While the Indian rupee can act as an enabler for export revival, it is unlikely to be a primary driver, says the ratings agency
India Ratings and Research (Ind-Ra) says the country's export performance is likely to stay weak in FY2017 as global economies face headwinds to their growth prospects. While the rupee can act as an enabler for export revival, it is unlikely to be a primary driver. Ind-Ra says it expects the rupee to weaken and trade at an average of 67.5 per US dollar.
"A revival in global consumption will be the key for improvement in India’s export trajectory. Evidence of the impact of the exchange rate on exports’ performance does not suggest strong linkages. Consequently, benefits of the weak exchange rate are unlikely to have a desired impact. With global outlook subdued, the recovery of Indian exports is likely to be protracted," the ratings agency said in a note.
Ind-Ra said it believes the government’s focus on infrastructure investment is likely to enhance India’s export competitiveness compared to its peers.
The ongoing slowdown in India’s merchandise exports over the year has drawn focus of stakeholders, in a bid to support the trade dynamics. It is in this context, that the rupee’s relative strength compared to its peers is believed to be at the centre of a raging debate, on the impact it has on India’s competitiveness in the global market.
The Bank of International Settlements’ measure of India’s real effective exchange rate (REER) stands at 104.34 as of January 2016 (indicating over 4% of scope for further depreciation), while most peers are running significantly weaker exchange rates, the ratings agency said.
Ind-Ra said evidence of the links between trade performance and currency movement has been weak, in the sample of countries it analyses. Barring the recent past, an appreciating rupee has been accompanied with robust export growth, while weaker exchange rates have not necessarily translated into an export push, it added.
According to the ratings agency, the primary drivers of exports are India’s established competence in key areas – namely refining, precious metals, pharmaceuticals and transportation equipment, which has enabled the country to hold on to its share in the global market.
"Additionally, consumption trends in the trading nations have a significant bearing on export performance. In such an event, outlook of major developed economies is likely to determine demand for Indian goods. The concentration of Indian exports is mainly to US, Europe and the Middle East. While the former two are battling with fragile growth impulses and deflationary pressure, the collapse in oil prices has impacted demand from the Middle East. The revival of India’s exports is unlikely in the near term, as the growth outlook for developed economies remains lacklustre," Ind-Ra said.
Exports from sectors like petroleum refining, chemicals and pharmaceuticals have, unarguably, witnessed subdued growth and even fallen in some cases in the last year. Global deflationary pressures and tepid demand have eroded headline export growth however, the ratings agency says, a look at the volume growth suggests that headwinds to India’s exports are pronounced on account of price pressures and not necessarily in quantity.
"In this context, India’s calibrated stance to diversify both the export composition and destination has enabled overall export performance to stay supported," it added.
Ind-Ra feels that the key challenge for India will be to maintain its overall competitiveness, at a time when other emerging markets (EMs) and China may pose a bigger competition. It says, "India majorly exports intermediate goods, thus moving up the value chain could be an alternative. A more near term and multi-linked benefit is likely in the form of infrastructural development. It may enable the private sector to enhance their cost competitiveness on a global platform, while providing an impetus to domestic growth as well. In this context, the introduction of Goods and Services Tax (GST) is yet another policy measure that seeks to rationalise existing tax structures and harmonise costs for major firms, domestically."