India's Looming Exports Challenge Is Closer To Home Than We Think

33% of India's exports are to the Asia Pacific region and are falling sharply according to a recent CRISIL report which suggests a structural shift as the reason

1 Aug 2023 12:00 PM GMT
On today’s episode, financial journalist Govindraj Ethiraj talks to Crisil chief economist D K Joshi, independent research analyst specialising in banking and micro-economy Hemindra Hazari, as well as Editor of Taxsutra Arun Anandagiri.

Our Top Reports For Today

  • <00:51> India has a looming exports challenge that is much closer to home than we think with D K Joshi
  • <08:32> Kotak Bank faces a succession challenge and a possible face off with regulator, the Reserve Bank with Hemindra Hazari
  • <20:08> Rainfall forecasts and numbers are now above normal and looking good for the country.
  • <24:58> Over 65 million taxpayers raced to file their returns on July 31st, the last day for doing so with Arun Anandagiri


NOTE: This transcript contains only the host's monologue and does not include any interviews or discussions that might be within the podcast. Please refer to the episode audio if you wish to quote the people interviewed. Email [email protected] for any queries.

India’s big export challenge is actually closer to home than the West

When it comes to exports in general, or merchandise exports which are physical in nature, one assumes that a good part of it goes to the west.

Actually, that’s not true. Some 33% of India’s exports are actually to the Asia Pacific region.

And for various reasons, they are falling quite sharply. Actually, it has been falling since the pandemic, which according to rating agency Crisil could suggest a structural shift. This is part of a report Crisil has just put out called quite ominously Beware the Pacific Headwinds and highlighting that the bigger exports challenge is closer home in APAC than on either side of the Atlantic.

A quick backdrop. India’s merchandise exports fell 22% year on year to $33 billion in June, thanks to slowing global growth, making it a contraction for 5 months now.

China is actually not a major importer of Indian goods - trade mostly flows the other way - so it is the non China countries in the APAC region which are importing more from India.

The reason is falling commodity prices which has, according to Crisil, substantially contributed to a fall in the dollar value of India’s exports.

The interesting contrast is this. India’s exports to APAC fell by 11% in the last year to $119 while it grew by 3% to the United States and 15% to the European Union.

The other interesting point is that falling commodity prices are reducing the value of exports but also helping Indian companies because their input costs are lower and thus shoring up their bottom lines and by extension their stock prices.

I reached out to Crisil chief economist D K Joshi and began by asking him what was the share of India’s exports versus the rest of the world


Speaking of dollar values, India’s foreign exchange reserves have dropped by around $ 2 billion to $607 billion for the week ended July 21.

Earlier reserves had gone up by $13 billion to touch $609 billion in the previous week.

As a background, India hit an all time high in forex reserves in October 2021, when it touched $645 billion. It began declining after that when the RBI was using up the dollars to defend the rupee which was falling.

Meanwhile the markets rose again, yesterday, reflecting optimism in global markets. The BSE Sensex was up 367 points to settle at 66,528 levels. The Nifty50 ended up 108 points at 19,754 levels. Both the Sensex and Nifty gained around 2.7% or a little under 3% in July incidentally.

Meanwhile, an interesting report in the WSJ overnight says the extra reward for holding stocks instead of bonds has fallen to its lowest level in 20 years.

This would threaten a recent hot streak for major indexes, it says.

One method for gauging the value of stocks is to compare their earnings yield—calculated by dividing a company’s expected earnings over the next year by its stock price—to the yield on government bonds, considered the closest thing to a risk-free return.

The difference, sometimes called the equity-risk premium, shows how much investors are being compensated for the additional risk of owning stocks.

And right now, that isn’t much, says the WSJ.

The gap between the earnings yield of the S&P 500 and the yield on the 10-year U.S. government bond dropped to around 1.1 percentage point last week, its narrowest since 2002.

Not to dwell too much on this right now but it does suggest that money could go chasing better returns in emerging markets if it’s the same pool or maybe just switch to bonds, depending of course on how the investors or the fund managers are feeling.

Results season is still on, with numbers still reflecting an underlying strength in consumption.

India’s largest car maker Maruti Suzuki reported a standalone net profit that was up 45% at Rs 2,485.1 crore in the quarter ended June 2023, which was attributed to higher sales, improved realisation, cost reduction and higher non-operating income. Sequentially, the company’s net profit was down from the previous quarter.

Its standalone revenue for the first quarter was up 22% to Rs 32,326 crore driven by sales of close to 500,000 cars, up 6.4% compared to last year.

Kotak Bank Faces A succession challenge.

A bank is a bank is not a company, is the moral of the story.

