India's widening trade gap alarmingly high

A whopping $185 billion trade deficit - the gap between a country’s exports and imports - in the last financial year (2011-12), which was around 9 to 10 per cent of the country’s gross domestic product (GDP), speaks volumes about the impact of global contraction on India as well. India’s strong export markets, the US and the European Union, remain caught in economic uncertainties, throwing a spanner in its shipments.

Meanwhile, the imports have surged, thanks to purchase of oil and petroleum products to the tune of $150 billion and gold and silver worth $60 billion in the last financial year. Both of these account for more than 40 per cent of the country’s total imports of $485 billion in 2011-12.

Added to the list was coal and fertiliser imports, together responsible for draining a vast chunk of foreign exchange from the country, and leading to a trade gap widening by the day.

This prompted the government to take some measures in this year’s budget to control gold imports. It raised the import duty on gold two-folds to 4 per cent, which in turn led to a 33 per cent decline in the import of precious metals last month. This is expected to help manage the increasing trade deficit.

But what about the soaring oil import bill? Presently, the country is heavily dependent on coal and foreign oil imports since imported petroleum products account for 80 per cent of our consumption for our energy needs. Incidentally, the government has no control over oil prices as it is primarily driven by international crude prices.

Falling rupee

A widening trade gap has led to a huge depreciation in India’s currency. This was quite evident when the rupee depreciated 22 per cent since the beginning of 2012 to around Rs54.50 to a dollar. As the growing imports and foreign investors pulling money out of Indian stocks are putting more pressure, analysts feel rupee in the near future may tumble to 56.

The ballooning trade deficit has other ramifications too as it may throw the current account deficit out of gear. The trade ministry has raised serious concerns as India’s trade deficit is set to balloon to $278.50 billion by 2014, a twenty-fold increase over a decade from the $14.3 billion in 2004.

But experts say a growing economy does need more energy and since India does not produce enough, it has to resort to imports. Ideally, the falling rupee should enhance exports, but not in India’s case, as we are a net importing country and it will hurt import-based exports such as refined petroleum products, gems and jewellery, or items made of copper.

“There are certain imports, which are necessary and a control on them may have an impact on economic growth,” says National Institute of Public Finance and Policy professor N R Bhanumurthy, adding that the solution lies only in enhancing exports to make a balance.

Explore new markets

Soon after the global financial crisis and its effect on the western markets, India had started exploring new markets to diversify its shipments. But, the prolonged crisis in developed countries has had a knock-on effect sent on new and emerging markets such as those in South America and Southeast Asia. These were increasingly emerging as attractive destinations for Indian exports. But, Japan has had a problem, China is slowing, Brazil is also engaged in setting its own house in order.

Worse will be Europe as the euro zone is caught in financial turmoil. Car exports from India, for instance, touched 5 lakh last year riding on demand mainly from Europe. But in the current financial year, the industry fears that recession and overcapacity in Europe will severely curtail exports.

According to the Federation of Indian Exporters Organisation (FIEO), new markets provided cushion for Indian exports in the wake of a sharp decline in demand in the traditional export destinations, but they are of little help now.

“The impact of global contraction in trade is now being felt by India as well. The situation is more grim at the moment as in the past periods of slowdown, the emerging and developing economies exhibited positive growth helping us increase our exports through market diversification strategy focusing on Latin America, Africa, and Asia,” says FIEO President Rafeeque Ahmed. The slowdown in new markets will be more obvious in the coming few months, he adds.

The more disturbing news is the sharp decline in exports of labour intensive sectors like gems & jewellery, readymade garments, which contracted lately. The growth in leather, electronics and plastics also slowed.

“This will have serious implications on employment and may lead to sharp reduction in additional job creation and even lay-off,” Ahmed opines.

According to FIEO, the solution lies in a stable exchange regime for exports rather than high volatility in the exchange market. The exporters’ body has also asked the government to devise a suitable strategy to counter the export slowdown in the revised edition of the Foreign Trade Policy. A continuance of export benefits in increased entitlement and immediate re-introduction of interest subvention. The government has only last week met exporters and is expected to come forth with some export enhancing measures in the upcoming foreign trade policy.

Trade deficit and BoP

A large widening of the trade deficit can potentially result in balance of payments difficulties, and it is not acceptable beyond a point as it may jeopardise the entire growth process of an already slowing economy.

But, trade deficit for India is not a new phenomenon. In 2009-2010, India had the world’s third largest merchandise trade deficit, at $107 billion, behind only the US at $ 691 billion and the UK at $154 billion.

Economists say that trade deficits in goods can be compensated for by trade surpluses in services.

However, despite services accounting for 60 per cent of India’s GDP, their share in India’s total exports of goods and services is not more than one-third. “This must change if India’s current account deficit is to be reduced from current levels of 4 per cent of GDP,” Bhanumurthy says.

That will require fast-tracking the agreement on trade in services under India-ASEAN FTA, getting into comprehensive economic pacts with key ASEAN nations, or including services under trade pacts with Latin American bloc Mercosur, BRICS nations and other trading partners.

The current policy inertia in the government and policy reversals in most of the cases is only prolonging the crisis, experts say. For example, the inability to raise domestic fuel prices only acts as an incentive to increase consumption of hydrocarbon products, most of which are imported. The difficulties in getting green clearances for new coal mines is forcing domestic power companies to buy from abroad. All these factors cumulatively are adding to trade gap.

Besides, India's growing non-plan expenditure limits its ability to raise public investment in infrastructure, an essential requirement for improving the cost competitiveness of India's exports.

The government recently announced that it will take some austerity measures to help check its dwindling finances and a cut-down in non-plan expenditure to the tune of 2 to 3 per cent is one among them. This is expected to help improve the crucial infrastructure sector and help the growth soar.

Last but not the least is the transport bottleneck, which need to be corrected in order to raise India’s exports. According to the government’s own admission, the exporters end up losing anywhere between 7 to 10 per cent of the value of their exports to due time taken to handle cargo at ports, the slow pace of inland transportation and other issues.

These infrastructural problems have never received attention they deserve, say experts.