On June 4, the Monetary Policy Committee (MPC) of the reserve bank of India downgraded its growth forecast for the Indian economy. India’s GDP is expected to grow at 9.5% in 2021-22 instead of 10.5%. Even as it made a downward revision in its growth projections, MPC noted a possible source of tailwinds to growth and said that “… the strengthening global recovery should support the export sector”. Can India exploit the export route to a faster economic recovery? The answer to this question is complicated.
World GDP will surpass 2019 levels in 2021, but India’s post-pandemic recovery will be relatively muted
A simple way to judge the extent (or lack ) of post-pandemic economic recovery for any country is to compare its GDP in 2021-22 with the 2019-20 (pre-pandemic) value. India was a better performer on this indicator according to data from the April 2021 World Economic Outlook (WEO) by the International Monetary Fund (IMF). The April 2021 WEO projected a GDP contraction of 8% for India in 2020-21 and a growth of 12.5% in 2021-22. These numbers were 3.3% and 6% respectively for the world economy. Once IMF’s projections for 2021-22 GDP growth are replaced with the RBI’s, India becomes a laggard on this count. A Bloomberg poll of economists has projected India’s 2021-22 GDP growth at 10%, a number closer to RBI’s forecast than IMF’s April projections.
Global trade will bounce back at a slower pace than GDP
The recovery in global trade will be slower than that in overall GDP. The WEO database also gives projections on what it calls traded volume of goods and services. This number fell sharply during the pandemic, suffering a contraction of 8.5% in 2020. It is expected to grow at 8.4% in 2021, which means trade volumes will not regain 2019 levels this year. While the annual growth will remain higher than average at 6.5% in 2022, it is expected to moderate gradually going forward. Because the latest WEO projections seem to overestimate GDP growth for India, the associated import and export growth projections — the former will exceed the latter until 2026 — could be misleading.
Foreign trade generated tailwinds, not headwinds, for India’s GDP in 2020-21
The argument that the Indian economy could gain from higher exports this year would hold true if India were a net exporter of goods. That is not the case. So, the net impact of trade on the economy will depend on what happens to imports as well. In other words, exports will have to rise at a faster rate than imports or imports fall at a faster rate than exports, for foreign trade to have a favourable impact on GDP. The latter is what happened in 2020-21. Trade deficit as share of GDP, was 1.27% in 2020-21, the lowest since 2017-18. If 2015-16 and 2016-17 are excluded, then the trade deficit to GDP ratio in 2020-21 is the lowest since 2005-06. A major reason for the abnormal fall in the trade deficit to GDP ratio in 2015-16, 2016-17 and 2020-21 was a crash in crude oil prices; it was less than $50/barrel in all these years. Because India is a large net importer of oil, oil prices have an important role in determining the trade deficit.
Lowering of trade deficit in 2020-21 was not just cheap oil
Although oil is an important determinant of India’s trade deficit, it is not the only factor. India is also a large importer of a variety of non-petroleum products, especially capital and intermediate goods. Because overall economic activity took a hit in 2020-21, even non-petroleum imports came down. This can be seen clearly if India’s trade deficit is broken up into petroleum and non-petroleum components. Both these components are expected to go up significantly in 2021-22. Crude oil prices are hovering around $70 per barrel, much higher than the average price of $44.8 per barrel in 2020-21. As the domestic economy picks up, even non-petroleum imports are expected to rise. To be sure, exports should go up as well, but then, India has been running a trade deficit in non-petroleum items for a long time. This means that the net positive impact of trade (net exports) on 2021-22 GDP might be lower than what it was in 2020-21.
Exports could still play a role in economic recovery
A senior private sector economist, who spoke on the condition of anonymity, said that there is another route which could lead to trade driven tailwinds for India’s GDP. If exporters are bullish about their foreign markets, they could undertake higher investments and this may create a virtuous cycle of private investment led demand in the economy. This can compensate to some extent for weak consumer sentiment driven headwinds in domestic markets, he said.
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This year’s Economic Survey had an important lesson on this count. It pointed out that a big reason for India’s exports underperforming Bangladesh’s was that the latter, unlike the former, was specialising in export of labour abundant goods, where both India and Bangladesh being labour intensive countries have a comparative advantage. While Bangladesh’s export basket is in keeping with this economic reality — textiles, footwear and apparel constitute 90% of its exports — around 40% of India’s exports are capital or technology intensive. As is obvious, realignment of export driven sectors to labour intensive goods can also generate a bigger positive impact on mass incomes and aggregate demand. If India has to exploit the export route, it will need to adopt a more pro-active policy than merely hoping that a statistical rebound in global trade can lift its economy.
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