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India Economics A Primer on India’s Exports Story:: Morgan Stanley Research
Why Exports Are Key to India’s Growth Outlook
Trend in exports is important for overall growth outlook in this cycle: We believe that a meaningful of recovery in private capex, government spending or private consumption will be difficult to achieve over the next 6-12 months while policy makers focus on improving macro stability indicators, such as inflation, current account deficit, and gap between loan growth and deposit growth. Hence, we believe that the strength of the overall growth improvement will be largely dependent on improvement in exports. Why CPI and Exports Are Key to India’s Macro Outlook?
Exports have been weak until recently: After declining 1% yoy during the 12 months ended March 2013, India’s merchandise exports continued to decline, falling 1.5% yoy in USD terms from April to June 2013. Similarly, services exports have also been weak, increasing only 1.7% yoy for 12 months ending Jun-13.
India’s market share in global merchandise exports has declined marginally since October 2011. While demand growth in the developed world was weak, India exports suffered due to a loss of market share. India’s market share in global merchandise exports declined from a peak of 1.7% during 12 months ended Oct-11 to 1.65% as of the 12 months ended June 2013. Market share in services exports has remained flat after a continued steady rise for many years.
Overvalued currency and supply constraints were key factors in the loss of market share: As per our real effective exchange rate model (using CPI inflation), INR moved into overvalued territory from Oct-09, only to correct below fair value in Jul-13. Moreover, constraints on mining and exports of iron ore kept export growth weak post credit crisis.
Export growth recovering since Jul-13: Since Jul-13, export growth has moved into double-digit territory. Exports of petroleum refined products, engineering merchandise and textiles have contributed significantly to the improvement in export growth from Jul-13.
Outlook for exports is improving, but sustained gains in market share will need a more systematic effort to improve the business environment: We expect merchandise export growth to be around 8-10% in F2H14 compared with 5.3% in F1H14. We expect services exports to follow the trajectory of merchandise exports, showing recovery in the second half of the financial year. In the near term, the key factor influencing the outlook of export growth will be domestic demand growth in the developed world. Although we do expect the improvement in domestic demand in the US and Europe to continue over the next 12 months, we believe it will be gradual. Moreover, we believe the recent depreciation of the currency (on a CPI-adjusted, real effective exchange rate basis) to below its fair value should help ensure that India’s market share begins to recover again. However, a sustained increase in market share would need an improvement in business environment with policies that create an enabling environment for businesses to operate in.
Trend in exports is important for overall growth outlook in this cycle: We believe that a meaningful of recovery in private capex, government spending or private consumption will be difficult to achieve over the next 6-12 months while policy makers focus on improving macro stability indicators, such as inflation, current account deficit, and gap between loan growth and deposit growth. Hence, we believe that the strength of the overall growth improvement will be largely dependent on improvement in exports. Why CPI and Exports Are Key to India’s Macro Outlook?
Exports have been weak until recently: After declining 1% yoy during the 12 months ended March 2013, India’s merchandise exports continued to decline, falling 1.5% yoy in USD terms from April to June 2013. Similarly, services exports have also been weak, increasing only 1.7% yoy for 12 months ending Jun-13.
India’s market share in global merchandise exports has declined marginally since October 2011. While demand growth in the developed world was weak, India exports suffered due to a loss of market share. India’s market share in global merchandise exports declined from a peak of 1.7% during 12 months ended Oct-11 to 1.65% as of the 12 months ended June 2013. Market share in services exports has remained flat after a continued steady rise for many years.
Overvalued currency and supply constraints were key factors in the loss of market share: As per our real effective exchange rate model (using CPI inflation), INR moved into overvalued territory from Oct-09, only to correct below fair value in Jul-13. Moreover, constraints on mining and exports of iron ore kept export growth weak post credit crisis.
Export growth recovering since Jul-13: Since Jul-13, export growth has moved into double-digit territory. Exports of petroleum refined products, engineering merchandise and textiles have contributed significantly to the improvement in export growth from Jul-13.
Outlook for exports is improving, but sustained gains in market share will need a more systematic effort to improve the business environment: We expect merchandise export growth to be around 8-10% in F2H14 compared with 5.3% in F1H14. We expect services exports to follow the trajectory of merchandise exports, showing recovery in the second half of the financial year. In the near term, the key factor influencing the outlook of export growth will be domestic demand growth in the developed world. Although we do expect the improvement in domestic demand in the US and Europe to continue over the next 12 months, we believe it will be gradual. Moreover, we believe the recent depreciation of the currency (on a CPI-adjusted, real effective exchange rate basis) to below its fair value should help ensure that India’s market share begins to recover again. However, a sustained increase in market share would need an improvement in business environment with policies that create an enabling environment for businesses to operate in.
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