India's export crash in March is not a one-off; there are no quick-fixes for this

The precipitate drop in exports during March 2015 by 21 percent is a confirmation of three things: First, the February revival in factory output, as indicated by the 5 percent rise in the Index of Industrial Production (IIP), is unlikely to be repeated in March. Second, the world economy is in no condition to take on more imports. And third, the rupee is probably overvalued, but any attempt to deliberately lower its value could have consequences for inflation, which has only recently come under control. There are, therefore, good reasons to worry. The odd dip in exports can be explained away by specific circumstances, but the overall export data show that fiscal 2014-15 saw yet another dip in exports, down 1.23 percent from $314 billion to $310 billion. This is the third time in six years when exports have shrunk – the other two being 1.85 percent in 2011-12, and 3.4 percent in 2009-10. [caption id=“attachment_2202204” align=“alignleft” width=“380”]  Reuters image[/caption] Since exports form around 15 percent of GDP, it means the stagnation in merchandise exports has impacted – and will continue to impact - the IIP too. In February, the IIP rose 5 percent largely due to the base effect of low growth in 2014. In March, there is a good chance that the IIP will actually turn negative due to the same reason. As _Firstpost_ reported earlier this week, “in February 2014, the IIP number was 172.7, while this year it was 181.3 – which is what made the growth figure nearly 5 percent. But the index number in March last year was much higher at 193.3 – which means even to achieve zero growth in March 2015, the IIP has to rise by 6.6 percent over what was achieved in February this year.” Now, with exports crashing in March, we can probably rule out any possibility of a positive IIP number in March. Fiscal 2014-15 will end on a negative note on factory output. However, there is no reason to self-flagellate. This drop is a reaffirmation that the world economy may be into a long-term period of low growth, and we now have to look inwards for speeding up. Moreover, at least two major economies – the European Union and Japan – are busy depreciating their currencies, making exports to these destinations tougher than ever. A falling euro and yen also makes their exports more competitive in available markets. That this tougher environment is not specific to India should be obvious from the fact that the world’s export champion – China – also had a terrible month in March. According to a Reuters report, China’s exports shrank by 15 percent in March, when the expectations were the opposite - of 12 percent growth. This shows that the Chinese economic slowdown is being exacerbated by a rising yuan. In short, the global slowdown and currency wars will queer the pitch for all exporters, including India. This brings us to the next question: is the rupee overvalued? Sure, it is. At Rs 62.50, the rupee has more or less held steady against the US dollar for some time, but has gained significantly against the euro. The rupee fell by around 3-4 percent between mid-April last year and now against the US dollar, but gained 19-20 percent against the euro. Clearly, our competitiveness has to improve dramatically – or the rupee has to depreciate significantly – to improve our export performance in future. This situation presents a significant dilemma for monetary and fiscal policy. Allowing the rupee to drop may help exports, but will raise the import costs of oil, impacting inflation. The Reserve Bank has been busy keeping the rupee stable by absorbing the dollar inflows. It has merely to stop buying dollar and the rupee will resume its secular trend of steady depreciation of 5-7 percent a year. This is what is ideal for us. Also, trying to join the currency wars is self-defeating. Depreciating the currency is something everyone can do, and is ultimately a zero-sum game for the world economy. It is not worth courting inflation at home to export goods cheaper to the rich world. Our best bet is not rupee depreciation, but to plug away at the ease of doing business and some degree of sector-specific support. There are no short-term fixes for the issue of stagnating exports in a situation of global slowdown and currency wars. We have to focus on improving competitiveness at a fundamental level. This is a three-year project, by 2015-16 is as good a time as any to accelerate what Narendra Modi began doing in 2014. The areas to focus on are the land bill, labour reforms, easing up on rules for business, adopting the goods and services tax, and creating one national market for agricultural produce.