For representative purposes. | Photo credit: iStockphoto
The story so far: Stuck in a slowing economy, an inflationary backdrop and tighter currency controls around the world, India’s merchandise exports fell 12.7% on an annual basis (YoY) to $34.66 billion. dollars in April, a six-month low. Imports fell 14% to $49.90 billion over the same period. As reported by The Hindu Earlier, the decline in imports and exports is not limited to India as other countries also recorded similar declines, supporting the idea of slowing global demand.
What are the current underlying trends in world trade?
The main headwinds observed with regard to global trade are weakening economic activities around the world, inflation and tighter monetary policies, disruption of supply chains due to the Russian-Ukrainian conflict and the financial instability due to the collapse of several financial institutions in advanced economies.
The ongoing conflict in Eastern Europe continues to impact energy, food and commodity prices. As the World Trade Organization (WTO) observed, although food and energy prices fell from their post-conflict peaks in the fourth quarter of last year, “they remained high by historical standards and continued to erode real incomes and import demand” during the mentioned period. . The impact of energy prices was strongest during the winter months in Europe, with Russia being one of Europe’s largest energy suppliers before it was sanctioned. Europe has reacted to Russia’s loss of gas shipments by turning to other suppliers, including the United States, Qatar, Norway and Algeria. This has potentially boosted LNG prices elsewhere, such as in Japan, where prices doubled between January last year and February this year.
The collapse of financial institutions – like the FTX crypto exchange (Nov 2022) alongside three banks in the US since March (Silicon Valley Bank, Signature Bank and First Republic Bank), and the loss of confidence in Credit Suisse added to the troubled scenario. As the United Nations Conference on Trade and Development (UNCTAD) concluded in its latest update (in April), the events have raised “the specter of financial contagion in an already slowing economy”.
What are we looking at?
The EU is India’s third largest trading partner after the United States and China. European economic forecasts (published in February) estimated that the region would “narrowly escape the recession” that took shape around September. Moreover, according to the latest statistics published for the euro area, food, alcohol and tobacco experienced the highest annual inflation rate (on a sequential basis) in May, followed by non-energy industrial goods, services and energy.
As for the United States, in May Fed Chairman Jerome Powell said inflation had moderated “somewhat” since the middle of last year. Nevertheless, inflationary pressures continued to be elevated, with expectations of a 2% cut having “a long way to go”. The JP Morgan Global Manufacturing Purchasing Managers’ Index (PMI), compiled by S&P, recorded 49.6 in May, unchanged for the third month in a row and indicating a slight deterioration in business conditions. The indicator is used to assess the conditions of manufacturing activity. He observed that, “although there was more positive news on the production front, with production up for a fourth consecutive month, production gains were again driven by improving l supply (allowing the fulfillment of orders placed in previous months) rather than any new influx of orders.
How are they related to trade?
To put it simply, in an economic downturn, international trade, both exports and imports, drops sharply as the overall demand for goods and services shrinks. There is an aversion to discretionary spending which weighs in particular on certain imports and carry-forward spending. It is in this light that exports of engineering goods, precious stones and jewellery, chemicals, ready-to-wear garments and plastics, as well as petroleum products contracted or increased to a slower pace in 2023. Similarly, inflation, the uneven rise in prices, especially of basic necessities such as food and energy erode an individual’s purchasing power. However, there may be times when people in the country turn to buying imports if they are cheaper than their native products, but this is where the conversion rate can potentially have an impact to offset the dynamic. Moreover, inflation also affects the flow of capital to a developing country. Importantly, the share of exports of goods and services combined in GDP stood at 21.4% in FY 2021-22.
After that ?
On May 15, Santosh Kumar Sarangi, Director General of Foreign Trade and Additional Secretary at the Ministry of Commerce, said, “Global demand is not looking good in markets like the EU and the US. For the next two or three months, the demand scenario does not look very optimistic,” adding that the government will initiate inter-ministerial discussions to find ways to diversify and maintain export momentum.
Similarly, Rumki Majumdar, Economist at Deloitte India, said The Hindu that a global slowdown, particularly in the United States, our largest trading partner, would affect demand for our merchandise exports. A high base effect can also affect growth figures. “However, service exports will hold the fort. Imports may remain low as commodity prices and INR value stabilize. However, a faster recovery could add pressure on import demand.
Regarding concerns over declining imports, Ms. Majumdar points to the non-rough non-jewelry segment which grew by 15% in the last fiscal year, which is above the long-term average growth. “This shows that domestic demand remains robust. A cyclical correction should not be considered a slowdown. The drop in imports is due to the stability of oil prices, which reduces our import bills.
