What is affecting trade momentum?
The article discusses the current underlying trends in global trade. It highlights factors such as weaker economic activities, inflation, tightening of monetary policies, supply chain disruptions due to the Russia-Ukraine conflict, and financial instability caused by the collapse of financial institutions. The article also mentions the impact on India’s trade with the EU and the US, and the potential effects of economic slowdown and inflation on imports and exports.
India’s merchandise exports and imports have experienced a significant decline, reflecting a global trend of slowing trade. The Indian government aims to diversify exports and sustain momentum. underlying trends in global trade indicate that services exports are expected to remain stable, while imports may remain low due to stable commodity prices. However, a quicker recovery may increase import demand.
Underlying Trends in Global Trade:
1. Impact of Russia-Ukraine Conflict:
- Ongoing conflict in Eastern Europe affects energy, food, and commodity prices, eroding real incomes and import demand.
- The shift in energy suppliers in Europe, due to Russia’s sanctions, increases LNG prices in other regions.
2. Financial Instability:
- The collapse of financial institutions and loss of confidence raise concerns about financial contagion, exacerbating the already slowing global economy.
Analysis of Key Trade Partners:
- The EU, India’s third-largest trading partner, is expected to narrowly avoid a recession.
- Inflation rates for food, alcohol, tobacco, and other goods remain high, impacting trade dynamics.
- Fed Chair Jerome Powell indicates a moderation of inflation but notes that inflation pressures persist.
- Business conditions show marginal deterioration, with manufacturing output driven by prior orders rather than new inflows.
Relationship Between Economic Challenges and Trade:
1.Impact of Economic Slowdown:
- During an economic slowdown, international trade experiences a sharp decline due to reduced overall demand for goods and services.
- Discretionary spending aversion affects imports and postponable expenditures, leading to contractions or slower growth in sectors like engineering goods, gems and jewelry, chemicals, and readymade garments.
Effects of Inflation:
- Rising prices, particularly for essentials like food and energy, erode individuals’ purchasing power.
- Exchange rates may influence the preference for cheaper imports over indigenous products.
- Inflation also affects capital flow to developing countries.
- In FY 2021-22, the share of exports of goods and services combined in India’s GDP stood at 21.4%.
- Recognizing the unfavorable global demand, the government plans to initiate inter-ministerial talks to diversify and sustain export momentum.
- Economist Rumki Majumdar suggests that a global slowdown, especially in the U.S., India’s major trading partner, would impact merchandise exports.
- Services exports are expected to remain resilient, while stable oil prices contribute to lower import bills. However, a quicker recovery may increase import demand.
- The non-crude non-jewelry segment has shown robust growth, indicating strong domestic demand.
- Lower imports can be attributed to stable oil prices, reducing import bills.
The decline in India’s merchandise exports and imports reflects the broader global trade slowdown. Weaker economic activities, inflation, disrupted supply chains, and financial instability contribute to this challenging trade environment. To mitigate the impact, the Indian government aims to diversify exports while emphasizing the resilience of services exports. Monitoring global demand patterns and promoting domestic demand will be crucial for navigating this period of trade uncertainty.
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