Economy: A 'deficit disorder' which needs affirmative action

The Prime Minister’s Economic Advisory Council (PMEAC) last week gave a slightly optimistic forecast of 6.4 per cent economic growth for India in the year 2013-14 on the back of an estimated 5 per cent GDP growth this year.

The projection gives reasons to cheer at a time when the world economy is expected to grow at half of India’s rate. The PMEAC also gave credit to the government for bringing down inflation, fiscal deficit to a lower level and commended steps taken to bring down the historically high current account deficit (CAD).

But, meanwhile, it expressed serious concerns about the external payment situation, saying that while some macroeconomic indicators were trending in the right direction, there was a need for greater correction in balance of payments.

It said that the rising trend in merchandise trade deficit, which forms a part of balance of payments and current account deficit, was something that needed to be curbed. India’s trade deficit stood at nearly $192 billion in the fiscal year just gone by. It is almost two-thirds of the country’s export receipts.

The trade deficit, which worsened in 2011-12 after it expanded by 54 per cent to $183 billion, from $119 billion in the previous year, could not improve in 2012-13. The merchandise trade deficit (on balance of payments basis) as a percentage of GDP rose from 7.6 per cent in 2010-11 to 10.2 per cent in 2011-12 and is estimated to be 10.9 per cent of GDP in 2012-13.

Higher oil, gold and coal imports are reasons why the trade deficit is always is on the rise, but the other equally significant reason is weakening of demand for the country’s merchandise goods in the western world, especially the United States, which is witnessing a slow economic recovery and Europe, which is still in contraction mode.

The share of merchandise exports to the European Union has declined from 21.2 per cent in 2006-07 to 17.9 per cent in April-January period of 2012-13. Within the EU, while exports have plummeted in the most affected countries like Greece, Italy, Spain and the UK, India’s exports to North America has declined from 16.2 to 14.1 per cent in the period, which is broadly in line with the economic difficulties these regions are facing.

But, what seemed to be a matter of concern according to the PMEAC, was the fall of nearly 12 per cent in India’s exports to ASEAN countries.

ASEAN was a rapidly growing market in the previous two years and this is a region with which India has entered into Free Trade Area, implying reduced barriers for trade in the region.

The council also attracted attention towards the drop in exports to China that was partly on account of a near cessation of India’s iron ore exports to the neighbouring country. But, it said there was considerable potential to export a range of consumer products to China, which must be energetically pursued.

About FTA arrangements with Japan and South Korea, the PMEAC said there seemed to be considerable potential but it remained to be tapped. “This must be seen as a near term challenge by the government,” the Economic Review for 2012-13 by the PMEAC said, indicating the underlined need for policy intervention to correct the trade gap.

India is still highly dependent on western markets for its exports and analysts said, there is a need for a conscious policy of diversifying export markets. Besides, the Foreign Trade Policies, which have more or less become a routine increment over the previous years, also need to be more broad-based, they said.

Concerns about worsening trade deficit also stem from the fact that an enlarged trade gap has been the major factor behind the sharp rise in India’s current account deficit that reached 5.4 per cent of GDP in the first three quarters of 2012-13 compared to 4.1 per cent in the corresponding period, the previous year.

The deficit in the third quarter (October-December 2012) was a record $33 billion or 6.7 per cent of GDP. For the full year, it is estimated to be 5.1 per cent of GDP or $94 billion. India’s CAD rose to 4.2 per cent of GDP in 2011-12, from 2.7 per cent the previous year as investment fell from 36.8 to 35 per cent and savings fell more, from 34 to 30.8 per cent. The PMEAC said the CAD was in “serious need of rectification”.

However, it warned that it might take more than a year to return to an acceptable level. Finance Minister P Chidambaram has also said from time to time that rising CAD remains the greatest worry for him and has organised several roadshows in financial hubs of Asia and Europe to woo foreign investors. So far, the CAD has been financed from capital flows but, the PMEAC has a different concern, it said, the capital flows may not always come at the same pace.

Hence, India needs to reduce dependence on import of oil and natural gas, coal and gold to reduce its trade deficit and CAD.

India’s coal imports increased by 40 per cent from 75 million tonnes in 2009-10 to 105 million tonnes in 2011-12. The increase was mostly on account of thermal coal. The council, while underlining the need to increase domestic production of coal, said, “The import of thermal coal is a direct consequence of our inability to meet domestic needs from our own reserves, which is one of the largest in the world.”

Lately, the steel plants in India are also planning to import iron ore due to court orders restraining mining and the hindrances in getting permission to open new mines. Clearly, if India restrains imports of some of the avoidable merchandise goods, it can narrow the trade gap, felt the PMEAC and other experts.