economy | IST

India on the threshold of a goldilocks period in exports: SBI’s Soumya Kanti Ghosh

Export-oriented sectors such as IT, metals are doing extremely well. India's GDP has a reasonably high correlation with its export performance. 2004-05 to 2011-12, were all almost 20 percent export growth years and those were the years when the GDP was over 8 percent, even over 9 percent in several years. From 2012 onwards, exports growth declined in practically every year, largely because global trade slowed down, which put pressure on the GDP as well.

Export-oriented sectors such as IT, metals are doing extremely well. India's GDP has a reasonably high correlation with its export performance. 2004-05 to 2011-12, were all almost 20 percent export growth years and those were the years when the GDP was over 8 percent, even over 9 percent in several years. From 2012 onwards, exports growth declined in practically every year, largely because global trade slowed down, which put pressure on the GDP as well.
However, the current year has seen exports re-emerging with a bang once again. The April to August export performance this year, is 67 percent above last year. Last year has a low base. The current year’s exports at 23 percent, even over 2019 means it is a compounded annual growth rate (CAGR) of 11 percent over two years. Now, that begins to look very different from the last decade when we had negative exports for the most part. So the question is - can exports pull up India's GDP in the coming years and to discuss this, CNBC-TV18’s Latha Venkatesh spoke to Pranjul Bhandari, chief India economist at HSBC India, and Soumya Kanti Ghosh, group chief economic advisor at SBI.
Ghosh said, “There is no denying that exports actually are a large contributor to the GDP growth, but we are considering only one part of C + I + G + (X - M). If you look at the 18-year period, beginning of FY13, the weighted contribution of exports to India's GDP was 28 percent, while that of consumption was 69 percent. For the period from FY14 till FY21, when actually global trade collapsed, the contribution of domestic consumption was at 91 percent, while that of exports declined to 7 percent. In the heydays, of those four to five years when we had to scale our exports growth 20 to 25 percent every year, the contribution of exports was close to 40 percent weighted contribution. Interestingly, that is the contribution of exports, GDP growth in the first quarter.”
He added, “So, my only limited point is that, yes, we are on the threshold of a possible goldilocks period in exports. But there are other factors and my only point is that consumption contribution, if we look into the first quarter, contribution has declined from 69 to 49 percent. So unless consumption and exports move together, I think that could be a challenge in terms of sustaining the trajectory.”
On exports, Bhandari said, “We are noticing a high export growth right now. But there is a very interesting story underway from 2017 onwards, if you remember pre-pandemic, there were talks about global supply chain diversification across different economies. Now we have that data and we find that what is happening since 2017 is that India's high skill exports have been rising very quickly. These include things like mobile phones, machinery, pharmaceutical products, IT services, in fact, not only are they rising in value and volume terms, but they are also rising in terms of global market share. So I think this has been an interesting story, which is sort of showing up much more now, in the middle of the pandemic.”
“I think the export story is very well known. It started from the beginning of 2021, at least the current run rate, and most of us have already baked it into our GDP forecast at this point. So, it is a medium-term positive story, but I am not sure at this point, on the back of exports, we can upgrade our GDP forecast.”
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On digital economy, she said, “The whole start-up tech ecosystem is very vibrant, or there is a supply of capital right now, with so much of global liquidity. In our country, we have so many new firms sprouting, so there is a demand for capital, the stars have aligned, high supply has matched high demand, and we are seeing all of these inflows. To be fair, I do think that, the start-ups is a small pocket, but it can have a lot of multiplier effect in the economy, ranging from job growth to a little bit of capex, to also GDP growth.”
She added, “Problem comes when I think about what could limit the growth of digital India, and then I am reminded about physical India. At the end of the day, digital economy will be a big user of the physical economy, its infrastructure, roads, rails, and ports. Also, its manufacturing sector is going to sell the things that it produces. So if the physical economy doesn't rise in line with the digital economy, then the digital economy could meet constraints sooner than later and this is my worry.”
On GDP growth, Bhandari said, “In terms of the GDP growth, we had written in the past that there are two scars that the pandemic may leave behind. One is the scar of rising inequality and the other is a slightly weaker banking sector once we see all the NPLs, both of these factors we are not seeing right now. Thankfully, a new driver, like the start-up ecosystem, can ameliorate some of the pains that these scars leave behind. But I don't think we are going back to the 7 percent GDP growth number in a hurry. My own sense is that, our potential growth was 6 percent and over the medium-term, we will go just under 6 percent.”
For full interview, watch accompanying video.