India saw a $185 billion trade deficit in 2011-12, around 9-10% of GDP, due to weak export markets in the US and EU and rising imports of oil and gold. Imports of oil, coal, fertilizer and gold accounted for over 40% of total imports and increased the trade gap. The growing trade deficit has led to a falling rupee and threatens to increase the current account deficit. India must enhance exports to balance imports, but new export markets are also slowing. Unless India curbs oil imports and increases exports, the large and growing trade deficit will be difficult to manage.

1. Annapurna Singh
A
whopping$185billiontradedeficit
- the gap between a country’s ex-
ports and imports - in the last fi-
nancial year (2011-12), which was
around 9 to 10 per cent of the country’s
grossdomesticproduct(GDP),speaksvol-
umes about the impact of global contrac-
tion on India as well. India’s strong export
markets,theUSandtheEuropeanUnion,
remaincaughtineconomicuncertainties,
throwingaspannerinitsshipments.
Meanwhile, the imports have surged,
thanks to purchase of oil and petroleum
products to the tune of $150 billion and
goldandsilverworth$60billioninthelast
financial year. Both of these account for
morethan40percentofthecountry’sto-
talimportsof$485billionin2011-12.
Added to the list was coal and fertiliser
imports,togetherresponsiblefordraining
avastchunkofforeignexchangefromthe
country,andleadingtoatradegapwiden-
ingbytheday.
This prompted the government to take
somemeasuresinthisyear’sbudgettocon-
trolgoldimports.Itraisedtheimportduty
on gold two-folds to 4 per cent, which in
turn led to a 33 per cent decline in the im-
portofpreciousmetalslastmonth.Thisis
expected to help manage the increasing
tradedeficit.
But what about the soaring oil import
bill? Presently, the country is heavily de-
pendent on coal and foreign oil imports
since imported petroleum products ac-
count for 80 per cent of our consumption
forourenergyneeds.Incidentally,thegov-
ernmenthasnocontroloveroilpricesasit
is primarily driven by international crude
prices.
Falling rupee
Awideningtradegaphasledtoahugede-
preciation in India’s currency. This was
quiteevidentwhentherupeedepreciated
22 per cent since the beginning of 2012 to
aroundRs54.50toadollar.Asthegrowing
importsandforeigninvestorspullingmon-
ey out of Indian stocks are putting more
pressure,analystsfeelrupeeinthenearfu-
turemaytumbleto56.
The ballooning trade deficit has other
ramifications too as it may throw the cur-
rent account deficit out of gear. The trade
ministryhasraisedseriousconcernsasIn-
dia’stradedeficitissettoballoonto$278.50
billionby2014,atwenty-foldincreaseover
adecadefromthe$14.3billionin2004.
Butexpertssayagrowingeconomydoes
need more energy and since India does
notproduceenough,ithastoresorttoim-
ports. Ideally, the falling rupee should en-
hanceexports,butnotinIndia’scase,aswe
areanetimportingcountryanditwillhurt
import-basedexportssuchasrefinedpetro-
leum products, gems and jewellery, or
itemsmadeofcopper.
“There are certain imports, which are
necessaryandacontrolonthemmayhave
an impact on economic growth,”says Na-
tionalInstituteofPublicFinanceandPoli-
cy professor N R Bhanumurthy, adding
thatthesolutionliesonlyinenhancingex-
portstomakeabalance.
Explore new markets
Soonaftertheglobalfinancialcrisisandits
effect on the western markets, India had
startedexploringnewmarketstodiversify
its shipments. But, the prolonged crisis in
developedcountrieshashadaknock-onef-
fect sent on new and emerging markets
suchasthoseinSouthAmericaandSouth-
eastAsia.Thesewereincreasinglyemerg-
ingasattractivedestinationsforIndianex-
ports.But,Japanhashadaproblem,China
isslowing,Brazilisalsoengagedinsetting
itsownhouseinorder.
WorsewillbeEuropeastheeurozoneis
caught in financial turmoil. Car exports
fromIndia,forinstance,touched5lakhlast
year riding on demand mainly from Eu-
rope.Butinthecurrentfinancialyear,the
industry fears that recession and overca-
pacity in Europe will severely curtail ex-
ports.
