Demonetisation, protectionism cause worry to Indian exporters

The main concerns of India’s exporters, as they brace themselves for yet another tumultuous year in international trade, are the problems locally due to the demonetisation-triggered cash crunch, as well as the rising support for protectionism in Europe and the U.S. owing to the backlash against globalisation.

Goods exports to the U.S. and the European Union nations — that are India’s traditional and main markets for its shipments — had accounted for 16 per cent and 17 per cent respectively of India’s total goods exports of $263 billion in 2015-16. However, in what could hurt India’s exports, the incoming administration in the U.S. is widely expected to announce protectionist policies given President-elect Donald Trump’s statements that America’s manufacturing sector has been severely hit by their policies and trade agreements promoting free-trade. In Europe, the Netherlands, France and Germany are going in for general / presidential elections in 2017, and parties and politicians backing policies that are protectionist and anti-immigration are gaining mileage. Then, there is the negotiation of the terms and conditions of Britain’s exit from the European Union to watch out for. “The outcome of Brexit negotiations and polls in EU countries, especially Germany, will have a bearing on the overall sentiments on global trade. If the EU disintegrates, it will add to the uncertainties in global trade, impacting India’s trade as well,” said Ajay Sahai, director general and chief executive officer, Federation of Indian Export Organisations – the apex body for Indian exporters. Also, if there are more rate hikes by the U.S. Federal Reserve in 2017, it will lead to a flight of capital from emerging market economies (other than India) and weaken their currencies, in turn hitting the competitiveness of India’s exports, he added.

Weak recovery

Plagued by the lingering feeble external demand, India’s goods exports had contracted from December 2014 to May 2016, but then registered positive growth for the first time in 18 months with a 1.97 per cent year-on-year growth in June. However, it immediately fell back into negative growth territory in July and August before recovering to post positive growth from September onwards. The 2.29 per cent growth in November was, however, less than 8.22 per cent growth in October.

Japanese financial major Nomura, in a recent report, had said demonetisation has hit export volumes much more than imports, and that the cash crunch induced by demonetisation has hurt cash-intensive export sectors such as gems & jewellery and textiles. Ashok Rajani, Chairman, Apparel Export Promotion Council, said: “While demonetisation is a step in the right direction, exporters (in the textiles sector that employs many workers on a temporary or seasonal basis) are a troubled lot as of now with several workers finding it difficult to open bank accounts (to get their wages on a non-cash basis).” Pointing out that many migrant workers in Delhi, Tirupur (Tamil Nadu) and Karnataka are returning to their villages, he hoped the government would take measures soon to provide relief. Small and medium firms, including those catering to overseas markets, are facing difficulties in raising working capital with the cash crunch hitting their informal sources of finance. Turning to the scheduled commercial banks for working capital would not only be a difficult proposition given their small size, but would also increase their cost of funds when compared to cheaper funds from informal sources.

While the demonetisation became effective November 9, trade data for the month showed that exports grew at a much slower pace than imports (2.29 per cent growth versus 10.44 per cent) leading to a trade deficit of $13 billion, the highest since $13.08 billion in July 2015. The Centre is slated to hold a meeting with the state governments early January on measures to boost exports and then follow it up soon with a meeting of the Board of Trade (the government-industry body for providing suggestions on trade policy measures). The impact of demonetisation, especially on the labour-intensive export sectors, is likely to top the agenda. The government will also seek a response on whether the $900 billion goods and services export target set to be achieved by 2019-20 will be feasible given the slowdown in global trade, and if the target should be lowered to a more realistic level.

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