Favourable trade winds

A 26 per cent rise in exports in September – the highest in the last six months – could not have come at a better time, either for Indian exporters or, indeed, the government. In that sense, the enthusiasm of Commerce Minister Suresh Prabhu is understandable. A thrilled Mr Prabhu tweeted after the data was out on Friday, “India’s growth story is back!” Improvement in some other economic indicators must have contributed to the feel-good factor for the minister. It is true that a big reason for exports to show such a big jump has been the rise in crude oil prices, which, in turn, pushed up processed petroleum exports by nearly 40 per cent. But the icing on the cake was the 29 per cent year-on-year increase in export growth of the non-oil and non-jewellery segment. This is the highest in six years and speaks well for the economy despite the argument that the increase was expected as global trade prospects are looking up.

Engineering goods accounted for two-thirds of the exports growth as they rose by 44 per cent, their second highest rate of growth ever. Among the 30 most important export sectors, only four sectors – meat and dairy products; fruit and vegetables; iron ore; and handicrafts – contracted. After a prolonged period of contraction, Indian exports have now notched up 13 straight months of uninterrupted growth. The rise in exports was mirrored by an 18 per cent increase in imports over last year to $37.5 billion, which also reflected healthy domestic demand. The growth in imports was also much lower than in August and helped pull down the trade deficit to a seven-month low; it is also likely to ease the current account deficit in the second quarter, as a result. 

This is good news for the government, which has been grappling with issues faced by exporters who have been complaining of a sharp working capital shortage in the wake of the introduction of the goods and services tax regime. But steps such as ensuring quicker tax refunds for exporters and extending two schemes predating the goods and services tax (GST) that allowed duty-free sourcing of materials for export production until March 2018 are likely to improve the liquidity of exporters by preventing working capital from being locked up in tax procedures. The GST Council’s decision to introduce a 0.1 per cent tax rate for merchant exporters will offer relief from the full applicable GST rates on procurements. Merchant exporters do not make products themselves but procure from others for shipping overseas. 

It would thus seem reasonable that sustained export growth, especially given the improving global demand, as well as positive domestic consumption trends could clear the road for the economy to come out of its latest slump. There is only one caveat: When a new tax system is put in place, firms may be tempted to show higher exports as a way of evading taxes by claiming input credit instead. For instance, a Credit Suisse study says the spectacular jump in engineering goods exports deserves a detailed study.

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