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India’s plans for increased exports may turn soggy amid the global economic slowdown, delayed FTP

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The Foreign Trade Policy (FTP), which formulates the plan of action and strategy for catalysing the Indian Exports in global scenario, is revised every 5 years in order to include the changing domestic and global socio-economic effects and formulate new goals. However, the FTP 2015-20 expired 2 years ago and we still do not have the new FTP 2021-25 in place yet. The Ministry of Commerce and Industry has been delaying the new policy in light of first the pandemic and then the uncertain global socio-economic conditions.

The FTP 2015-20, which was scheduled to be replaced by the FTP 2021-26 in March 2021, was extended for 6 months initially and then further extended till March 2022 with a notification from the DGFT.

The experts have a split opinion on this. While some say that the current situation needs a well defined FTP policy, others say that the policy should be launched only during a phase of economic tranquillity, if not buoyancy, and not when India’s key export markets in the west, are experiencing a massive economic downturn

“Releasing a foreign trade policy is not enough. As the government is targeting a yearly export of USD 1 trillion (by 2030), it must also bring in a funding mechanism to incentivise exporters. The global slowdown has started impacting us. One, the demand for high-value products has started shrinking. Two, prices of raw materials and intermediates which India exports in huge quantities have drastically fallen in recent months.”

Ajay Sahai, Director-General, Federation of Indian Export Organisations (FIEO)

With the world going through grave turbulence in terms of economic activity, price rise and currency fluctuations, it is evident that Indian exports will take a hit, however, to what extend is still something that remains unanswered.

Despite the COVID pandemic and global supply chain disruptions, India’s exports performed tremendously, and rose to a record high of USD 421.8 billion during the financial year ended March 2022, the export shipments are likely to surge further to USD 1 trillion by 2030, according to what the Union Minister for Commerce and Industry Piyush Goyal said back in the starting of the year. Down the timeline in August, India’s exports rose by 2.14% to USD 36.27 billion in July.

The number for September is likely to be released mid-October but exporters did not show much confidence. Exports seem to have begun a turbulent path downhill.

The finance ministry’s monthly economic review for August also points to how the world’s growth and trade outlook have weakened. “Global composite PMI declined from 50.8 in July 2022 to 49.3 in August, as manufacturing and services output, mainly in advanced economies contracted. The US witnessed a massive slowdown with its rate of decline the steepest since May 2020. Japan, Germany, the UK and Italy faced similar contraction of output,” it says. PMI (Purchasing Managers’ Index) above 50 means an expansion in business activity; if it falls below 50, it denotes contraction.

From April to August this year, the US continued to be the top importer from India, buying goods worth USD 35 billion, a jump of 18% year-on-year. However, a negative trend in the US economy would not bring a good news to Indian exporters

Similarly, exports to China have seen a 36% fall in April-August Y-o-Y, and while the slowdown may be temporary, considering them a result of China’s COVID related restriction, it still affects both volume and value in exports. Showing the silver lining to it, economist and former Chief Statistician of India, Pronab Sen, says India’s export to China may bounce back to the original level as the story of China’s slowdown is a bit different from that in the West. “Its slowdown is the result of very harsh Covid restrictions. Once the restrictions are lifted, the country will rebound.” However, when it comes to exports to the west, the impact could be huge.

Exporters are also having to deal with the pesky challenge of currency fluctuations. Though a depreciated rupee should theoretically fetch more value in exports, in practice it’s not so simple. Exports with high import contents, for instance, petroleum, cut diamond, gold jewellery etc., don’t gain much due to the fall of rupee against the dollar.

On the same note, Indian exporters settling their accounts in pounds or euros may end up losing some money. Meanwhile, the newly conceived mechanism of rupee trade is still at a nascent stage and requires more clarity.

India’s export dreams are also often jolted by inflation, which weakens household spending in advanced economies, thus, exerting pressure on high-value export items. On the other hand, to combat homeland inflation the government has imposed bans, partial restrictions and export duties on multiple items ranging from wheat and broken rice to steel.

Earlier this year, the shortage of wheat forced buyers from all over the world to turn to India as a big and steady supplier of wheat. As a result, India was set to export a record 7 million tonnes of wheat this year, capitalising on the huge export opportunity. However, on May 12, reports came in that annual retail inflation witnessed 8 year high in the previous month.

As a result, India banned wheat exports as the record breaking heatwave restricted output, sending domestic prices off the charts. It also presented a serious blow to global buyers who were banking on India for the exports. The three staples which were fully or partially banned this year had a 32% share in last year’s exports in terms of value— rice (USD 9.65 billion), wheat (USD 2.19 billion) and sugar (USD 4.6 billion).

“The ban on broken rice (used for poultry feed in some countries), effective from September 9, may lead to a loss of business worth INR 6,000 crore for the rest of the fiscal year,” says Vinod Kaul, Executive Director, All India Rice Exporters Association.

This has led to speculation on whether India’s agri-exports will touch last year’s milestone, wherein, agricultural exports saw a 20% rise Y-o-Y, with wheat witnessing a 273% jump, mainly due to low base effect.

Ajay Sahai of FIEO anticipates that this year’s export growth will settle at about 10%, down from 17% till August, which means business will fall in the rest of the fiscal. “The situation is so volatile that we need to evaluate targets on a monthly basis,” he says.

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