GSP Scheme Withdrawal to Hit March Exports: SBI Research Note

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Decline in exports may continue as India has graduated out of the generalised system of preferences (GSP) scheme under which goods were being sent to the European Union at lower duties.

A note prepared by State Bank of India’s (SBI) chief economic advisor Soumya Kanti Ghosh said, “As per the new GSP from January 2013, mineral products, textiles, motor vehicles, bicycles and chemicals originating in India will no longer invite preferential treatment.”

India’s exports recorded a decline of 3.7 per cent in February 2014 to $25.7 billion compared to $26.7 billion in the same period last year. The dip comes after seven straight months of positive growth.

Explaining the importance of exports to the EU, SBI said that in terms of direction of trade, Europe and Asia account for 70 per cent of total exports from India. The note further said that in both these zones, mineral fuel has the largest market share and based on linear extrapolation, this item will sharply contract in financial year 2014.

Exports of other products like precious stones, organic chemicals and apparel not knitted or crocheted are also expected to decline or stay the same in March 2014, the SBI research shows. Even mineral oil, one of the biggest exports to the US, will see a fall in March, the research said.

Looking forward, Ghosh expects exports to decline in March compared to the corresponding period last year although it will be higher incrementally compared to February this year.

The Street, however, sees the decline in exports as a worry but does not view it as an alarming situation. Motilal Oswal Asset Mangement’s senior vice-president and head-equity PMS Manish Sonthalia said, “As long as the decline in imports is more than the decline in exports, it is not alarming as the CAD is in control.”

SBI has also noted that although the fair value of the rupee is below 60, RBI will continue to bolster reserves as a result of which the rupee will continue to trade in the current range and hover around 60.

Commenting on the direction of the rupee in the face of falling exports, global brokerage CLSA pointed out that the disappointing export performance will put pressure on RBI to check excessive appreciation of the rupee.

Sonthalia said the rupee appreciation is very much on course and is a temporary phenomena. “It’s largely due to sentiment and the bunching up of some large transactions like Glaxo’s buy back offer, Moody’s stake hike in ICRA etc. On its own, I don’t see the rupee breaching 60 to a dollar,” he said.
 

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