Goods exports need healing touch

In contrast, the same measure for the manufacturing sector eased to 50.5 from 51.2 in January. This drop is not surprising.

“The PMI findings on manufacturing exports are now converging with hard data, which has already been indicating weakness in India’s goods exports,” said Rahul Bajoria, managing director and head, emerging Asia (Ex-China) economics, Barclays. Until recently, PMI surveys showed that India’s manufacturing exports were an outlier when other Asian exporters were bearing the brunt of weakening global growth.

The good part is, thanks to services exports, India’s Composite (weighted average of manufacturing and services) New Export Orders Index managed to remain in the expansion zone at 50.5 in February. “The strength of (India’s) services exports is due to software services exports which accounts for nearly 50% share in total services exports and the US is the main destination,” said Gaura Sen Gupta, economist, IDFC First Bank.

View Full Image

Interestingly, as chart 1 shows, not just in India, services exports are holding the fort in other regions as well. But the problem, at least in the case of India, could emerge from looming recession risks that do not bode well for IT services exporters. While a large contraction in India’s services exports isn’t expected, a moderation is on the cards, if the recession risk plays out, cautioned Bajoria.

PMI’s gauge of year-ahead outlook or business optimism, the Composite Future Output Index, showed Indian firms were least confident about business prospects compared to Asian and global peers (See chart 2).

One reason could be that despite easing commodity cost inflation trends, pricing power is yet to meaningfully improve. In February, most manufacturers and service providers left output charges or selling prices unchanged, showed the PMI reports. This means, companies feel demand is not strong enough yet, to absorb steep price hikes.

“For the near-term, say, in the next three months, we expect India and Asia goods exports to be on a weak footing. This is because the price hikes by goods exporters have been nominal,” added Bajoria. So, while the manufacturing New Export Orders Index is still in expansion zone, economists caution that Indian goods exporters have started to feel the blues too. They feel a near-term contraction in PMI’s New Export Orders Index cannot be ruled out.

In this backdrop, a key monitorable is China’s reopening. “When China was in a lockdown, expectations were that exports would pick up, but we were not able to capitalize on that in a meaningful way, barring in some categories,” said Madan Sabnavis, chief economist at Bank of Baroda. Sabnavis is of the view that with China’s reopening, it would try to flood the global market with cheaper goods, given its competitive advantage, to make up for the lost opportunity and whatever little demand there is, will be grabbed by them.

What’s more, the interest rate hiking cycle of key central banks is still going on. As earlier rate hikes keep reflecting on economic activities, which tends to happen with a lag, global growth would further taper. “We expect global growth to slow down as the impact of rate hikes done by central banks last year is gradually felt on growth. Hence, we do see some slowdown in export growth this year,” Sen Gupta added. The road to recovery for goods exporters may be long and weary.