Decreasing Exports: Indian Economy Not Doing Good - Really?

Mr. Achintya Ramesh

Chief Consultant Advisor (Economy & Defence) for the Prime Minister of India

Here is a fun fact: India's largest export is Refined Petroleum and it is the world's
fourth largest exporter of refined petroleum.

Think of it this way. Let's say you are running a refinery - buying crude oil at Rs. 20
and selling petrol at Rs. 25. You are making Rs. 5 in profits out of Rs. 25 in sales

A year later, the crude oil and petrol prices go down. Now, you are buying crude oil
at Rs. 10 and selling petrol at Rs. 15. You are making Rs. 5 in profits out of Rs. 15 in
sales.

For an uninformed outsider, it might look like you are entering bad times [sales was
Rs. 25 last year and Rs. 15 now], but you know that you are making the same Rs. 5 in
profits, but with even higher margins [33% instead of 20%].

This is what is happening to India. Refineries are among India's largest industries
and they are profiting a lot even if the export/import numbers shows down due to
the factor shown above. See this news item for exhibit A: RIL Again Loses Most
Profitable Tag, This Time to Indian Oil.

Indian Oil is the most profitable Indian company now as as they are making huge
killings in refining petroleum even if the sales numbers are down. Same is happening
in a number of other major valued added industries like gems & jewelry.

India's huge network of refineries refine a big chunk of crude oil to export to a
variety of nations in Asia. Of course, India's largest imports are its raw material -
crude oil. India (IND) Exports, Imports, and Trade Partners

In parallel, gold prices have also been going down [in dollar terms] and gold is
India's second largest import.
When the price of oil and gold reduces, naturally India's imports would drop and so
would India's exports [jewellery is also a major Indian export]. But, that doesn't
mean India's economy is going down. On the contrary, lower price of oil & gold was a
major boost for the Indian economy - even if the trade data would show otherwise.

Here is the chart of Indian trade. Despite the massive drop in oil prices and
somewhat drop in gold prices, India's exports & imports have barely reduced in
dollar terms [and even increased in rupee terms] indicating that the non-oil exports
of India was actually going up. That is the one perking the economy up and the
second chart shows Indian rupee vs other currencies [it is the leading one in
emerging markets] as the trade deficit as % of GDP is quite low now.
Source: Great fall of India’s exports [a misleading title that doesn't take the above
facts]

As this data shows, many of India's industries - plastic, chemicals, pharma, agri etc
have been showing a trend upward - Exports: 15 sectors out of 30 decline in
December

The bottomline so far: Indian exports have reduced a bit and that is primarily due to
oil, gold etc. The non-oil and jewelry sector seems to be doing good. But, Indian
manufacturing is far beyond just exports [most of it is used domestically] and India
is far beyond just manufacturing [that accounts for just 15% of India's GDP].

Indian software and services industry continues to grow - India’s Software Exports
to Grow Faster Next Fiscal Year - and this sector is far bigger than any other industry
segment. When the software exports are growing 14% that surely has a large impact
on India's overall growth. India’s economy is on the rise. Also, include all the new
startups coming up all around. All of them impact the economy.

Added to that the inflation rate has been low and part of it is due to the oil prices
[before you talk of Modi's luck also realize that he also has two back to back drought
years partly neutralizing his advantage].

Inflation is lower than in years.

Final note to make is that Indian economy is measured in rupees and thus the
growth numbers will take the rupee figures. If you measure this year in dollar terms,
the growth might not be 7%, but that would also be an unfair comparison [as US is
also growing] and if you measure in Euro terms, Indian growth would look higher
than 7% [because Euro is going down too].

Let me summarize what is happening in key industries:

1. Oil refiners [IOC, RIL etc] are making a killing thanks to falling import
prices and higher refiner margins. Refinery stocks becoming hot-picks due
to improving gross refining margins
2. Software companies are growing substantially - in double digits. Robust
growth for the Indian IT-BPM Industry
3. Airline industry is growing fast partly due to low oil prices - India crowned
world's fastest growing aviation market in 2015 as economy takes off
4. Pharma industry is growing near 20% - Indian pharmaceutical exports: The
growth story
5. Media and Communication industry is looking up at broadband penetration
keeps increasing, even if the carriers are figuring out the profitability
part.Digital media industry to touch Rs 200-b by 2020: E&Y
6. Infrastructure is looking up as large amounts of new electricity sources are
getting added and new roadways & railway projects coming up. Availability
of power improves as generation outgrows demand

Overall, India's economy is in a far better position than most give it the credit.