No, Not Conflict With Pakistan; Obstructions To India’s Trade Growth Come From Elsewhere

Will escalating tensions with Pakistan in the wake of the surgical strikes spook the economy? The initial negative reactions from the stock markets have raised fears about this.

But unless hostilities are prolonged and there is actually a mini-war, there appears little reason to worry. Even repetition of a 1999 Kargil-like situation may not have a hugely negative or prolonged impact, according to a State Bank of India Ecowrap report. The report points out that both the Sensex and Nifty had dropped by 286 points and 79 points respectively in the initial three days of the Kargil conflict but quickly recovered. In fact, they ended higher by 652 points (Sensex) and 191 points (Nifty) by the time the conflict ended. And at 6.5 per cent, economic growth in 1999-2000 was the same as the previous year.

Another source of worry appears to be trade with Pakistan getting affected. Two-way trade with Pakistan is worth $2.5 billion (less than 0.4 percent of India’s total trade), of which Indian exports are $2 billion. Sure, individual sectors with a major exposure to Pakistan’s markets will get affected.

Cotton accounts for close to 30 percent of exports from India to Pakistan, according to a data sheet on Indo-Pakistan trade by ICRIER. The others items have a negligible share; the second largest commodity to be exported is polypropelene, which accounts for 3.87 percent of India’s exports. So, the government may have to find a way of helping out cotton exporters, but other exporters will not be too badly hit, even if India does suspend the most favoured nation (MFN) status to Pakistan.

Real reason for worry

The really worrisome story on the exports front actually comes from data put out by the World Trade Organization (WTO). On Tuesday, the WTO revised its trade growth projection for the current year downward - from 2.8 percent in April to 1.7 percent. It didn’t hold out much hope about things improving next year as well – it put growth in a rather wide range of 1.8-3.1 percent, saying there were many imponderables.

This is clearly not good news for India. It puts a serious question mark over the government’s plan (set out in the Foreign Trade Policy, 2015-20) to double India’s exports from $465 billion to $900 billion by 2020. Moreover, it imperils the nascent recovery in exports that had just started to manifest itself. After negative growth in double digits almost continuously since January 2015, the fall had moderated to single digits for some months now; June actually saw positive growth of 1.27 percent and the figures for August show a drop of only 0.30 percent.

The WTO data estimates that the volume growth in imports by developed economies in 2016 will be only 2.6 percent, half of what it was in 2015. The fall will be particularly sharp in North America (India’s largest export destination at 17.2 per cent) – from 6.5 percent to 1.9 percent (the April estimate of growth in 2016 was 4.1 percent). Growth in imports into Europe is also set to fall from 4.3 percent to 3.7 percent (fortunately, this is higher than the April projection of 3.1 percent).

There has been talk for decades now about the need for India to diversify its export markets, but success has been patchy.

There have been efforts to tap the markets in the east, but these have not been very successful. The share of ASEAN continues to be just about 10 percent (it dropped to 9.5 percent in 2015-16) and that of East Asia improved marginally from 1.03 percent to 1.3 percent. The share of Northeast Asia had gone up marginally from 15.8 percent in 2004-05 to 16.1 percent in 2009-10, but dropped to 11.7 percent in 2015-16.

West Asia has seen some success, with the share of the Gulf Cooperation Council (GCC) countries increasing from 11.7 percent to 15.8 percent. The GCC countries are Saudi Arabia, Kuwait, United Arab Emirates, Qatar, Bahrain and Oman. The share of other West Asian countries has remained stagnant at around 3 percent. But most resource-exporting countries are not in the best of health and whether West Asia will prove a strong counter to weak import demand from North America and Europe will depend on how oil prices move.

Is there any reason of optimism at all?

What, then, of Africa and Latin America? These provide a lot of promise, and that’s where India should concentrate its efforts.

India has not been able to get much success in Latin America – that region’s share has increased only marginally from 2.14 percent to 2.86 percent between 2004-05 and 2015-16. Light engineering goods and pharmaceuticals have a good chance here; the region is the top destination for automobile exports. But the WTO outlook for import demand in the region is quite dismal. Pulled down mainly by Brazil (a significant market for India) the decline in imports to the region is set to worsen from minus 5.8 percent in 2015 to minus 8.3 percent in 2016.

All African markets (North Africa, West Africa, East Africa, Central Africa, the South African Customs Union countries and other South African countries) have seen their shares in Indian exports rising, some significantly, others just a tad. The combined share of Africa in Indian exports has risen from 6.45 percent to 9.43 percent between 2004-05 and 2015-16. This could be one ray of hope for Indian exports.

But in a world where trade is shrinking – and protectionism is rising – competition will be fiercely cut throat. China is a formidable competitor and though its ranking in the Global Competitiveness Index may be stagnant at 28, it is still several notches above India, which has moved up from 55 to 39.

But look at where India stands on the 11 pillars of competitiveness – it has to cover a lot of ground on infrastructure and labour market efficiency, both of which are crucial factors in making exports competitive.

It’s great that India has moved up 16 places on the competitiveness index. But this should not lead to smugness. Given the challenges to trade in a weakening global economy, it is time to hunker down and address the remaining infirmities.