How much will Indian exports go up?

The rupee is lower, but don’t expect a very elastic supply response.  Here is one set of comments:

These [sectors] suffer in particular from numerous domestic obstacles, from overly-restrictive labour and land-acquisition laws to poor supporting infrastructure in areas like power and roads, which make rapid ramp-ups in exports difficult.

Other industries suffer from similar constraints. DG Shah, secretary-general of the Indian Pharmaceutical Alliance, a trade body, says new domestic regulatory impediments, including limits on clinical drug trials that make exports to western markets more difficult, could negate any boost from the plunging currency.

“I’m not entirely convinced that the conditions about the responsiveness of exporters to depreciation mentioned in economics textbooks hold true in India, given these problems,” says one senior Indian policy maker, who asked to remain anonymous. “So its not impossible exports in the round could even go down, which would be a disaster.”

Keep in mind that the Indian growth rate fell from over eight percent to 4.4 percent in not much more than a year, and without any huge noticeable, underlying shock to aggregate demand.  That likely means the Indian economy is supply-constrained and that ongoing growth bumped it up against a very steep portion of a bunch of marginal cost curves.  That limits future export potential.

Alternatively, you might see the Indian economy as oscillating across multiple equilibria.  Further bad news for the rupee could serve as a negative sunspot and indeed we already seeing year-to-year declines in manufacturing activity as of August.  On the brighter side, Indian exports are up 12 percent year-to-year as of July, but it is not obvious that a declining rupee will bring continuing gains through this channel.

There is also this problem:

A look at our major export items suggests there is a change in its composition from price-sensitive items such as leather footwear, dairy products, beverages, textiles and apparel, to less price-sensitive items such as refined petroleum products, chemicals, mineral products (especially, mineral fuels, bituminous substances, etc.), and machinery and transport equipment (engineering goods).

The share of petroleum products in India’s export basket increased dramatically from around 2 per cent in 1993 to around 20 per cent in 2012. The surge in exports in the case of petroleum items is because of India’s potential in oil refining activities.

On contrary, India’s CAD is likely to increase further as oil and precious metals still contribute to bulk of our imports. Controlling CAD is an important factor from the perspective of sovereign rating.

Fortunately, IT exports do seem to be doing well.  More NRIs will be planning weddings in India.  Elsewhere, the trade in processed Indian human hair with Bangladesh is hitting some bumps.  It is also becoming much harder for Indian students to invest in education abroad.


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