Exports surge paves the way for much-needed reforms

India's merchandise exports surged by 23 percent in September, reaching $44.4 billion, a significant increase from $259 billion in the first half of the year. This growth, which has been sluggish for several years after the pandemic-era boom, marks a welcome development. Engineering and electronic goods are among the key drivers of this surge, with combined exports reaching $100 billion for the financial year, a 26 percent rise compared to the same period last year. Together, these sectors now account for almost half of all non-oil exports.

Exports to the United States, despite uncertainties over tariffs, grew by 48 percent in September. China's exports also saw robust growth, increasing by 36 percent for the year. However, shipments to the Middle East remain weak. Importantly, China remains India's largest trading partner, accounting for the largest share in the country's imports. The trade deficit with China widened to $68.9 billion during the April-September period, up from $54.4 billion in the same period last year.

ICRA, a ratings agency, anticipates the current account deficit to escalate to $13-15 billion in the second quarter due to a modest increase in the trade deficit with China and a potential easing in invisible earnings. The currency's decline may have contributed to heightened export competitiveness. However, the decline has prompted the Reserve Bank of India (RBI) to implement several measures and intervene in forex markets to curb the slide.

While the RBI has consistently stated that it intervenes solely to prevent excessive volatility, it must refrain from targeting any specific rupee/dollar level. Simultaneously, the government must persist in its reform agenda. In recent years, the country has signed several Free Trade Agreements (FTAs), but it should also proceed with more contentious agreements. Additionally, the government should take steps to stimulate manufacturing activity and attract more foreign investments.