The world economy is facing contraction in growth mired by the financial crisis that is considered to be having a larger impact since the time of 'Great Depression'. Many advanced economies have already acknowledged setting off recession in their economies, which is deteriorating the prospects of economic development in developing regions as well. According to a forecast by the United Nations, world GDP is expected to slowdown to 1 per cent for the year 2009; another estimate by International Monetary Fund (IMF) projects the GDP growth of the world to be a mere 0.5 per cent in 2009, with the developed economies witnessing a negative growth of (-) 2.0 per cent, and the developing economies witnessing a growth of 3.3 per cent, almost half the growth that was witnessed by them in the year 2008. The developing economies especially are facing the economic-drag due to fall in export demand, lower realisation from trading in commodities, and financing constraints for developmental projects, including the external sector.

Trends in global trade

The crisis has already placed significant impact on global trade with far-reaching implications for the prospects of the developing countries at large. According to IMF data, growth in world trade (both merchandise and services) has decelerated to 4.1 per cent in 2008, as compared to a growth of 7.2 per cent witnessed in 2007. Imports by advanced economies shrank to (-) 1.5 per cent in 2008, as compared to an import growth of 10.4 per cent for the emerging economies. As regards export growth, IMF estimates for the year 2008 are: 3.1 per cent for advanced economies, and 5.6 per cent for the emerging economies.

According to IMF, the outlook for global trade for 2009 is expected to weaken further due to shrinking external demand caused by the economic crisis. For 2009, the growth in global trade (both merchandise and services) is expected to decelerate to (-) 2.8 per cent with the growth in imports by advanced economies shrinking to (-) 3.1 per cent, and exports by emerging economies shrinking to (-) 0.8 per cent. The impact of declining trade and commodity prices tend to be distributed unevenly across countries.

As could be seen from Table-1, there would be negative growth in imports of North America (-) 4.5 per cent, developed countries of Asia & Oceania (-) 5.5 per cent and possible slowdown (growth of 1.2 per cent) in import of developed nations in Europe in the year 2009. The slowdown or negative growth in imports in the developed regions has reflected in the slowdown in export growth of developing regions. It is estimated that the export growth of Africa would be 3.6 per cent; for East Asia it would be 5.3 per cent; South Asia and West Asia it would be 3.9 per cent each; and for Latin America it would be 4.1 per cent in 2009. In a nutshell, developing countries are facing export contraction due to fall in demand in developed countries.

Reflecting this trend, in the month of January 2009, China's exports shrank by over 17 per cent (over the corresponding month of 2008); South Korea's exports tumbled by around 32 per cent, Singapore's exports dropped by 38 per cent, Brazilian exports declined by 26 per cent and South Africa's exports dropped by around 8 per cent in the month of January 2009, over the corresponding month of previous year.

Shortage in trade finance

The global financial crisis, which has resulted in a slowdown in economic growth, has impaired also the access to trade finance. Trade finance is an essential part for helping developing countries in particular to project their export capabilities and thus, develop-ing countries, especially in the SME segments, are the worst affected.

The shortage in trade finance has affected developing economies in two ways: firstly, there is an estimated shortage of liquidity (estimated to be over US $ 25 billion) to finance trade credits; secondly, there is also a general reassessment of risk caused by the financial crisis, which has tightened the trade finance availability to emerging market economies. As a result, the cost of finance has increased approximately by over 3-4 per cent in international markets, even for exporters considered to be good. There are also reports that trade, to some extent, has been delayed due to refusal of banks to issue letters of credit, reportedly disrupting the global supply chains that might push the manufacturing output further down.

According to a study conducted by International Chamber of Commerce (ICC), exporters in general are seeking confirmed letters of credit, where they had exported on the basis of open account or cash against delivery (CAD). The banks' perception of risk is leading to tightening of liquidity and, therefore, greater difficulty in getting confirmed letters of credit.

Emerging protectionist measures

The global economic crisis is no doubt a catalyst for trade protectionism. As the world economy falls into steep recession, some economies may try to erect trade barriers to protect the local industry and boost the growth prospects of domestic market. The probablity of developed countries taking such trade protectionist measures is more in such a crisis situation. USA has already announced a 'Buy American' provision and indication of tax rebates to firms that do not outsource the work to other countries leading to job loss. Differences of opinion surfaced in the European Union whether to have a common approach or individualist approach with regard to combating the economic crisis. There are also conflicts of opinions, countries warning racial job loss within the region.

