At the FE Best Banks Awards ceremony on Friday evening, Union Finance and Trade Minister Nirmala Sitharaman answered, with her usual composure, a range of questions ranging from debate over gifts to risks decline in growth projections. She also skilfully evaded a few issues in the realm of policy-making, such as a possible extension of the free food program, the first extension of which expires in September, and the reasons for the lack of structural reforms. The overall impression, however, was of a confident minister ready to share a realistic assessment of the economy with a host of industry leaders in the audience. Pointing out that the International Monetary Fund’s latest projection of 7.4% economic expansion for India in FY23-24 was broadly in line with the government’s own assessment, she was quick to add that Given the downside risks from external factors, it was not yet time to give up caution on the growth front. Sitharaman was generous to the private sector and called the slow growth of private investment spending a “media perception”, as strong corporate tax collections were a clear sign that private investment was growing rapidly.
The most important point she made was recognition of the risks to India’s exports from a deteriorating external situation following a slowdown in at least two major economies. The United States has slipped into a technical recession with two consecutive quarters of GDP contraction. Meanwhile, major European economies are battling high inflation and damage to economic growth. The United States is the main destination for Indian exports, with the EU coming second. It is therefore not surprising that in July, export growth was the slowest since February 2021, having increased by 47% between the two.
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In this context, exporters should feel reassured by Sitharaman’s comments that the government is “ready for the challenges” and will give them all the necessary support they need. This support will be needed at a time when the global environment is less than hospitable. There is no doubt that Indian exporters have achieved a remarkable feat in the last financial year by crossing the $400 billion mark for merchandise exports. The pandemic had rattled the numbers – in FY21, exports fell 7.3% from a year earlier. It’s a dramatic turnaround, but the fact is that imports have also increased, pushing the trade deficit to record highs and putting significant pressure on the overall balance of payments. In addition, the higher value of exports was largely due to inflation in commodity markets, which had pushed up the price of raw materials in the international market. This inflation has eased recently.
Although the external situation is not under India’s control, there are things the government can do to make exports competitive on a sustainable basis. On the one hand, the brakes on the rupee should be released to allow some depreciation of the currency in terms of the real effective exchange rate in order to ensure the medium-term sustainability of the external payments situation. Renowned economist Shankar Acharya has made some important suggestions that should be noted. For example, tariff increases since 2017 should be phased out, as a tax on imports is equivalent to a tax on exports. Furthermore, India needs a policy shift away from subsidy-based export promotions and towards faster adoption of environmental, social and governance regulations.