Crisis of Confidence?

The World Trade Organization(WTO) has revised its projection for World trade growth upwards to 13.5 per cent in 2010, following faster than expected recovery in trade flow so far this Year. “The surge in trade flows provides the means to climb out of this painful economic recession and can help put people back to work. It underscores, as well, the wisdom governments have shown in rejecting protectionism”, says the Report. However, WTO in its published report in early March, 2010 had forecast global trade volume to expand 10 % in the current fiscal. Merchandise exports of developed economies are predicted to expand 11.5 per cent in volume terms while the rest of the world including emerging economies and the Commonwealth of Independent States, is expected to inch towards a growth of 16.5 per cent.

The 13.5per cent growth in global trade volume would be the fastest year-on-year expansion recorded since 1950. However, the current expansion is on a low base of the previous year (2009) when the world trade volume was severely depressed. The world exports had plunged 12.2 per cent in 2009-10. The fastest YoY growth so far since 1950 was the 11.8 per cent growth recorded in 1976, one year after the then unprecedented decline of 7.3% in 1975.

The total world trade in 2009-10 was in the region of $ 31.2 trillion, against which China topped the Trade table with $1.2 trillion, Germany came second with $ 1.16 trillion and United States sliding to the third positon with exports at $1.05 trillion. Brazil was ranked (23) with exports worth $ 153 billion, Russia (11 position)($303 billion), India (18th position)($176.5billion). The total export trade realized US $ 12.5 trillion.

World merchandise trade rose sharply in the first two quarters of 2010, boosted by a recovery of GDP in both developed nd developing economies. However, many economists expect output growth to slacken in the Second half with the expiry of fiscal stimulus measures and the winding down of the inventory cycle. The slackening of trade growth in the second half accentuate that an eminent fall in the rate of growth in GDP in developed Countries. While there can be risks of downside, particularly in case an unforeseen financial or microscopic shock triggers another economic downturn, the Report hopes that the upside potentials could trigger better than expected growth in the Second half.

Coincidentally, the Bloomberg quarterly Global Poll forecasts predicts that the United States will lag behind the emerging markets of Brazil, China and India as a preferred destination for investment, having slid from the first position it held during the last Poll conducted three months ago. US economy has been rated as in the fourth place with Brazil and China tied for first, and India in the third Place. The slide in sentiment came as US GDP slid to 1.6% in the Second quarter from 3.7% in the first quarter. Expectations for2011 are down to a median forecast of2.5% from 2.9% in first quarter of 2011-12. The Survey showed that there were dim chances of double dip recession and that United States was slowly on to the path of slow yet steady growth. US people are wary of US budget deficits as a result, crisis of confidence would provoke a dramatic increase in interest rates within two years. The present budget deficit is forecast to be around $ 1.47 trillion for2010 and $1.42 trillion for 2011.

Even though stimulus offered through the various Schemes of the Foreign Trade Policy was evenly balanced, the downsizing of Duty Drawback rates for crucial sectors when it is struggling to find competitive space in the international market show that the policy makers have not become wiser by the bad experiences of the Past. While China’s exports are clocked $1.2 trillion, India has an export figure of just US $ 176.50 billion, the bulk of which comes from textiles and leather segments. As the dollar rate parity with the Rupee is slowly widening, choking inflation is already bleeding the bottom line of Cost of production, Government’s insensitiveness to the export related problems will cost the Country dear in terms of Balance of Trade and BoP, resulting in depletion of Foreign Exchange Reserves. When huge fund outlay is ear-marked for Populist schemes, the export sector becoming cost prohibitive would lead to India loosing advantage in world Trade.