However, EU, after due debate and considerations, rejected protectionsim as a response to tackling the crisis. Even at the G-20 Financial Summit, held in November 2008, world leaders called for countries to resist trade protectionsim, and committed themselves to refraining from new barriers to trade and investment.

It is generally believed that protectionist measures could save or minimise the negative impact in an economy during crisis period. But this is a myth than reality. Even when the Great Depression erupted in 1930s, many countries adopted protectionist measures resulting in trade war, restricting the growth of international trade. For the under-developed countries, protectionist measures could spell disasters for the people in particular, sweeping into a humanitarian crisis.

Developments in India's trade

Reflecting the global trade trends, India's exports are also in a contraction mode since the time the crisis spread across the world. As per the statistics released by the Ministry of Commerce and Industry, Government of India, exports for the period April-January 2008-09 witnessed a growth of 13.2 per cent, while that of imports witnessing a growth of 25.3 per cent during the same period. Though this growth appears to be satisfactory, much of this has been achieved during the first six months (April-September) of 2008-09. Since October 2008, exports have been slipping down; the negative growth in exports in the month of October 2008 was (-) 12.1 per cent; it was (-) 9.9 per cent in the month of November 2008; (-) 1.1 per cent in the month of December 2008; and (-) 15.9 per cent in the month of January 2009.

Cumulatively, since October 2008 and upto January 2009, India's exports witnessed a negative growth of (-) 10.1 per cent, pulling down the overall export growth to 13.2 per cent for the period April - January 2008-09. Also, the import growth during the period October - January 2008-09 has been near stagnant signifying the slackening export related manufacturing activity in the economy. It may be mentioned that to some extent decline in oil prices have contributed in bringing down the import growth during the period October 2008 - January 2009.

Deceleration in export growth is primarily on account of slowdown in demand in external markets, especially the USA and EU, wherein slowdown in economy has already been witnessed (for the year 2008) and economic recession has been estimated for the year 2009. As per the available data for the period April-October 2008, sectors such as marine products (-9.7 per cent), handicrafts (-50.8 per cent), carpets (-12.4 per cent) and project goods (-0.1 per cent) have witnessed negative export growth. Sectors such as gems and jewellery (7.5 per cent), plastics and linoleum (7.4 per cent), iron and steel bars / rods (8.7 per cent), cotton textiles (3.6 per cent), garments (6 per cent), silk (3.4 per cent), jute (7.6 per cent) are witnessing slowdown in exports during April-October 2008, most of which witnessing negative growth in recent months (month-to-month basis). Notwithstanding the slowdown in world demand and resultant export growth in majority of the sectors in India, sectors such as electronic goods (43 per cent growth), engineering goods (37 per cent growth), basic chemicals and pharmaceuticals (26 per cent) have performed well during this period.

The overall export deceleration has reduced the operating performance of export-oriented units, affecting both top-line and bottom-line. Some firms have closed the operations and several have partially cut-down the production level, due to deceleration in demand in external markets. This situation, coupled with liquidity conditions, has also made the exporters defer their capacity expansion plans. Closure or partial shut down of operations, and deferment of capacity expansion plans have resulted in job-loss in various sectors. It has been reported that a survey undertaken by the Ministry of Labour, Government of India, has estimated a job loss to an extent of 5 lakh persons, across 20 sectors, in the last quarter of 2008, with maximum job-loss reported by exporting units. Sectors that have been witnessing job-loss include mining, textiles, metals, gems and jewellery, automobile, transport and IT / BPO.

Road ahead

The world economy is witnessing a major downtrend following the crisis in international financial market. The global economic slowdown has been impacting the prospects for growth in world trade, which in turn would be impacting the economic prospects of outward oriented emerging economies, including India. India's export target set for the year 2008-09 (US $ 200 billion) may become unrealistic in view of contraction in global demand. The negative export growth (- 10.1 per cent during October 2008 to January 2009) and sluggish growth in imports (1.2 per cent during October 2008 to January 2009), corroborate the slowdown in India's manufacturing activity and export growth. It is projected that India's exports could reach US $ 175 billion for the whole year 2008-09, an expected growth of around 7 per cent.

The economic crisis reflects structural imbalance in the global economy and financial risk accumulation, and thus there is no immediate solution to this challenge. In such crisis, it is critical that all countries refrain from pursuing their own interests and address the crisis as a common challenge, and in a collective manner. Countries need to step up consultation and cooperation with their partners to keep up the momentum in international trade, which could revive the world economy from this recessionary situation.