Export recovery, which may begin from the second quarter, could get further delayed if the border standoff with China lingers on, an India Ratings report said, adding ability of export-oriented manufacturers to keep up supply will remain key to navigating the path to recovery.

"While domestic exporters are facing vulnerability in form of geography and commodity concentration, the overall demand prospects for merchandise goods from importing countries can improve, creating a potential demand-supply mismatch for domestic exporters," the report said.
Since January, the agency has taken 25 negative rating actions and 13 positive rating actions, as well as revised the rating outlook down for another 16 issuers exposed to exports.

Noting that domestic exports have dual concentration in terms of geography as well as the category of goods -- though the former is common for many exporting countries, it says top 10 export partner countries constitute over 50 per cent of the total merchandise exports and a substantial portion of which comprises discretionary goods like gems and jewellery, etc.

The report notes that exports are largely concentrated in the red zone countries (over 500 COVID-19 cases per million people) which could inherently a take longer time to return to normalcy, delaying domestic exports.

On the evolving geopolitical risks, the report said China saw a revival of exports in April as its operations resumed and pending orders were cleared. Additionally, stable or increasing Chinese exports would suggest a smoothening of exports environment globally and may also place domestic exports in a favourable spot in the second quarter if geopolitical condition remains conducive. 

The supply-side issues, it noted that domestic companies are likely to face supply-side challenges, ranging from issues related to factors of production such as capital and labour to nuanced operational issues like physical distancing and logistic related hurdles.
"The reverse migration of labourers may increase the cost of production, and under-capacity utilisation will deter production till the end of the second quarter. Furthermore, export-oriented MSMEs are likely to be more impacted than large corporates due to lesser resilience to withstand the pandemic-related financial damages.
"A prolonged impact on the ability of domestic exporters to meet demand can also result in the country losing its market share to competing exporting countries," warns the report.

Warning that weak exports could disproportionately impact credit and liquidity conditions, the report expects the exogenous shock from the pandemic could accentuate the pressure on credit profiles of export-oriented entities, if the recovery gets prolonged. Before the pandemic, sectors like gems and jewellery saw lower growth. 

Source: PTI