According to the Federation of Indian
ExportersOrganisation(FIEO),newmar-
ketsprovidedcushionforIndianexportsin
the wake of a sharp decline in demand in
thetraditionalexportdestinations,butthey
areoflittlehelpnow.
“The impact of global contraction in
tradeisnowbeingfeltbyIndiaaswell.The
situationismoregrimatthemomentasin
thepastperiodsofslowdown,theemerging
anddevelopingeconomiesexhibitedposi-
tive growth helping us increase our ex-
portsthroughmarketdiversificationstrat-
egyfocusingonLatinAmerica,Africa,and
Asia,” says FIEO President Rafeeque
Ahmed.Theslowdowninnewmarketswill
bemoreobviousinthecomingfewmonths,
headds.
The more disturbing news is the sharp
decline in exports of labour intensive sec-
torslikegems&jewellery,readymadegar-
ments,whichcontractedlately.Thegrowth
in leather, electronics and plastics also
slowed.
“This will have serious implications on
employmentandmayleadtosharpreduc-
tion in additional job creation and even
lay-off,”Ahmedopines.
AccordingtoFIEO,thesolutionliesina
stableexchangeregimeforexportsrather
thanhighvolatilityintheexchangemarket.
Theexporters’bodyhasalsoaskedthegov-
ernment to devise a suitable strategy to
counter the export slowdown in the re-
visededitionoftheForeignTradePolicy.A
continuanceofexportbenefitsinincreased
entitlement and immediate re-introduc-
tion of interest subvention. The govern-
menthasonlylastweekmetexportersand
isexpectedtocomeforthwithsomeexport
enhancingmeasuresintheupcomingfor-
eigntradepolicy.
Trade deficit and BoP
Alargewideningofthetradedeficitcanpo-
tentiallyresultinbalanceofpaymentsdif-
ficulties, and it is not acceptable beyond a
pointasitmayjeopardisetheentiregrowth
processofanalreadyslowingeconomy.
But, trade deficit for India is not a new
phenomenon.In2009-2010,Indiahadthe
world’s third largest merchandise trade
deficit, at $107 billion, behind only the US
at$691billionandtheUKat$154billion.
Economists say that trade deficits in
goods can be compensated for by trade
surplusesinservices.
However, despite services accounting
for 60 per cent of India’s GDP, their share
inIndia’stotalexportsofgoodsandservic-
es 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
centofGDP,”Bhanumurthysays.
Thatwillrequirefast-trackingtheagree-
ment on trade in services under India-
ASEAN FTA, getting into comprehensive
economic pacts with key ASEAN nations,
or including services under trade pacts
withLatinAmericanblocMercosur,BRICS
nationsandothertradingpartners.
Thecurrentpolicyinertiainthegovern-
mentandpolicyreversalsinmostofthecas-
esisonlyprolongingthecrisis,expertssay.
For example, the inability to raise domes-
ticfuelpricesonlyactsasanincentivetoin-
creaseconsumptionofhydrocarbonprod-
ucts, 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 ex-
penditurelimitsitsabilitytoraisepublicin-
vestmentininfrastructure,anessentialre-
quirement for improving the cost
competitivenessofIndia'sexports.
The government recently announced
thatitwilltakesomeausteritymeasuresto
help check its dwindling finances and a
cut-down in non-plan expenditure to the
tuneof2to3percentisoneamongthem.
Thisisexpectedtohelpimprovethecrucial
infrastructure sector and help the growth
soar.
Lastbutnottheleastisthetransportbot-
tleneck, which need to be corrected in or-
dertoraiseIndia’sexports.Accordingtothe
government’s own admission, the ex-
portersenduplosinganywherebetween7
to 10 per cent of the value of their exports
toduetimetakentohandlecargoatports,
theslowpaceofinlandtransportationand
otherissues.
These infrastructural problems have
never received attention they deserve, say
experts.
DH News Service
India’swideningtradegapalarminglyhigh
Unlesswecurb
theconsumption
ofoilproducts,
ourgrowing
importsand
stagnating
exportswill
makeitdifficult
toachievethe
balance