ascertain whether or not there is a turnaround. But even this formula can be misleading at times as is the case with exports growth this year.

Further, the delinking of such performance with the underlying, that is industrial industrial production does make interpretation more challenging.

The coming year will be interesting for our foreign trade as the US economy is expected to recover, which can be deduced from the Federal Reserve increasing interest rates and indicating more similar actions.

This can be good news for exporters who, however, will have to also contend with the negative effect of a strong rupee.

The recent appreciation may be considered to be a temporary aberration, but the Reserve Bank of India may have to keep a closer watch and intervene in case the rupee strengthens beyond fundamentals. Otherwise, while it has not been proved unequivocally that a weaker rupee helps in exports growth to the extent that it does, a stronger rupee will come in the way.