India’s exports should recover by the second half of FY24 despite a modest recession in the US and Europe on the back of nearing an inflection point with deeper integration with supply chains, Fitch Ratings said.
“We are sort of nearing that inflection point. In the second half of the year, we should see exports gradually begin to recover from where they are at the moment. India is also looking to integrate itself more deeply into global supply chains. We've seen initial signs of that. As India continues to develop itself in the global supply chain that will help support Indian exports,” Jeremy Zook, Director at Asia Sovereign Ratings, at Fitch told Moneycontrol in an interview.
Trade data released by the commerce and industry ministry showed India’s merchandise exports continued to contract in February by over 8 percent, leading to a fiscal deficit of $17.43 billion. Merchandise exports fell 6.6 percent in January with a fiscal deficit of $17.75 billion and 3.1 percent in December.
“We are expecting a modest recession in Europe and the US but, by the second half of the year, the worst of it will start to fade and we should be on a path of recovery when it comes to exports. But there will be a very gradual recovery in exports,” he said.
Exports are likely to be driven by larger trends and global demand. When it comes to green energy compliance, India is starting to make some of those initial efforts but, like many economies, it still has a long way to go on that front.
Exports have come down quite a bit, driven by global demand factors, and will continue to be driven by these broader macro trends, Zook said.
“The slowing global demand in FY24 will weigh on exports not just from India, but globally as well and particularly from other Asia Pacific economies. But India is not at the bottom of the export downturn in the APAC region. A big factor is the more rapid reopening in China which is likely to drive domestic services consumption. Stronger economic growth in China will eventually support India’s export outlook,” he said.
The current account deficit which was a worry over the past few years due to high commodity prices is also expected to moderate in FY24. “We see the deficit coming back down to about 2 percent of the GDP level in FY24. Few factors behind that are moderating imports, slightly lower commodity prices and subdued domestic demand. Last year, we saw very elevated commodity prices. But certainly there are upside risks given the high uncertainty around Russia-Ukraine, and its potential impact on commodity prices,” the Fitch analyst said.
But, with buffers by way of foreign exchange reserves to help manage volatility, India has a manageable current account deficit, he said.
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