Collapsing exports

Published : May 25, 2016 16:02 IST

Loading dumpers with iron ore in Odisha for exports. A file picture.

Loading dumpers with iron ore in Odisha for exports. A file picture.

AS the Modi government completes two years in office, the “Make in India” initiative, one of its major economic programmes, that promised manufacturing growth based on exports, is staring at failure. According to the most recent monthly figure available at the time of writing, India’s merchandise exports for April stood at $20.57 billion, 6.74 per cent lower than the figure for April 2015, marking the 17th consecutive month of year-on-year decline in India’s merchandise exports in dollars. The export downturn during this period was worse than even what the April figure suggests. For instance, over the 2015-16 fiscal, which covers 12 of those 17 months, merchandise exports were down 15.85 per cent at $261.14 billion, compared with $310.34 billion in 2014-15.

The most obvious explanation for the decline is the sluggish state of global demand ever since the crisis of 2008-09, which has affected all countries adversely. That is an explanation the government is quick to advance since it absolves domestic policy of all responsibility. Commerce Secretary Rita Teaotia reportedly said: “Exports have been declining and this is a part of the global slowdown in trade. We are very much part of that. If the slowdown in India is different from what is happening in the rest of the world, then we would have been alarmed.”

But that argument ignores signals coming from more detailed evidence. India’s export performance was not as bad in the period after 2009 as a whole as it has been over the year and a half ending April 2016. If we take the figures for the calendar years 2009 to 2015, the year-on-year growth of exports was the worst in 2015. The 17 per cent decline in 2015 was higher than the 15 per cent decline recorded in 2008 (Chart 1).

Moreover, the annual average growth recorded over 2009-15 was a respectable 10 per cent. While volatility in oil and commodity prices explain some of the differences in annual growth rates across time, it cannot be denied that export performance has taken a turn for the worse over the last year and a half.

But that is not all. The downturn in India’s export performance in 2015 seems sharper than that experienced by many Asian neighbours, whom India is competing with in global markets. If we take the average year-on-year rate of growth between 2010 and 2015, India was the third best performer on the merchandise export front, after Vietnam and China. On the other hand, while all countries recorded a much lower rate of export growth in 2015 as compared to the average rate over 2010-15, India was by far the worst performer in terms of the extent of the export growth reversal in 2015 relative to the medium-term average (Chart 2). So, the argument that India’s record is only a reflection of trends in other similarly placed economies does not hold.

For the Modi-led government with its “Make in India” hype, the fact that the export downturn has coincided with much of its term in power is indeed an embarrassment. So is the fact that India’s performance in this period, though reflective of global trends, was much worse than elsewhere. Mere denial does not make the evidence disappear.

The reasons

What explains India’s poor performance even relative to comparable countries?

If we turn to more disaggregated product groups to find an answer, it emerges that the range of commodity groups that have recorded negative export growth in the 2014-15 fiscal is rather wide. While sluggish global demand played a role in all instances, in some cases India-specific factors played an important role in the export decline. A sample of commodity groups where the decline in exports was significant (more than $1 billion) includes oil meal, iron ore, engineering goods and petroleum. There were other areas, especially pharmaceuticals, where they fell from 25.7 per cent in 2011-12 to 3.3 per cent in 2014-15, even though the rates of growth of dollar export values were positive.

Clearly, very different factors could have played a role across these groups. Consider oil meal (used as feed in poultry, cattle and fish farming). India has, for some years now, been a significant exporter of oil meal products. But recent poor or indifferent monsoons have adversely affected domestic oilseed output. This not only reduced the surplus of domestic supply relative to demand that could be released for exports, but also raised domestic prices at a time when global demand conditions were depressing the prices charged by India’s competitors. The net result was a shift away from Indian oil meal in global markets. Expectations are that, with domestic demand rising, India would turn a net importer of oil meal in the near future. Thus, domestic factors intensified the outcomes deriving from global trends.

Iron ore

Similarly, while the immediate drivers of the 2015 iron ore export decline are external, with the sharp fall in Chinese demand and overexpansion of capacity by global majors such as Vale, BHP and Rio Tinto playing an important role, medium-term domestic factors contributed to the fall in the value of exports from close to $6 billion in 2009-10 to just above $500 million in 2014-15.

Earlier, global demand conditions encouraged a sharp increase in iron ore exports from India. When the volume of iron ore exports soared, domestic manufacturers of steel were hit by supply shortfalls of iron and a rise in prices. This was only worsened by a Supreme Court verdict banning iron ore mining in Goa for environmental reasons, which was lifted only in 2014.

