It is never quite clear why ministers in charge of foreign trade like to speak up for exporters but rarely lobby for importers, even though both groups are equally important to an economy. Perhaps this is because politicians are hard-wired to be mercantilists. They are more comfortable with high export growth than with high import growth.
Commerce minister Kamal Nath seems to be upset about the fact that the recent Budget has showered gifts on various groups, but ignored exporters. Nath met Prime Minister Manmohan Singh this week to take up the cause of exporters.
The sharp appreciation in the rupee has undoubtedly pinched many exporters. But the latest trade data released by the government this week shows that exports in terms of dollars have increased by 21.6% in the first 10 months of this fiscal year. Not quite a picture of generalized exporter distress.
Higher productivity may have done the trick. Long-term policy should then focus on helping exporters become even more productive rather than giving them fiscal sops.
Yet, there are two immediate policy concerns. First, while exports of engineering goods, petroleum products, chemicals and gems and jewellery have done well, textile exports have faltered. Textiles are a labour-intensive business. A pinch here could hurt employment growth.
Indian textile companies have not been able to seize the opportunities thrown up by the repeal of the Multi Fibre Agreement that restricted access to Western markets. This happened even before the rupee started appreciating. The underlying issues are thus deeper than the negative impact of the strong rupee. But they do need to be addressed.
Second, while exports in the first 10 months of this year have gone up by 21.6%, imports have shot up by 29.6%. But a lot of this is because of imports of machinery and raw materials needed to sustain the investment boom.
The trade gap has widened. A Citibank report says that the trade deficit could cross $100 billion (Rs4 trillion) by the end of 2008-09. India can comfortably finance such a trade deficit if its earnings from software and capital inflows are sustained at current levels. The question is: Will they be sustained if the US slips into a recession?
The big question in the months ahead is whether India can comfortably fund a $100 billion trade deficit. As of now, there is no reason for major worry.
Should we worry about the trade deficit? Write to us at firstname.lastname@example.org