India’s exports set to feel the heat from weakening global growth

The maximum drag on exports in April was on account of gems and jewellery, which contracted 30 percent year on year. These exports have contracted in seven of the last 10 months, which is a direct result of a slump in demand from the US and Europe, Sarangi said.

But it is not just luxury exports, such as gems and jewellery, that are suffering.

“All discretionary buying, not just in the gems and jewellery industry but also in textile and auto parts, has seen a slump,” Abheek Barua, Chief Economist at HDFC Bank, told Moneycontrol.

“The situation is expected to further intensify as the slowdown deepens from the second half of the fiscal year, when the US is expected to enter into a recession,” Barua added.

The US exports, which dropped by 17 percent in April, has witnessed rapid tightening of monetary policy over the last year to combat multi-decade high inflation levels. The Federal Reserve is now edging closer to ending its rate hike cycle, with markets widely expecting the US central bank to leave its key interest rate unchanged at 5-5.25 percent at its next meeting in June.

“There could be renewed weakness as the slowdown deepens from H2 2023 onwards, when we expect the US to enter into recession,” Nomura economists Aurodeep Nandi and Sonal Varma said in a report on May 15.

Domestic demand concerns

If weakening global growth is set to hurt India’s exports even more, concerns surrounding India’s domestic demand is showing up in moderating imports.

India’s merchandise imports fell by 14 percent in April to $49.9 billion. According to Yuvika Singhal, economist at QuantEco Research, the fall in imports is due to lower prices as well as volumes.

“While the value (of imports) has gone down due to the stabilisation of commodity prices, the drop in volume, we assess, is a result of pent-up demand being over,” Singhal said, adding that there are expectations of domestic consumption slowing, especially on the urban side.

India’s GDP growth has fallen in recent quarters, partly as a favourable base effect has faded. In October-December, growth slowed down to 4.4 percent from 6.3 percent in July-September. The statistics ministry’s second advance estimate of 7 percent GDP growth in 2022-23 implies a growth rate of 5.1 percent in January-March. However, economists think the official number for the last quarter of 2022-23, scheduled to be released later this month, will undershoot the implied number of 5.1 percent.

Some silver lining

Despite the global headwinds, exports of the engineering and electronic goods sector have so far been resilient.

“Engineering goods have held up fairly well with exports amounting to $9 billion in April. Electronic goods have sustained growth momentum, growing at more than 26 percent,” Sarangi said.

Other items whose exports registered growth in April include drugs and pharmaceuticals, organic and inorganic chemicals, and basmati rice.

“India has established itself as a leader in the supply chain of engineering goods segments as well as supply of agri-chemicals. This is leading the growth in these segments,” HDFC Bank’s Barua said.