Data on India’s merchandise trade for the last fiscal released recently shows a rather bleak picture with the deficit increasing to a record $185 billion. Compared with the previous year, trade deficit in fiscal 2011-12 increased by 56%, one of the steepest annual increases over the past decade and the highest since 2006-07. The increase in trade deficit occurred as annual export growth halved from the highest ever recorded level of 41% in 2010-11, while imports increased by almost one-third over the previous year’s level. The sharp deceleration in annual export growth is not the only cause for concern: monthly figures for 2011-12 show that over the corresponding period in 2010-11, export growth remained in single digits during most months in the second half of the year; and March 2012 recorded negative growth.
The widening deficit on the trade account has affected the current account balance quite severely. Data for the first nine months of the previous fiscal indicates that the current account deficit (CAD) has widened to touch an all-time high of nearly $54 billion. Matters could have been worse but for a strong showing on the invisibles account, the surplus in which increased to nearly $79 billion, compared with $61 billion recorded in the immediately preceding year. Buoyancy in transfers from abroad, occurring primarily on account of workers’ remittances increased by a substantially higher rate as compared with the previous years.
There is no doubt that the increasing trade deficit and the resulting higher CAD bring with them major concerns for the government, of which three are particularly significant. First, CAD, which was almost 3% of the gross domestic product last year, is likely to increase to well beyond 4% during 2011-12, if the trends seen in the first three quarters of the year are maintained in the final quarter as well. This seems quite likely given that merchandise exports have been extremely sluggish during this period. The second area of concern is that the increasing CAD will increase demand for dollars, thus contributing to the weakness currently seen in the rupee. And, finally, the bulge in CAD will increase the country’s overall debt situation.
It is normal for any country facing such a tight external payment situation to explore ways of curbing imports. But in India’s case, this strategy can be no more than a temporary fix, using which some of the more inessential imports can be curbed. There are two reasons that militate against the targeting of imports for managing the trade deficit. One, import dependence of the Indian economy has increased considerably over the past couple of decades; the rising import intensity of the domestic industry being one of the contributing factors. Two, given that the global economy is tottering on the brink of yet another slowdown, the international community will be loath to see a major economy such as India resort to the use of import curbs.
Thus, seeking new markets is the only realistic option that India has in the present circumstances. The government and the private sector will have to work in tandem to identify the measures that are needed to promote exports. It is a travesty that economic reforms have not focused on the imperatives for increasing the country’s exports in a sustainable manner. Exports have increased only in fits and starts, the performance during the previous fiscal is a case in point. During the first half, exports grew by a whopping 50% over the same period in 2010-11, but in the second half, export growth was no more than 5%.
Over the past several years, India has been engaged in deepening its economic partnership with a large number of countries by formalizing free trade agreements. Most of the agreements that have been concluded are with the countries in India’s immediate neighbourhood in south Asia as well as those in the east and south-east Asia. But even after the agreements have been done and dusted, the share of preferential trade partners in India’s overall exports has hardly improved.
Take, for example, the case of the Association of Southeast Asian Nations (Asean): when India initiated the process to conclude a free trade agreement with Asean in middle of the last decade, the share of its exports to the region was around 9% of its total exports. Two years after the agreement came into force on 1 January 2010, the share had increased to only 12.5%. In contrast, the India-Korea free trade agreement, which became effective on the same day, has failed to provide the necessary impetus. Korea’s share in India’s exports has declined, coming on the back of a none-too-impressive growth. There is, therefore, an obvious need to leverage on the market access opportunities that the free trade agreements have offered. These are some of the fastest growing markets and Indian businesses must ensure that they get hooked on to these growth poles.
Two decades ago, India initiated the “Look East” policy to strengthen its ties with its eastern neighbours, but it has clearly failed to realize the desirable economic benefits thus far. However, the incremental gains from this policy can be considerable, provided India is able to rake in higher export earnings from its eastern neighbourhood at this critical juncture.
Biswajit Dhar is director general at Research and Information System for Developing Countries, New Delhi.
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