Authors: Shradha Diwan, Jasvinder Kaur

India's exports grew at a spectacular rate of 81.79%, amounting to USD29.344 billion in July 2011 from USD16.142 billion in the same month of the previous year. This has happened despite the global recession, appreciation of REER i.e. The Real Effective Exchange Rate and rising rates of interest. The popular perception is that with a rising interest rate and with an appreciation of REER the exports get hurt. But this did not hold.

Global demand and level of exchange rate have been identified by the Reserve Bank of India (RBI) as the two most important drivers of export growth. The export numbers, though spectacular, are nevertheless puzzling - considering the fact that the world economy has not been in great shape, and the significant appreciation of the exchange rate, until recently, particularly in real terms, in the last 2 years.

What could be the possible reasons for this???
First, the growth in worldwide output and merchandise trade volumes did help growth in exports. While output rebounded for the world economy to 5% from a negative 0.8%, trade volumes grew by 14.5% in 2010 from a negative 12% in 2009.

Second reason is the diversification of the export basket. Exports have seen a shift away from the US and EU to West Asia, Asia and other emerging markets.

Third, Nominal Effective Exchange Rate (NEER) appreciation has been much less than REER appreciation.

The spread of global supply chains have also helped. Global supply chains cause goods to cross national boundaries several times during the production process, which raises measured world trade flows compared to earlier decades. The quantification of this effect would require data on trade in value added that are not currently available.

India's exports were badly hit in 2008, after the global financial downturn crippled the demand for Indian goods in premier overseas markets. This time however our government was better prepared to handle the slowdown. Indian exports are also following a different path in the sense that India has skipped the first step and gone to producing capital intensive items that require skilled labor and not many of them.

Leading the way are high-value products like industrial machinery, automobiles and car parts, and refined petroleum products. Over the last decade, industrial export hubs have sprouted around India, some with the help of Government Planning. In Pune a vibrant domestic automotive and engineering hub supplies the United States and other Western markets. Chennai in the south has a lot of car factories that ship small Fords, Nissans and Hyundai's to Europe, Africa and Latin America. In the west, Gujarat State is home to several large petroleum refineries that take imported crude oil and process it into products like jet and diesel fuel that are sold in other Asian countries. Meanwhile, traditional exports like textiles and agricultural products together account for less than 20% of the goods India sells to the world. India now exports fewer garments than its neighbor Bangladesh, which has one-eighth India's population and an economy only about one-fifteenth as large.

Apart from petroleum and industrial products, India's spice export share has shown an uptrend. Gems and jewelry and chemicals are also one of the largest export items .Even the country's total seafood exports have gone up. The government credited the hike in the value of seafood exports to increased production of vannamei shrimp, increased production of black tiger shrimp and higher prices of shrimp, cuttlefish and squid.

The surge in India's exports is also attributed to a reduction of dependence on traditional export markets such as Europe and US, and an increased focus on some promising markets in Asia, Africa, and Latin America. However, the European Union remains India's top market for sea food followed by Southeast Asia and China. India's export to the Arab countries has grown by 54.7% during January-June 2011 over the year-ago period. Trade across the Line of Control (Loc) in Jammu and Kashmir was suspended during April and May 2011 due to certain demands from the traders which included infrastructure and taxation issues. The tax issue has been resolved in favour of the traders.

It is to be noted, however, that the genuineness of the export numbers has come in question from an important class of stakeholders, i.e. the foreign investors. Foreign Institutional Investors (FIIs) in the Indian capital markets have been drawn towards the country by its robust export figures, apart from the great consumption theory that has enabled India to weather the 2008 financial crisis. These investors are now seeking answers to the anomalies in export data in the process of considering further investments in the India market.

The most glaring anomaly stems from the fact that the value of exports from India (Free on Board, FOB) in higher than the value of world imports (which includes cost, insurance, and freight). Logically, exports should be less than imports at the buyers' end. Also, IMF statistics are indicative of the fact that other countries' imports numbers from India do not match with the commerce ministry's numbers on exports from India. Also, the export acceleration is not reflected in shipment data.

Another plausible explanation being cited is the possible involvement of black money and money laundering through over invoicing of exports. It has been deliberated that unscrupulous politicians, bureaucrats, and businessmen, who have stashed their illicit wealth abroad, are bringing back some of it in the name of exports. This mode of secret repatriation of wealth not only launders money but also earns export incentives as bonus.

As the Executive Editor of Corporate India, Mr. Virendra Parekh, notes - The agreement signed with Switzerland for sharing banking information on demand is likely to come into force by September. The government has received information about Indians having accounts in Swiss banks and is taking appropriate action to bring back funds stashed abroad. Deposits of Indians in Swiss banks have shown a steady decline over the years and had more than halved to Rs. 9,295 crore last year from about Rs. 23,373 crore in 2006, Finance Minister Pranab Mukherjee has said quoting Swiss National Bank data.   

Repatriation becomes an important option for the money launderers who can safely bring back the black money into the country by over-invoicing of exports. Exports may thus be serving as one of the important routes for home-bound money. It is this black money which has set fire to the prices of gold, property prices, and prices of commodities including food grains, edible oils, and sugar.  

Explaining the surge in exports is going to be a daunting task in the face of the global economic scenario and illicit repatriation of wealth.

References:

• The Hindu Business Line
• Export surge or return of black money? - Mr. Virendra Parekh, Executive Editor, Corporate India

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