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Central Idea

• The Ministry of Commerce and Industry has released the latest trade data that shows a continued contraction in India’s merchandise exports and imports in February. It indicates a slowdown in both the global and domestic economies.

Overview

• The pace of contraction has deepened, and this has resulted in a further narrowing of the country’s merchandise trade deficit.
• The disaggregated data shows that core-exports and core imports have continued to contract, and there has been a softening in imports of consumer and investment goods, pointing towards weakening domestic demand.

What the data shows?

• Deepening of Contraction: Both exports and imports have seen a deepening of the pace of contraction. Merchandise exports fell by 8.8% in February, while imports declined by 8.2% in the same month. These figures follow a decline of 6.6% and 3.6% in exports and imports respectively in January.
• Narrowing Trade Deficit: The contraction has led to a further narrowing of the trade deficit to $17.4 billion in February.
• Impact on Export Destinations: The report by Nomura reveals that the sharpest declines have been observed in India’s exports to the US, China, Japan, and the rest of Asia.
• Overall Growth: The higher export growth in the first half of the financial year has pushed overall growth for the year so far (April-February) to 7.55%.

Sectors Affected

1. Exports side:

• The disaggregated data reveals that core exports, which exclude exports of oil, gold, and gems and jewellery, have continued to contract.
• 16 out of the 30 main export segments have fallen in February, including labour-intensive segments such as leather and textiles.
• Non-oil non-gems and jewellery exports are almost at the same level as last year.

2. On the imports side:

• Core imports, which exclude oil, gold, and gems and jewellery, have also continued to contract.
• The data points towards a softening of imports of consumer and investment goods, indicative of weakening domestic demand.

Back to basics: Trade Deficit

• A trade deficit occurs when a country’s imports of goods and services exceed its exports.
• In other words, it is the amount by which the value of a country’s imports exceeds the value of its exports. It is often seen as an indicator of a country’s economic competitiveness and can have implications for the overall balance of payments and the strength of the domestic currency.

How Narrowing of trade deficit is beneficial?

• Narrowing of the trade deficit means that the country is importing fewer goods than it is exporting, which can improve the overall balance of payments and help to strengthen the domestic currency.
• This can also have positive effects on the economy by reducing the dependence on foreign borrowing and boosting domestic production and employment.

The outlook for exports remains subdued

• According to a report by Crisil, India’s merchandise export growth is likely to moderate to 2-4 per cent in the coming fiscal year as two of the country’s biggest destinations for exports the US and EU are expected to slow down sharply.
• As per the International Monetary Fund’s latest World Economic Outlook, the US economic growth is expected to slow down from 2 per cent in 2022 to 1.4 per cent in 2023, while the Euro region is expected to moderate from 3.5 per cent to 0.7 per cent over the same period.

Conclusion

• The trade data indicates a slowdown in the economy. Sluggish exports and tight monetary policy are expected to reduce growth further. This assessment by the World economic outlook implies that exports are unlikely to provide a fillip to growth. The overall economic momentum will be further weighed down as the full impact of the RBI’s tighter monetary policy will be felt across the country.

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Central Idea

• The Chinese government’s growth target of 5% for 2023 has disappointed observers, given that it is lower than last year’s target and below the expected GDP growth for India in 2023. This is all the more surprising if one considers that India is benefiting from the positive impact of the country reopening after COVID-19 lockdowns while China should benefit from its reopening only this year.

Reasons for China’s lower growth target?

• Risk of undershooting growth target again: The Chinese government does not want to run the risk of undershooting its growth target again, as it happened in 2022.
• Weak external demand and doubts about private investment: Even if consumption is recovering, external demand remains weak and it is hard to know whether private investment will indeed rise given the doubts about the role of the private sector in the Chinese economy as well as increasingly cautious sentiment being expressed by foreign investors.
• Real estate sector dragging down growth: The real estate sector is still dragging down growth.

Sustainable growth

• The Chinese government recognizes that too high a growth rate is no longer desirable, as it only aggravates financial imbalances.
• Instead, they are promoting sustainable growth, which involves a structural shift of the Chinese economy and the implementation of tighter regulatory measures to contain financial risks and achieve more social objectives, such as a green economy and food security.

Job creation and foreign investment

• China emphasises the importance of job security as an objective of sustainable growth, with a higher target for new jobs set by the Chinese government.
• China’s recent charm offensive to retain foreign direct investment in China is an important source of job creation, given the country’s concern about the job market, especially young workers.
• However, investors are looking at new pastures, with India likely to be a major beneficiary. Foreign investors are beginning to contribute more substantially to job creation in India, which could pose challenges for China as it tries to hold on to foreign direct investment within the country.

Comparison of India and China’s growth prospects

• The growth prospects of India and China, with a focus on job creation and competition for foreign direct investment.
• while India and China may not be too different in size and population, growth prospects differ substantially.
• The Chinese government’s cautious growth targets are consistent with the current challenges facing the Chinese economy, but they face more competition than before, especially from India, which has a larger market size and labor pool.
• This pattern of India’s resilient growth and China’s cautious growth targets will accelerate in the next few years, especially if the reshuffling of the value chain continues, pushed by geopolitics and high costs in China.

Conclusion

• The Chinese economy could be facing structural deceleration while India enjoys the benefits of its demographic dividend. China’s structural deceleration and tighter regulatory measures may also affect its future growth prospects. As a result, India may be better positioned for sustained growth compared to China in the coming years.

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