Sunday, September 7, 2008

Downside to India's exports is limited: Goldman Sachs


India's exports have more than tripled in the last five years. However, in the face of a slowdown in developed markets, there are concerns of a fall in the nation’s exports growth. But the good news is that the downside to exports is limited, according to a just–released study by Goldman Sachs. 

Citing the reasons, Tushar Poddar, V-P Asia Economic Research, Goldman Sachs, says that exports to developed markets—the US and EU—are not as important as in the past. “Nearly two-thirds of India’s exports now go to other regions, especially to China, the Middle East, and Africa. As these markets continue to grow, we believe demand for exports will sustain,” he says. 

Second, India’s fastest-growing export products are resource intensive and commodity-based—raw materials, iron ore, metals, and refined petroleum—which continue to see strong demand in the rest of the BRICs and N-11. 

Third, exports will be helped by a weaker INR in 2008. The INR has depreciated 10 per cent year-to-date in nominal effective terms, and 20 per cent year-to-date against the CNY. 

Finally, falling trade barriers, including a recently-signed free-trade agreement with ASEAN, and higher foreign direct investment will help boost exports in the medium term. 

Looking at the product-geography mix, “we think the highest growth opportunities lie in high-skilled products on the one hand and resource-intensive products on the other, in the BRICS and N-11, rather than labour-intensive products in traditional markets,” Poddar says. 

Ever since trade reforms began in 1991, spurring more openness and increasing competitiveness, India’s exports have been on an accelerating path. Over the past five years, exports have increased more than three-fold. While still low in absolute terms compared to the rest of Asia, India’s external sector, especially its IT sector, has been one of the more dynamic sectors in the economy. 

In the face of a slowdown in demand from the US and EU -- traditionally India’s largest export markets -- concerns have now arisen on how deeply will Indian exports be affected. Within the context of a policy-induced slowdown in domestic demand, the extent of diminution in exports growth will be important in distinguishing whether the economy will have a soft or hard landing. “We argue that even though some moderation in exports growth is inevitable, the downside is limited,” he says. 

India’s rising exports to fast-growing emerging markets, especially China, the Middle East and Africa, the dominance of raw materials such as iron ore, metals, and refined petroleum which are not showing any slowdown, a currency depreciation of 10 per cent year-to-date in nominal effective terms in 2008, and ongoing trade reforms along with increasing foreign direct investment (FDI) in recent years, will all help in buttressing exports growth. 

In what follows, “we elaborate on the composition and destination of India’s exports, and the prospects for growth. We find that India’s fastest-growing exports are skewed towards a combination of skill-intensive exports on the one hand and resource-intensive exports on the other, and that the largest growth opportunities lie in exporting newer products to emerging markets,” Poddar says.