India Ratings believes the key risk to India’s export growth remains a disorderly market response to attempted reversal of Unconventional Monetary Policy (UMP) and transmission of the shock to real economy in developed markets.
India Ratings & Research (Ind-Ra) believes the recent recovery of export growth was driven by a tentative revival of global demand as well as low base of 2012. In absence of any further global shocks and continuation of Unconventional Monetary Policy (UMP) in the US and eurozone, the revival in export growth is likely to be sustained with a marginal positive bias. However, Ind-Ra expects the recent, high double-digit monthly export growth to taper off and be replaced by a growth rate in the range of 3 percent to 7 percent during 2014 given the base effect.
Indian merchandise exports grew 11.7 percent (in US dollar terms) over July-October 2013. On an aggregate basis, merchandise export in the first 10 months of 2013 was 5.2 percent higher than the corresponding period of 2012 and 2.6 percent higher than the corresponding period of 2011.
Exports of petroleum products, chemicals & allied products (pharmaceuticals being a major contributor) and textiles were the major contributors to the revival seen in the last four months. The most significant growth in merchandise exports was to Europe, the US and ASEAN countries. However, India’s exports to its emerging market trade partners remained muted over April-September-2013 as they are experiencing moderating industrial activity.
Historically, industrial activity and consumption in the US and Europe have been the key drivers for export growth of Asian exporters including India. The two regions together accounted for 30.7 percent of India’s merchandise exports in FY13. Industrial activity and consumption in the US have remained at broadly stable levels with some negative bias since 1Q12. However, given the uptick in the levels of US Purchasing Managers Index and the Conference Board Consumer Confidence Index, a significant downside is not likely. The eurozone, which is tentatively out of recession, and the UK, are exhibiting some buoyancy in industrial activity and retail spending. This is likely to support demand for Indian exports.
Overall, trading partners who account for an estimated 42 percent to 50 percent of India’s merchandise exports (primarily advanced economies) are likely to exhibit stable-to-improving gross domestic product growth prospects suggesting demand is unlikely to go down from current levels. However, moderation in industrial activity of emerging market trading partners may limit growth opportunities in the near term.
Ind-Ra believes the key risk to India’s export growth remains a disorderly market response to attempted reversal of UMP and transmission of the shock to real economy in developed markets. Alternately, a relatively lower risk emanates from an aggressive revival of the Chinese export centric policy.
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