Economic Decline

By Aadil Nakhoda | March 2020

The Indian economy is currently experiencing a poor patch as its GDP growth has tumbled below 6% in the last two quarters. The GDP growth rate at market prices based on constant local currency as reported by the World Bank for India was on an ascendency between 2011 and 2016, peaking at 8.17%. This ascendancy in the economy had provided several opportunities to the smaller economies of South Asia to tap into the expanding market potential through greater trade integration with India and consequently with other regional countries.

India is currently reporting its slowest expansion reported since 2013, with growth rates expected to be below 6% in 2019. Raghuram Rajan, the former Reserve Bank of India governor, has stated that India is in a ‘growth recession’ as he raises concerns not only on the real sectors of the economy and on the consumption demand, but also on the rising corporate and household debt as well as on growing unemployment. India experienced six quarters of slowing growth. Further, the IMF projected a reduction in its growth rate. National statistics are indicating a struggling economy. Government officials continue to tout India to grow to $5 trillion by 2024, making it the fourth largest economy in terms of nominal GDP, overtaking Germany, United Kingdom and France. Although, India, in all possibility will overtake its European counterparts in the next twenty years or so even if it grows at a relatively modest rate of 5% per annum, its dream of achieving such a status in the next four years seems impossible. According to basic calculations, the nominal GDP has to grow at more than 10% per annum for it to achieve the impossible.

The statistics provided by the Reserve Bank of India paint a gloomy picture in 2019-20 relative to the readings reported in the previous fiscal year. The industry growth rate is at -0.5% in Q2 of 2019-2020 from 9.9% in Q1 of 2018-2019, services growth has declined to 6.4% from 7.5%, and gross fixed capital formation growth has fallen from 13.3% to 1%.

The inflation in India is also reporting an upward trend as the All India consumer price index has increased to 5.5% in November 2019 from 2.3% in November 2018. Foreign trade has also been on a declining trend. Exports declined by 0.3% in November 2019 and imports declined by 12.7%. The growth rate in October 2018 was strongly positive for exports and imports in 2018-19, at 8.7% and 10.4%, respectively. With India by far the largest country in South Asia, the declining trajectory in its growth and trade is likely to have an impact on regional integration.

Although, the regional trade between India and Pakistan is held hostage to uncertain diplomatic relationships and territorial disputes, the period when India reported exceptional GDP growth rates was accompanied by greater trade integration between the two countries. According to data obtained from ITC’s Trademap.org, exports from India to Pakistan picked up sharply in 2004 as it grew by more than 180% relative to the value reported in 2003. In 2006, exports further increased by more than 100% as they surpassed the $1 billion mark. This upward trend continued rapidly as exports from India to Pakistan surpassed the $2 billion mark in 2010. Therefore, exports increased from a meagre amount of $180 million in 2003 to $2 billion in 2010, an increase of more than 11 times in a span of 7 years. It was in this period that India reported high growth rates of more than 7% each year, except in 2008 as the global recession hit several major economies. Even though diplomatic ties between India and Pakistan were again impacted after the Mumbai attacks in 2008, trade was not hampered as much as expected. India exported more than $2 billion to Pakistan in 2013 and 2014. Interestingly, the exports to Pakistan were the highest in 2018, as they crossed the $2.3 billion mark. A significant proportion of exports to Pakistan from India in 2018 was of raw cotton, cotton yarn, organic chemicals and petrochemical products.

Trade between India and Pakistan is severely impacted today, not only due to the economic conditions prevailing in both countries but also due to the conditions in the disputed territory of Kashmir and the war tensions between the two countries. Trade is virtually frozen. According to the import payment data obtained from the State Bank of Pakistan, import payments to India in the first five months of FY20 are down more than 60% relative to the import payments in the same period in the last fiscal year.

On the other hand, the growing economy of India and easier access into the Indian market benefitted Pakistani exporters as exports to India from Pakistan more than doubled between 2004 and 2005. The figure crossed $500 million in 2012, 2014 and in 2018. India imported dates, Portland cement, light and medium oils and preparations of petroleum and gypsum from Pakistan. Pakistan is a crucial source for dates, Portland cement and gypsum. Again, export receipts from India reported by SBP were down 91% in the first five months of FY20 as compared to the values reported in the same period in the previous year.

India’s exports to SAARC had increased significantly from $2 billion in 2001 to more than $24 billion in 2018. However, 2019 has imposed certain challenges in trade. For instance, exports of onions from India to Bangladesh and Sri Lanka were banned as production failed to meet domestic demand.

In essence, South Asian intra-regional trade gained when India reported higher growth rates. With economic and other domestic political and economic challenges looming within India, regional trade integration is likely to suffer as well. Ultimately, better regional integration should accompany the resolution of long-standing disputes between India and Pakistan. The South Asian region is reported to be the least integrated region in the world. Greater trade integration can only benefit the entire region.

The writer is an Assistant Professor of Economics & Research Fellow at CBER,
Institute of Business Administration (IBA) Karachi. He can be reached at
anakhoda@iba.edu.pk

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