The recent data for April 2023 reveals a notable contraction in India’s merchandise exports by 12.7%, resulting in a six-month low of USD 34.66 billion. During the same period, imports also saw a sharp decline of 14%, reaching USD 49.90 billion.
This downward trend is not unique to India, but reflects a broader pattern of dwindling global demand. This article delves into the current situation, exploring its causes and implications.
Factors Driving Current Trends in Global Trade
Several key factors have contributed to the slowing down of international trade, impacting both import and export volumes around the globe.
Weaker Economic Activities and Rising Inflation
Global economic growth has been experiencing a slowdown, which inevitably impacts consumer spending and investment, thus affecting trade volumes. Concurrently, a surge in inflation in many countries has prompted central banks to implement tighter monetary policies. This course of action, while necessary, negatively affects trade as it decreases consumer purchasing power and raises the cost of borrowing for businesses.
Disruptions Due to Russia-Ukraine Conflict and Financial Instability
Over in Europe, the ongoing Russia-Ukraine conflict has disrupted supply chains, leading to increased energy and commodity prices. This situation triggers a ripple effect, impacting global trade flows and elevating costs for businesses.
Furthermore, financial instability resulting from collapses of financial institutions like the Crypto exchange FTX and several US banks have shaken confidence in the financial sector. The ensuing concerns of potential contagion could result in further negative impacts on global trade.
Case Study: Trade Situation in EU, US, and India
In the European Union (EU), the February 2023 forecast predicted narrowly avoiding recession that appeared to be looming from September 2022. Inflation in the area was primarily driven by food, alcohol, and tobacco.
In the United States, the Federal Reserve reported in May 2023 that while inflation had improved compared to mid-previous year, pressures remain high. The decrease to their target inflation of 2% is anticipated to be a slow process.
In India, demand from key markets like the EU and the US is not promising. Despite this, India managed to surpass long-term average growth in certain non-crude and non-jewelry segments in the previous fiscal year 2022 – 2023. This indicates a robust domestic demand in India.
The Impact of Economic Slowdown on International Trade and Purchasing Power
During an economic slowdown, international trade volumes can significantly decline due to overall reduced demand for goods and services. Consumers usually cut back on discretionary spending, which can particularly impact certain imports and postponable expenses. Hence, some sectors such as engineering goods, gems and jewelry, chemicals, readymade garments, plastics, and petroleum products have seen slower growth or contraction in 2023.
Inflation, especially for essential commodities like food and energy, drastically erodes individuals’ purchasing power. However, if imported products are cheaper than domestic alternatives, consumers may choose them. The exchange rate between currencies also plays a role in determining purchasing power.
The Way Forward: Strategic Responses to Global Economic Conditions
As a response to the situation, it is crucial for the Indian government to engage in multi-ministry discussions to explore ways to diversify and sustain export momentum. Recognizing that certain non-crude and non-jewelry segments have shown strong growth, indicating robust domestic demand, provides a positive outlook for the Indian economy.
Stability in commodity prices and the value of the Indian rupee can help maintain low import levels. It is important to closely monitor global economic conditions and adapt export strategies to target emerging markets. Additionally, fostering domestic demand can further support sustained economic growth.
Reflecting on Past UPSC Civil Services Examination Questions
In a previous year’s UPSC Civil Services Examination, the question related to this topic was:
Q. Consider the following statements: (2023)
Statement-I: In the post-pandemic recent past, many Central Banks worldwide had carried out interest rate hikes.
Statement-II: Central Banks generally assume that they have the ability to counteract the rising consumer prices via monetary policy means.
The correct answer was (a), with both Statement-I and Statement-II are correct, and Statement-II being the correct explanation for Statement-1.
Such questions highlight the importance of understanding how global and national economic trends intersect, an understanding that is crucial as India navigates the current economic climate.