Surge in merchandise exports may not sustain in FY23 amid global challenges: Ind-Ra

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The continuous record growth in exports over more than a year seen in FY22 may not sustain in the current FY23, rating agency India Ratings and Research (Ind-Ra) said. Meanwhile, existing growth has not been broad-based and has remained confined to a handful of sectors in manufacturing, it said.

Released on August 18, the Ind-Ra report analyzing India's industrial output and merchandise exports data stressed that the initial boost to exports in the aftermath of the Covid pandemic is now petering out due to a series of global challenges.

"The exports trend of FY22 might not sustain in FY23 due to adverse impact of Russia-Ukraine war leading to recessionary concerns in the advanced economies, stringent strategy to control COVID-19 in China having implications for production in various sub-sectors in India and continued disruptions in global supply chain/trading sanctions imposed on Russia," the report said.

India’s average annual merchandise exports during FY16-FY20 were $297.02 billion, having peaked at $330.08 billion in FY19. However, it jumped to the highest-ever $421.89 billion in FY22. The year saw India meeting the government's annual export target for the first time since 2014.

The government has attributed the surpassing of the crucial $400-billion annual merchandise export target to better policy and export incentives. It remains sanguine that India will hit a $500 billion export target in the current financial year, even as internal estimates show a slowdown in foreign orders from key markets such as the United States.

The US has slipped into technical recession with two consecutive quarters of GDP shrinking. The US GDP shrank 1.6 percent in Q1 and 0.9 percent in Q2 of the current year. Meanwhile, hit by a sudden uptick in energy prices as the flow of Russian crude oil to Europe has dried up in the aftermath of stringent sanctions, major European economies are currently battling high inflation and damage to economic growth.

The economy of the United Kingdom has contracted by 0.1 percent in the second quarter of the year, while inflation in Britain has soared to 10.1 percent. The US is the biggest destination for Indian exports, and while taken together, the EU comes second. Data released by the commerce and industry ministry on August 2 showed exports in July fell for the first time in more than a year, albeit slightly.

Patchy boost to manufacturing

The slowing down of growth is expected to hurt manufacturing further especially since the last 14-straight months of export growth boosted certain manufacturing segments, skipping many others. Amid weak domestic demand, exports have remained the primary driver of growth in many segments.
"Since the pickup in merchandise exports has primarily been driven by the higher exports of manufactured goods, its spill-over effect was expected to be visible in the higher capacity utilization and an improvement in the industrial growth numbers in FY22," the report pointed out. Since FY21 was an exceptional year due to the COVID-19 pandemic, the report also looked at the FY22 exports volume growth over the FY20 base.

It noted that barring a few, most manufacturing segments recorded double-digit year-on-year growth in export volumes in FY22. "Even on the FY20 base with the exception of few, most manufacturing segments recorded double-digit export volume growth. In fact, the export volume growth pattern across the different manufacturing segments was broadly similar both on the FY21 and FY20 base” said Paras Jasrai, Analyst, Ind-Ra.

Basic metals, textiles, pharmaceuticals, and food products witnessed a robust rebound in export volumes in FY22, as compared with FY20 volume levels. These sectors have a share of 26.4 percent in the overall industrial sector and made up 24.1 percent of the merchandise exports in FY22.

On the other hand, the report pointed out that sectors such as other transport equipment (which include railways locomotives, ships and aircraft), wearing apparel and leather products, among others, witnessed low growth in production levels, and low-to-moderate growth in export volumes in FY22.

This suggests labour-intensive sectors such as wearing apparel and leather products have benefited from neither domestic nor external demand. "This does not augur well from the perspective of employment generation in the country. Moreover, wearing apparel and leather sectors are under pressure due to high inflation," the report said.

Inflation in clothing & footwear was at a 35-quarter high of 9.41 percent in Q1FY23. Overall, while the sectors in this group have a lower share of 9.8 percent in the industrial sector, they still made up 14.3 percent of the merchandise exports in FY22.