Moneycontrol Pro Panorama | The worrying reasons behind disinflation and declining exports

A slowdown in the global economy and subdued demand conditions are sending prices lower.

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Easing inflation is generally celebrated. But the latest slump in the wholesale price index (WPI) amid moderation in exports warrants caution.

WPI declined 0.9 percent in April on a favourable base and implies a contraction in wholesale prices. The last time WPI dropped into negative territory was in July 2020 when the world was in the throes of COVID and faced demand contraction.

Merchandise exports, meanwhile, declined by 12.7 percent in April, continuing the moderation seen in earlier months. Services' exports continue to rise at a brisk pace (up 26 percent) and provided a cushion to India’s trade balance. You can read Manas Chakravarty’s piece on the trade balance here.

However, one should not forget the worrying reasons behind the current disinflationary situation and moderation seen in exports. A slowdown in the global economy and subdued demand conditions are sending prices lower. If the US enters into recession this year as feared, then exports may sag further. China's April data for industrial output and retail sales were lower than what consensus estimates were projecting, signalling the initial surge in activity is not holding up.

“The continued weakness in export and import growth is in part reflective of weaker global growth and domestic demand conditions, respectively, and serves as an early warning sign of likely growth headwinds ahead,” warn economists at Nomura.

Of course, the reduction in manufactured goods inflation will help lower product prices and aid consumers. But investors should also note the impact of decelerating prices on commodity producers.

Crucially, falling exports can hurt labour intensive sectors such as such as textiles and gems & jewellery. As such the March quarter results indicate subdued demand trends for the IT services industry. If the global economic slowdown deepens then it can pose risks to consumer incomes and temper economic activity in India.

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R Sree Ram
Moneycontrol Pro