Uday Kotak started Kotak Mahindra as a non bank finance company in 1985 with a foray into the bill discounting business. He went onto a range of financial products and services, often in step with the opening of the market for them, like lease and hire purchase of vehicles, auto finance, investment banking and finally a bank in 2003, becoming the first non bank finance company to become a bank.

At that time, there were many aspirants for the bank licence and while some objective criteria for awarding the licence is clear, there is a degree of subjectivity as well in the central bank, the Reserve Bank of India’s decision.

And these decisions go all ways. To take an example of a licence that’s worked out in a manner of speaking, IndusInd Bank got a licence to start a bank in 1994. The move came as a surprise then to many because the Hinduja family was backing it and the RBI’s position was to not give any industrial family a bank. And yet they did.

Back to Kotak, Uday Kotak has run the bank since 2003, taking it to well levels that have kept shareholders and the stock markets happy, growing along the way organically and inorganically, like through a merger with ING Vysya Bank.

At this point Uday Kotak has been running the bank for more than 18 years as CEO.

The problem is that the Reserve Bank has now capped bank CEO tenures to 15 years and classically will ask the banks to suggest three names in order of preference to choose the next CEO.

The RBI has discretionary powers to decide who the CEO of a bank can be and can also reject names that are put forward. We will come to the how and why shortly.

The day before, news reports quoting sources emerged suggesting the RBI had communicated to Kotak Bank that they would like someone from outside Kotak Bank to run it, as opposed to the names suggested.

Kotak Bank denied this resoundly yesterday saying that there was no approach formally or informally to anyone in its system, management or board.

The hitch of course is that Uday Kotak has already been elected as a board member and would thus continue in that role even if an external CEO to come in, were an external CEO to come in.

If someone from within was promoted, then the same team would continue, so to speak, with fresh roles of course.

The current Kotak board has a mix of mostly finance veterans, including from within the company, apart from Uday Shankar, former CEO of Star India and Ashok Gulati, the economist and columnist.

The larger question of course is how should one view such a situation where the shareholders would quite obviously prefer continuity for matters of stock price, business and maybe even heart while the RBI would like to take a firmer, rules-based approach.

I reached out to Hemindra Hazari, an independent research analyst specialising in banking and micro-economy and who tracks private banks quite closely. I began by asking him how he was seeing the current situation at Kotak Bank.

The Economy Is Holding Out Again

Some macro numbers. India’s core sector which has a weight of 40% in the Index of Industrial Production or IIP has grown at 8.2% over 13% reported in 2022.

BOB Research which has collated the figures points out that with the exception of crude oil which declined marginally, growth has been broad-based thus reflecting the buoyancy in the infrastructure sector this year.

Among sectors that grew strongly were steel which grew 22% and cement at 9.4%, thanks in some ways to the Government’s push on infrastructure.

Income Tax

And if parts of the economy are doing well, incomes must be doing well too.

Actually scratch that, you have to file a return whether you earn more or less or nothing at all.

So the push seems to be working with overall numbers likely to be higher for the last financial year that is 2022-23 as taxpayers raced to meet the 31 July deadline, hoping against hope of course that the Government would provide an extension.

The numbers had crossed 65 million and were inching towards 70 million.

How do the numbers look and what can we take away at this point? I reached out to Arun Anandagiri, Editor of Taxsutra, a well known tax affairs portal and began by asking him how he was analysing tax payer response so far, particularly in context of overall tax numbers for the country.

It’s raining taxes and it's raining too

The Indian Meteorological Department is forecasting that the country will most likely see normal rainfall during the second half of the monsoon season (August and September).

It said normal to above normal rainfall is very likely over east central India, parts of the east and northeast region and most subdivisions along the Himalayas.

While India recorded 13% excess rainfall in July, east and northeast regions of the country gauged the third lowest precipitation in the month since 1901, the IMD chief said.

India saw a turnaround in monsoon rains -- from a 9% deficit in June to 13% excess rain in July, the IMD chief also said.

El Nino -- warming of the waters in the Pacific Ocean near South America -- has not affected the monsoon rains so far.

Meanwhile, BOB Research says the Met’s latest data for 30 July shows that cumulative rainfall for the country is now 6% above normal which is not only a good sign but means you can put worries of deficient monsoons behind you, at least for now.

BOB Research says only 6 divisions covering 15% of India are in deficient categories and 7 states are in deficit. Though if you were to break it up in terms of districts, 236 of 715 districts are in deficit.

The numbers become important when trying to assess sewing patterns. BOB Research says pulses continue to have lower acreage which could have some impact on inflation. Pulses which include urad dal and tur dal and are a household staple in India are already over 10% inflation now.

That’s it from me for today. Have a great day ahead. Feel free to reach out, thank you for your comments and feedback which as always make our day.

Have a great day ahead !

Updated On: 1 Aug 2023 2:01 PM GMT
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