Macroscan | What role did exports play in India’s growth acceleration?
While the role of decelerating domestic demand in driving India’s growth slowdown is much discussed, there is a view that this tendency has been significantly aggravated by a fall in export demand as well. Underlying the latter view is the argument that India high growth in the 2000s was driven to a substantial extent by an increase in exports, resulting from improved competitiveness.
In the years since 2013, though the ratio of services exports to GDP has remained in the 7-8 per cent range, that of goods exports to GDP has fallen sharply from 17.2 per cent in 2013 to 12.2 per cent in 2018 (Chart 1). This would have affected growth adversely even if exports have not been the principal driver of growth and deceleration in post-reform India.
But going beyond this obvious conclusion, the negative role of exports in recent times has become the basis for a narrative that accords a dominant role for them, both in making India a high-growth economy and, more recently, in losing that position.
This claim is backed by evidence that during the high-growth years between 2003 and 2008, the ratio of exports of goods and services to GDP rose from around 14 per cent to more than 25 per cent. While services exports accounted for around 5 percentage points of this 11-percentage point increase, exports of goods had also played an important role. This fact, combined with the congruence of decelerating export and GDP growth in recent years, has only strengthened the export-stimulus narrative.
This narrative appears to be corroborated by the fact that manufactures have played an important part in India’s improved export performance during the high-growth years. Thus, between 2002-03 and 2007-08, exports of manufactures contributed 12-19 per cent of the export growth in individual years, when the rate of growth of exports stood at 20-31 per cent.
Within manufactures, three important export growth areas that explained a significant part of export increases in individual years were chemicals, engineering goods and textiles.
This broad-based expansion in manufactured exports, which in turn contributed a significant — even if not dominant — share of overall export growth lends credence to the view that exports played a role in making India one of the fastest growing emerging markets.
However, some aspects of India’s export performance challenge this view. To start with, on average, the share in GDP of goods exports from India (12.2 per cent) is significantly lower than in other similarly-placed economies which are seen as successful exporters such as China (17.8 per cent), Indonesia (17.3 per cent) and South Africa (25.5 per cent) (Chart 2). Goods exports from India are more comparable with that from an economy like Brazil, which was neither a high-growth economy nor seen as a successful exporter.
Second, though India is a net oil importer, since it has surplus refining capacity, it exports petroleum products produced by refining imported crude. This factor, combined with the rise in oil prices during the high-growth years, resulted in significant increase in the dollar value of India’s oil exports.
As Chart 3 shows, the index of the dollar value of oil exports rose distinctly more than that for non-oil exports between 2003-04 and 2013-14, resulting in a significant increase in the contribution of oil to total exports.
The share of petroleum products in total exports, which was less than 1 per cent in 2001-02, was between 5.4 per cent and 7.7 per cent between 2004-05 and 2007-08. Given the overall negative balance in the oil trade and the nature of the specific structural factors underlying the rise in share of petroleum product exports, this contribution cannot be seen as a meaningful explanation of India’s rise to high-growth status.
Moreover, the “oil factor” seems to have played a role in the growth of non-oil exports as well. Between 2002-03 and 2008-09, the prices of West Texas Intermediate rose from a little more than $25 per barrel to close to $100 a barrel. This restored buoyancy to the countries that were members of OPEC, including the Gulf countries that have been important destinations for India’s exports since the 1970s.
Not surprisingly, a collateral effect of the oil price rise was an increase in India’s exports to the OPEC countries, whose share in India’s total exports rose from 25 per cent to 40 per cent in that period. Since this was a period when aggregate non-oil exports were rising as well, the increased demand from the oil-exporting nations in the Gulf region must have played a significant role in driving that trend (Chart 4).
There are two implications of this correlation between oil price trends and exports to the Gulf. The first is that demand side influences resulting from developments in destination countries — rather than supply side factors, such as an improvement in India’s competitiveness — account for this component of the increase in exports.
Second, since oil prices are volatile and are structurally on a downward trend because of the emergence of both new sources and forms of supply, the rise in exports due to this factor is not a longer-term tendency.
Put together, these features of India’s export performance during the high-growth years suggest that higher growth was not the result of a change in India’s competitiveness, especially in manufacturing competitiveness.
The acceleration of growth was the result of an expansion of domestic demand, which in turn was due to increased consumption and investment, substantially financed with credit.
This implies that the recent slowdown is primarily driven by a deceleration in domestic demand, rather than by the deceleration in India’s export growth, though the latter makes an already adverse situation worse.