The government’s response to the iron ore shortage for domestic producers was to impose an export duty on ore exports, which was raised sequentially from 5 per cent in 2008-09 to 30 per cent in December 2011. This affected exports adversely, bringing them down from 117.37 million tonnes in 2009-10 to 14.42 million tonnes in 2013-14. Although the duties have been reduced over the last two years to revive exports which the government is now desperate to promote, the efforts have not yielded results as global demand has worsened tremendously even as global capacity expanded in the interim. In sum, well before the recent downturn in iron ore demand and prices, the domestic economic and environmental effects of indiscriminate mining to earn export revenues had already scaled down the volume and value of iron ore exports from India. This trend has only continued in recent months.


An interesting case is that of pharmaceuticals. India’s pharmaceutical industry, which benefited from the absence of product patents until the revision of the patent law in 2005, acquired significant strengths in the manufacture of generic drugs that are substitutes for more expensive branded products. Exercising that strength, the industry built up a position in the market for such drugs. The generic drug market is estimated to account for around a third of the more than $1 trillion global market for pharmaceutical products. India was seen as a major beneficiary, and this was reflected in export growth figures during the years ending 2011-12. But, as noted earlier, those growth rates have collapsed more recently.

One explanation for this decline is the changing structure of the industry. While on the supply side the generic drug industry is highly competitive, with a large number of producers of varying sizes, there is growing consolidation of the distribution business in the world’s largest markets, especially the United States. This is driving down prices in many areas, affecting export revenues adversely.

Further, drug multinationals, which are striving to retain market share by introducing newer, patented (but not necessarily novel) substitutes for their drugs that are going off patent, are pushing to rein in imports from generic drug exporters in countries like India. They are pressuring their governments, especially in the U.S., to tighten regulatory standards that can result in a ban on particular exporters either on the grounds that they do not meet the purity and strength standards of the branded “original” or that production and testing conditions of the drugs concerned do not meet required developed-country quality standards.

In practice, the line separating warranted as opposed to a purely protectionist application of such standards is increasingly blurred. The result has been the forced withdrawal of some Indian exporters from some markets. To top it all, the U.S. government recently made it mandatory for producers of formulations in that country to procure active pharmaceutical ingredients (APIs) domestically. This would mean that producers in the U.S. who were acquiring APIs or bulk drugs from producers abroad to produce formulations at home cannot continue to do so. India was an important supplier of such bulk drugs. More recent developments such as the collapse in commodity prices, the global recession and the resulting sharp depreciation in currencies have only intensified this process of market contraction for producers from India, which are also disadvantaged by a relatively stronger rupee.

Finally, the most curious case is, of course, crude and petroleum products. For a long time India has imported crude and petroleum products because its requirements far exceed domestic production. Crude is imported and refined domestically and to the extent that some petroleum products thus obtained are in excess of the domestic demand for such products after accounting for imports, the balance is exported.

This has two effects. The first is that if only petroleum products are considered, India has been a net exporter since the early 2000s, as the increase in refining capacity took supply (production and imports) beyond domestic demand. But India is a large importer of crude, so when crude and petroleum products are considered together, it is a net importer in this product group.

However, as India’s demand for petroleum products has grown, the volume of exports has fallen from a peak of 67.9 million tonnes in 2013-14 to 60.5 million tonnes in 2015-16, even as crude imports rose from 18.9 million tonnes to 20.3 million tonnes. India’s net export of petroleum products (after adjusting for imports) fell from 51.1 million tonnes in 2013-14 to 32.2 million tonnes. This was, however, occurring at a time when the international prices of crude and petroleum products were falling steeply. The average price of the basket of crude imported by India fell from $105.5 per barrel in 2013-14 to $84.16 in 2014-15 and $46.17 in 2015-16. Associated with this sharp decline in crude prices has been an equally sharp decline in international prices of petroleum products. This has resulted in a collapse in the value of petroleum product exports, from $60.7 billion in 2013-14 to $47.3 billion in 2014-15 and $27.1 billion in 2015-16.

This has also contributed to the fall in the dollar value of merchandise exports, although it is not the sole or even principal cause of the fall as the government seems to argue.

Thus, a combination of factors —India’s continued dependence on traditional exports including oil meal, domestic policy, protectionism abroad, and a distorted dependence on export revenues from an area like petroleum and products where India is a net importer overall, besides sluggish global markets, excess supply, and the loss of India’s competitiveness due to a relatively stronger currency—explain the downturn. These are not factors that are all temporary. They reflect deeper structural weaknesses in the composition of India’s exports. What that suggests is India would do well to focus on structural changes supported by its domestic markets that build new dynamic comparative advantages rather than plead with transnationals to come and “Make in India” so as to push growth without generating balance of payments problems.

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